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Milk producers, processors spar over proposed 4b price hike

Tim Hearden
A University of California-Davis economist's analysis of California's dairy industry led off a lengthy and contentious state hearing Sept. 12 on the value of whey in the minimum pricing formula for milk going into cheese. Hundreds of dairy producers were expected to attend the hearing in Sacramento.

SACRAMENTO — The closure of more than 300 California dairy farms in recent years has caused a herd reduction resulting in the loss of about 15,000 jobs statewide, a university economist told a state panel here.

The Golden State also saw a 1 percent decrease in market share relative to other states in 2012 and will lose more unless pricing issues are resolved, said Richard Sexton, a professor and chairman of the University of California-Davis’ Agriculture and Resource Economics department.

On average, California dairy producers are working with “substantial” negative margins while most producers in other major dairy states are making money, Sexton told a California Department of Food and Agriculture administrative panel on Sept. 12.

“If you incur losses, you can hang in there in the short run,” he said. “If they persist in the long run, you go out of business. That’s what’s been happening to California dairy farms. The losses have been unabated.”

Sexton conducted an independent study at the request of Western United Dairymen, which is petitioning the state to raise the state’s minimum price of milk used for making cheese.

Sexton’s remarks came amid nearly seven hours of testimony at the CDFA’s headquarters here, as the WUD and other producer groups sought changes in the pricing formula for Class 4b milk while processors argued the changes are unnecessary because conditions for farmers are improving.

“This year’s (corn and grain) crops are in much better condition” than when feed costs spiked in late 2012, asserted Renee Peets, the Illinois-based Kraft Foods’ senior director for cheese and dairy procurement. “Therefore, they’re provided much-needed relief to farmers’ input costs.”

The hearing was called following a negotiated agreement between dairymen and cheese manufactures, represented by the Dairy Institute of California, to bring the value of whey in California’s pricing formula more in line with the whey value in Class III formulas in federal milk marketing orders.

The agreement was sought by Assemblyman Richard Pan, who introduced legislation earlier this year that would have established prices more favorable to producers.

As part of the pact, the Dairy Institute supported a hearing, a temporary price increase to 4b and a permanent increase to the cap on whey value if economic conditions warranted.

As a result of the deal reached this summer, four producer organizations petitioned CDFA Secretary Karen Ross to hold the hearing to implement the agreed-upon changes.

Producer groups hoped the deal might bring price relief after repeated petitions to CDFA over the last three years brought disappointing results. But that last provision – if economic conditions warranted – has proven to be a sticking point in recent days.

Greg Dryer, a senior vice president of the Illinois-based Saputo Cheese USA, Inc., said CDFA data showed the 4b price through August to be $1.70 per hundredweight higher than last year. Production costs early this year were $1.06 higher than a year earlier, but did decline by 86 cents per hundredweight from late 2012, he said.

“Further alterations of the 4b whey factor cannot be justified given the scarcity of relevant California data and the inherent unfairness of such a factor given the myriad practices employed across the industry,” Dryer said.

Processor groups repeatedly called for a new pricing formula to be developed by a dairy task force set up by Ross to achieve long-term stability in the industry.

But the same CDFA data showed the average cost of production in the first quarter of 2013 was $1.71 per hundredweight higher than the average mailbox milk price, countered Bob Vandenheuvel, general manager of the Milk Producers Council.

Sexton and producer groups’ representatives told the administrative panel members that even if the CDFA grants a temporary 46 cents per hundredweight increase in the price of 4b milk and an increase in the cap of the whey value from 75 cents to $1 per hundredweight of milk, not all dairy farmers will be made whole.

“However, dairy farmers and their organizations have stepped up to support this modification in the interest of providing much needed revenue for dairy farmers in a form that our processor representatives can support,” Vandenheuvel said. “The process of coming to this proposal was an exercise in balance, with political concessions made by both sides of the industry.”

The panel has 62 days to make a recommendation to Ross, who will make the final decision on whether to change the pricing.



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