USDA clears the way for California FMMO

Cows are milked at VanderWoude Dairy near Merced, Calif. An analysis of California's move to a federal marketing order shows the system has resolved the price disparity and brought other changes to the industry.

California’s dairy farmers abandoned the milk pricing system regulated under the California Department of Food and Agriculture last November to join USDA’s Federal Milk Marketing Order system in hopes of better prices.

The disparity between the federal Class III price for milk used to manufacture cheese and California’s correlating 4b price was the driving factor. But the move brought other changes for producers and processors.

Wanting to know how the state’s dairy farmers are faring under the new FMMO, CoBank asked Annie AcMoody, director of economic analysis for Western United Dairymen, to review the impacts.

In her analysis, AcMoody said the move to the federal system resolved the price disparity and brought other changes as well.

California’s 4b price averaged $1.33 per hundredweight of milk lower than the federal Class III price from 2010 until the FMMO was implemented — including averaging $2.41 lower in 2014.

“Now that California prices match other FMMOs, the historical price discrepancy is behind us. For most, this alone means the system conversion to FMMO is a success,” she said.

But the move also altered processor incentives, led to a wide range of milk prices and created an uncertain future for the state’s quota system — which distributes additional money to farmers holding quota certificates.

The old system required virtually all grade A milk to participate in the regulated pool and set minimum prices. The FFMO only requires handlers of Class I milk, used for fluid consumption, to pool their milk. Processors of milk used for other products such as yogurt, cheese or milk powders can make monthly decisions on whether or not to pool their milk.

With more flexibility, processors can reevaluate the best product mix for their operation. Having to pay higher milk prices in some situations, some might not be able to decrease cost of production or increase sales prices and might be forced out of business. Or they might redirect and focus on the products they can produce most efficiently, she said.

“The traditionally stable landscape of milk utilization in California has changed and will keep changing as processors make monthly pooling decisions,” AcMoody said.

The changes have led to some heartburn in the producer community, she said.

The FMMO also replaced the one-state, one minimum blend price with five pricing zones, which values milk based on where it is received, with the highest prices in the base zone of Los Angeles, she said.

Within the zoned sub-groups, the amount of pool benefit that stays with the producers versus the processor creates uncertainty every month. And outside the regulated system, some producers are now paid on contracts that use an entirely different formula, she said.

The switch to the federal system also eliminated the transportation allowance system, which subsidized processors’ cost of moving Class I milk from surplus areas to deficit areas. Without it, processors were forced to reevaluate the most efficient way to move milk.

It also gave them incentive to try to pass on some of those added costs to buyers, she said.

USDA allowed the state to maintain its quota system — which has paid certificate-holding producers an extra $1.43 to $1.70 per hundredweight of milk since pooling was implemented in 1994. The assessment to fund the quota at $0.38 per hundredweight of milk hasn’t changed, but it is now visible on producers’ milk check.

That has led to a second attempt at a petition to abolish it, and it’s bound to remain a hot topic for at least the next year, she said.

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