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Joining a federal order raises issues for Calif. dairy producers

Published on March 28, 2013 3:01AM

Last changed on April 25, 2013 8:41AM

Michael Marsh

Michael Marsh


Capital Press

While California dairymen don't need legislation to petition the USDA to join the federal milk marketing order system, they would need some legal language to roll parts of California's order system advantageous to them into the federal order.

Rep. David Valadao, R-Calif., last week introduced HR1396, which provides for the inclusion of California as a separate federal milk marketing order.

California's state milk marketing order operates differently than federal orders, said Michael Marsh, CEO of Western United Dairymen, the state's largest dairy producer organization with about 900 members.

Western United wants to be sure it understands the ins and outs of joining the federal system before encouraging producers to take that route, Marsh said.

The organization wants the order to retain California's quota system, which provides additional payments to Grade A, Class 1 producers holding quota certificates, and prevent processing plants from paying less than the regulated mandated minimum milk price, he said.

Both have been issues in the past when considering joining the federal system, he said.

California's quota system was developed in the late 1960s to gain producer support for forming a state milk marketing order. At that time, processors held dairy producers hostage, pitting them against each other for contracts for fluid milk, Class I, which has a higher value than milk for processing other dairy products, he said.

In return for the support of Class I producers to get on board with a marketing order that would blend milk prices for different uses and distribute them more evenly, the quota system was developed to pay those Grade A shippers selling into Class I markets an amount over the blend price.

The quota can represent all or a portion of a producer's production and brings a price higher than the blend price.

The quota is now worth about $1 billion. Nearly 900 producers out of 1,500 in California now own quota, and it's not uncommon for a producer to hold quota worth $4 million to $5 million. That asset needs to be protected when considering joining a federal order, Marsh said.

Most federal orders don't have quota. Some allowed for a state quota when states joined federal orders, but they either quickly disappeared or were bought by out-of state producers shipping into the federal order, he said.

Because quota can be traded, the concern is not just preserving the quota but keeping the revenue in the state of California. If the quota is retained in a federal order, it could be sold to anyone selling milk into the state's fluid markets, and that money above the blend price would then benefit out-of-state producers, he said.

Valadao' bill briefly addresses the quota by stating "the order covering California shall have the right to reblend and distribute order receipts to recognize quota value."

But that doesn't give any reassurance that it would prohibit the transfer of quota outside California, and there doesn't currently appear to be a way to protect the integrity of quota for California producers in federal orders, Marsh said.

Another big challenge is maintaining the requirement that California processors pay the mandated minimum milk price.

Under a federal order, only Class I processors have to participate in the milk pool and pay the minimum price. Processors of other dairy products can jump in and out of the pool and their requirement to pay minimum prices to their advantage.

California processors don't have to participate in the milk pool, but they still have to pay the state's regulated minimum price. Only 13 to 14 percent of California's milk production goes to the highest value Class I utilization. If other processors didn't have to pay the minimum prices, the pool value would drop significantly, Marsh said.

California Dairies Inc., Dairy farmers of American and Land O'Lakes have funded an economic analysis of California joining a federal order, which should be released by the end of the week, he said.

Western United is interested in the discussion of joining a federal order and having the opportunity open to California dairymen, but is surprised Valadao introduced his legislation before the analysis was completed, he said.


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