California Federal Order Could Have Broad Consequences

September 30, 2015 05:23 AM

Because it produces 20% of the nation’s milk, California’s hiccups make the rest of the country queasy.
So when hearings began Sept. 22 on four Federal Order proposals for the Golden State, there was almost as much interest nationally as there was within state borders. There was even a forum in a suburb of Minneapolis Sept. 24 to look at impacts in the Midwest.

USDA ratcheted up anxiety levels by releasing a 45-page econometric analysis of the four proposals over the summer. The analysis not only looks at their impact on California, it also projects what will happen nationally in each Federal Order and on imports and exports.


A summary of USDA’s estimates on the effect on the all-milk prices for two (of the four) proposals are shown in the table below. The first is the co-op proposal, submitted by California Dairies, Inc. (CDI), Dairy Farmers of America (DFA) and Land O’Lakes (LOL). The second is the processors’ proposal, submitted by the Dairy Institute of California.   

Prices would change because higher milk prices in California mean higher milk production. USDA estimates the higher California milk prices under the co-op proposal could bring an additional
540 million pounds to market, on average, over the 10 years of the analysis (2017 to 2024).
Some take issue with this logic, noting the three major co-ops in the state, CDI, DFA and LOL, all have base plans in place. These three co-ops market 80% of the state’s milk, so the base plans would keep a lid on production.

That’s true—to a point. California produced 42 billion pounds of milk this past year. Its monthly year-over-year production has been down roughly 3% in 2015, which is about 1.25 billion pounds on an annual basis. (California is down 650 million pounds of milk through the first six months of 2015.)
So California producers could increase milk production 540 million pounds and not even make up their production losses this year. On a per cow basis, that’s just 300 lb. more milk per year—or 1 lb. per cow per day in a 305-day lactation.
All of this is speculative:

  • The economic model USDA used to do this analysis is brand new. Independent economists have not yet had the chance to see “what the model is and isn’t,” says Mark Stephenson, a dairy economist with the University of Wisconsin. “Some of the impacts seem awfully large.”
  • No one knows what the final proposal will look like. USDA must first hold the hearing, then decide if a Federal Order makes sense for the state and, if it does, what provisions should be included based only on evidence and testimony from the hearing. It could take a year for USDA to issue a proposed rule and another year to implement if approved by California dairy farmers.
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