Milk Producers Council
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From The MPC Newsletter
Friday, January 6, 201

Establishing the Value of Milk on a California Dairy
By Rob Vandenheuvel, General Manager

There’s been a lot of talk in the past year about the California milk pricing structure. That’s to be expected when we have a structure that cheats the State’s dairy farmers out of hundreds of millions of dollars. But this week, I’d like to take it back to basics. I’d like to address the question of why CDFA even has control over our prices and what responsibilities come with that control.

Many years ago, the California Legislature decided that the price of milk should be regulated by the State of California. They passed laws, instructing the California Department of Food and Agriculture (CDFA) to establish and implement a “Stabilization and Marketing Plan” that “includes, among other things, the establishing of prices to be paid by handlers for any or all of the various classes of market milk.” These laws are published in the California Food and Agricultural Code (“The Code”). That simple fact is the only reason CDFA even has the authority to establish minimum prices for the milk being produced and sold in California.

In delegating that important authority to CDFA, the Legislature didn’t just give them a blank slate. They outlined a set of parameters that CDFA is required – by law – to follow as they establish a minimum value of milk. Those parameters are outlined in Chapter 2 of The Code. There are 18 “Articles” in Chapter 2 dealing with a host of legal requirements CDFA must follow. But the area I will be focusing on today is Article 9, which outlines the “Establishment of Minimum Prices and Provisions of Stabilization and Marketing Plans.”

Article 9 of The Code gives the Secretary of Agriculture (currently, that’s Secretary Karen Ross) broad discretion in establishing the minimum prices for each class of milk. The Secretary can determine the minimum price for each class of milk by either simply announcing a price or “by adopting methods or formulas…whereby the prices can be determined,” or any combination of those two things. In adopting those “methods or formulas,” the Secretary also has broad discretion. The Secretary can base the price on the cost of producing the milk. For that matter, the Secretary can even set up a formula that looks at the price of bread, automobiles and orange juice. The Secretary has full discretion. What CDFA has done in the past and continues to do today is utilize “end-product pricing,” that is setting the minimum price for each class of milk based on the value of the “end products” that can be manufactured from that milk (i.e., butter, nonfat dry milk, cheese and dry whey).

However, no matter how the Secretary decides to determine the minimum price of milk, the price that results from that determination must meet a specific standard. Section 62062 of The Code states that the prices that are announced “shall be reasonably calculated to result in prices that are in a reasonable and sound economic relationship with the national value of manufactured milk products.”

So let’s look at how the current formulas are performing. In determining the “national value of manufactured milk products,” we have to look at what comparable milk is worth in other parts of the country. While California operates our own state system when it comes to valuing milk, more than 80 percent of the milk produced outside of California is produced in Federal Milk Marketing Order (FMMO) areas. FMMOs also divide their milk prices into “classes,” based on how that milk is ultimately used (i.e., bottled as fluid milk, turned into cheese, etc.). The FMMO Class III minimum price is a well-known price around the country – it’s the price that a plant regulated under a FMMO and producing cheese must pay for the milk they purchase. The comparable price here in California is the Class 4b price.

Over the past two years, the Class 4b minimum price has averaged $14.77 per hundredweight. Over that same period, the FMMO Class III minimum price has averaged $16.39 per hundredweight. That’s a staggering difference of $1.62 per hundredweight over the entire 24-month period! Just this past month alone – December 2011 – the California Class 4b minimum price was $15.14 per hundredweight vs. the FMMO Class III minimum price of $18.77 per hundredweight – a $3.63 per hundredweight difference! What do these numbers mean in real dollars? Over the past two years, an average of more than 1.25 billion lbs of milk per month have been sold to our State’s cheese manufacturers. A $1.62 per hundredweight difference between the California Class 4b and FMMO Class III prices represents a “California discount” of more than $20 million per month, or $240 million per year!

So looking at these numbers, what evidence is there that our Class 4b minimum price is reasonably calculated to result in a price that is in a “reasonable and sound economic relationship with the national value of manufactured milk products”? That’s an outstanding question, and one that MPC and the rest of the dairy producer side of our industry must continue to demand an answer for.


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