California Dairies in Turmoil over Pricing

September 11, 2012 09:54 PM
California Dairies in Turmoil over Pricing

Amid producers’ disappointment over the whey factor ruling, all agree the state’s pricing system needs overhaul

At first glance, it seemed like a small victory for California’s dairies. On second glance, it didn’t mean much.

In July, California’s agriculture secretary overruled a state panel’s recommendation—and pleased processors—by raising the whey-factor cap in the Class 4b pricing formula.

But producers in the nation’s No. 1 dairy state aren’t pleased. In fact, some are incensed.

"The increase was not substantial," says Tom Barcellos, a dairy producer from Porterville, Calif., who serves as president of Western United Dairymen (WUD). "While the Secretary announced a change in the sliding scale, it fell far short of what was requested."

"To say the results were disappointing doesn’t begin to capture the emotion felt on the producer side of the industry," says Rob Vandenheuvel of Milk Producers Council (MPC), based in Ontario, Calif.

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WUD and MPC were among the petitioners who asked the California Department of Food and Agriculture (CDFA) in March to amend the state’s 4b pricing formula. The two groups contended that California’s dairy producers were losing hundreds of millions of dollars each year because the whey factor in the state’s milk pricing system was undervalued compared to Federal Order levels. They wanted CDFA to replace the 4b formula with one that more closely tracked the market direction of Federal Orders’ Class III whey value.

California’s 4b price is what handlers pay for farm milk for cheese and whey production. The CDFA Secretary sets minimum prices for the state’s five classes of milk.

The petitions led to a two-day hearing May 31 and June 1 in Sacramento. Petition supporters and oppo-nents testified before a panel about the proposed change. Weeks later, on July 20, the panel handed down its verdict: no change in the whey factor formula.

But that same day, CDFA Secretary Karen Ross ruled that challenging times for dairies, compounded by drought-fueled feed costs, compelled her to reject the panel’s decision. Instead, Ross gave the green light to a modest increase in the whey-factor value in the Class 4b formula.

Starting Aug. 1, CDFA increased the cap to 75¢ per cwt., up from the 65¢ per cwt. cap that had been in place since last year. For each 5¢ step in the dry whey commodity price, the corresponding whey factor increases in increments of 6.25¢ per cwt. The effect of the new sliding scale is an increase in the Class 4b price of approximately 10¢ per cwt. when the dry whey commodity market is at the upper end of the new scale.

At whey’s July price of 49.5¢ per pound, the increase added 6.25¢ per cwt. to the Class 4b price. WUD says the sliding scale it sought in its petition would have added $1.09 per cwt. to the Class 4b price.

"We were thrown a pacifier," Barcellos says. "That ruling incensed many. There was a huge disparity in the past between Federal Order and California whey prices. Now, with whey prices down, the increase amounts to just pennies per cwt., if even that. It won’t save us."

For the state’s dairy processors, Ross’ decision "made a lot of sense," says Bill Schiek, economist for the Dairy Institute of California, a nonprofit trade association that represents milk and dairy processors on legislative and regulatory matters.

"The California market is very different from the federal market," Schiek says. "A regulated price is more binding in California than in Federal Orders, and because of that and the general market situation, milk supply has grown faster than plant capacity. We just couldn’t see a strong economic argument for an increase in the regulated price."

Processors are aware the decision has not ended the turmoil among producers, who are struggling with record-high feed costs and poor margins. "We know producers are frustrated," Schiek says. "One problem with a system that has an end-product pricing formula is that you can’t have one side winning without the other side losing. It creates an ‘us-against-them’ dynamic."

Aware of the dysfunction, Ross has created the California Dairy Future Task Force to help develop recommendations for structural change in the state’s dairy pricing formula and other milk marketing regulations.

"It is imperative that we all work together—processors, producers, cooperatives and [CDFA]—to evaluate and resolve the critical issues facing the dairy industry," Ross says. "We must work as one and not in factions."

Processors agree California needs to take a more strategic look at its regulated pricing system. "I don’t know how a new system would be structured," Schiek says. "But I do think growth at the farm level has to match what’s happening in the market in terms of customers, products and value."

As the troubled summer of 2012 winds down, dairy producer groups are searching for options. In August, WUD again petitioned CDFA for a new whey pricing hearing. This time, WUD also asked for emergency price relief from the financial pressures on dairy producers. WUD requested a six-month increase of 50¢ per cwt. on all classes of milk. CDFA has denied the petition.

In addition, WUD has been exploring the possibility of moving California from its own pricing structure into the Federal Milk Marketing Order system. It’s been several years since California’s dairy industry considered such a move.

"But times have changed," Barcellos says. "The system we have is not going to save us. We need to reevaluate it. We need to look at what it will take for producers and processors to be profitable equally."

A move to a Federal Order, however, can’t come soon enough for dairies since it would take years for evaluation and a referendum. "How many producers are we going to lose by then?" Barcellos asks.

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