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California dairy industry at odds over pricing

Carol Ryan Dumas
Cailfornia's producers and processors agree that change is needed in the state's milk-pricing system but differ on the formula for change. Processors blame an antiquated pricing system that stifles growth, while producers say the system performs well with the exception of the pricing for milk going into cheese vats.

The chasm between California’s milk producers and processors grew even wider last week when California Ag Secretary Karen Ross again denied a proposal to increase the price of milk used to manufacture cheese.

The level of frustration among producers mirrors their struggle in making ends meet, which has grown steadily more difficult because of a downturn in exports followed by record-high feed costs and milk prices that fail to cover the cost of production.

The widening gap between California’s Class 4b cheese milk price and the federal milk marketing orders for Class III cheese milk has been the focus of producer ire.

The California prices for milk used for other purposes correspond with the prices in the federal orders. But producers contend the gap between state and federal prices for cheese milk is due to the value of whey in the state 4b pricing formula. It was disconnected from the marketplace in late 2007.

Processors counter they can’t pay a higher whey value, either because they don’t have the capability to process the whey stream and recoup the value or they’ve invested large sums to process and manage what was formerly considered a waste product.

Both agree change is needed, but they don’t agree on the formula for that change.

Processors claim the state’s pricing system is antiquated and prevents the industry from pressing opportunities in new and expanding markets. Producers say that while expanded processing capacity is needed, the pricing system is sustainable with the exception of pricing 4b milk.

“Given the power of the market to add substantially to farmer prosperity, we should be working together to expand our global reach, instead of relying on an antiquated pricing system that stifles growth and limits revenue,” said Rachel Kaldor, executive director of Dairy Institute of California, which represents processors.

The industry needs to work together to create a new market-driven system with high levels of investment and vigorous competition, she said.

Secretary Ross agrees, and said continued adjustments to minimum milk prices, resulting from industry petitions, are inadequate to address the ongoing difficulties in the industry.

She said the state’s antiquated pricing system, based on conditions in the 1960s, impairs the industry’s ability to meet 21st Century challenges and opportunities in national and international markets.

The state’s regulated milk pricing impairs the ability of the industry to rise to the challenge of producing new, value-added products to help milk producers capture more value, she said.

The industry needs to work together to allow producers to improve margins by being responsive to market signals, encourage new innovative products and provide incentives for new technology, construction and more processing capacity, she said.

Structural changes — such as regulatory and tax relief — in California’s business climate do need to take place to make the state more attractive to potential processors. But the pricing system is not the problem, said Michael Marsh, CEO of Western United Dairymen.

He said California’s pricing system is not outdated and compares well with other pricing systems in the world, including the GDT (Global Dairy Trade), with the exception of how producers are paid for milk going into cheese production.

He said the problem is that the value for whey in the 4b pricing system was disconnected from the market by the previous CDFA secretary in 2007. The losses to dairy families resulting from that disconnect will hit $1 billion next month, he said.

That money has been transferred from dairy farmers to processors in the form of discounted milk. Marsh said the longer it is allowed to continue, the more money processors will make and the more dairymen will lose.

The state has lost nearly 500 dairy operations since that disconnect was made, he said.

“It’s a tragedy for dairy farmers in California,” he said. “It’s been extremely frustrating trying to reconnect the price to markets.”

Dairymen have petitioned CDFA repeatedly, but the secretary says she doesn’t have the authority to make that change. That’s why producers took the matter to the Legislature, he said.

Producers were hopeful they would get some short-term relief from a negotiated agreement with processors, which played into the latest CDFA hearing, but processors testified there was no agreement. Producers will continue to pursue a long-term resolution through the Legislature, he said.



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