A USDA study of the impact of a Federal Order in California released in August suggests milk prices there could increase $1/cwt while milk prices everywhere will head south.
On the face of it, the study makes sense. A $1/cwt higher milk price in California would encourage more milk production there, to the tune of 540 million lb. of milk on average. More milk there would be mean lower prices everywhere else—or one would think.
But maybe not. Likely not, says Mike Brown, Director of Dairy Economics and Policy for Glanbia Foods, Evanston, Ill. Brown spoke September 24 at a Federal Milk Marketing Orders Forum in Bloomington, Minn., sponsored by the Midwest-based Cooperative Network.
The reason: Higher milk prices will make California cheese less competitive nationally. If California’s cheese costs go up 6 or 6 1/2¢/lb., it will make California cheese less of a buy.
And once these higher prices are in the system, California will not be able to catch up. The reason: A phenomenon known as “NASS circularity.”
Federal Order prices are based on component values, which are based on a weekly National Agricultural Statistics Service (NASS) survey of cheese plants. California’s higher cheese prices, which necessarily will have to increase if milk prices increase, will get reported into the NASS data base. The survey, then, is used to set Federal Order minimums across the country, bumping up component prices everywhere—not just California.
“California remains stuck in the circle (i.e., NASS circularity), and can never catch up,” says Brown.
Plus, cheese has “location value”—wherever cheese is made must then be transported to where it is eaten. Cheese made in the Midwest is that much closer to Midwest and Eastern population centers. And that location value could add another nickel per pound price disadvantage to California.
The result, says Brown, will be the movement of cheese production east to Idaho, New Mexico, Minnesota, Wisconsin and Michigan due to lower landed product cost. “We think California will make less cheese and more powder,” he says. “I don’t think the Upper Midwest has a lot to fear from California joining the Federal Order system.”
“A Federal Order doesn’t fix the California problem,” he maintains, because the state has other, deeper problems. Water availability and soaring forage costs due to high land value will continue to be huge challenges, he says.