From The MPC Newsletter
What's the Definition of
"Reasonable"? Depends on Who You Ask
Starting on September 1st, a new minimum price formula was established for milk sold to our state’s cheese plants (otherwise known as the Class 4b minimum price). This new formula included a variable “dry whey factor,” that moves up and down (within a range of $0.25 - $0.65 per hundredweight), depending on what the dry whey markets are doing. So how are dairy farmers faring under this new formula?
Let’s start with the September and October Class 4b minimum prices. September was announced at $16.33 per hundredweight; October was announced at $15.78 per hundredweight. That information alone doesn’t tell us much (other than the obvious fact that dairy farmers can’t afford to be selling our milk to any of the state’s processors at these low prices for very long).
So now let’s look at comparable values for similar milk around the country. Last month, the Federal Milk Marketing Orders (FMMOs) announced that the September Class III (cheese milk) minimum price was $19.07 per hundredweight. And this past week, the FMMOs announced the October 2011 Class III minimum price was $18.03 per hundredweight. Yes, these are substantially higher than our California minimum prices, but even these facts alone don’t tell us what we need to know.
While we are comparing the same quality of milk going into equivalent plants (cheese plants), we need to account for the fact that FMMO minimum price formulas are not identical in structure to the California minimum price formulas. These formulas vary in how they calculate the underlying value of cheese, the amount of the make allowances and generally how the formula captures those factors. What we are trying to dissect today is what portion of that difference is a direct result of differences in how the formulas account for the value of whey products being manufactured and sold by cheese plants in California and throughout the country.
Determining that is actually quite simple. It’s just a matter of reconciling the FMMO minimum price with the California minimum price, and isolating what portion is a direct result of the different whey factors. Rather than bore you with the calculations, let me just provide you with the final results:
So let’s break this down. Over the past two months, the difference between the FMMO Class III price and the California Class 4b price has averaged about $2.50 per hundredweight. Of that difference, about $0.77 per hundredweight can be attributed to differences in make allowances and a time lag on the value of cheese (FMMOs use USDA’s cheddar cheese prices, which lag behind the CME prices that California uses in our Class 4b formulas). While the make allowance differences are steady and predictable (around $0.20 per hundredweight), we understand that over time, the differences between the NASS and CME cheddar cheese prices will largely even out over the course of the year.
The more troubling fact is that in the past two months, the dry whey factor has been responsible for about $1.73 per hundredweight of the difference between the Class III and Class 4b minimum prices! And unlike the differences in how we “discover” the price of cheese, there is no time-lag that will “even out” this huge difference in the coming months/years.
So why does this matter? Well for starters, our California dairy farmers are paying some of the highest feed prices in the country, making it extremely frustrating to see our State’s cheese plants paying significantly less for the same quality milk being purchased by cheese plants in FMMO areas. In fact, some of our State’s cheese makers operate plants in other areas of the country (like Leprino, Saputo and Hilmar Cheese). How much more are they paying for their milk in those areas than what they are paying for their milk supply here in California? But secondly – and of equal importance for this discussion – the numbers provided above simply don’t jive with what our State legislators have demanded of the California Department of Food and Agriculture.
The following language is taken straight out of the California Food and Agricultural Code (Section 62062):
“If the [Secretary of Agriculture] adopts methods or formulas…for designation of prices, the methods or formulas 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.” (emphasis added)
Our elected officials in California have given the Secretary of Agriculture broad discretion in how the formulas are established. But looking at this provision of the Code, it is clear that regardless of how those formulas are set up, the results of those formulas shall be a price that is in a “reasonable and sound economic relationship” with national values of manufactured milk products. Does it say “we prefer the prices to be”? Does it say “it probably should be”? No. The Code clearly says it “shall be” in a reasonable and sound economic relation.”
Of course, MPC and others made this argument at the hearing this past summer. Representatives from the State’s cheese plants countered with arguments about how plants in FMMOs can more easily de-pool, removing their obligation to pay the minimum price. What those folks fail to mention is that simply removing themselves from the pool doesn’t remove the need for those plants to compete for an adequate milk supply. Are the plants that have chosen to de-pool able to secure that adequate milk supply by paying $1.50-$2.00 per hundredweight below the Class III price like they are doing in California? I highly doubt it.
So what exactly is “a reasonable and sound relationship with the national value of manufactured milk products?” I guess it just depends on who you ask.
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