California Wheys In

March 28, 2012 10:23 AM

The state’s dairy producers seek changes in their milk pricing system. 

California dairy producers believe they’re losing millions of dollars each year because the whey factor in the state’s milk pricing system is undervalued compared to Federal Milk Marketing Order levels.
Through their producer organizations, they’re pushing for change in the state’s Class 4b minimum price formula, which sets the price of milk used in cheese production and includes a factor for whey. They’ve taken their concerns to the California Department of Food and Agriculture (CDFA) in hopes the state agency will replace the current formula with one that more closely tracks the market direction of Federal Orders Class III whey value.
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California’s dairy producers say they’re suffering significant financial losses from the discrepancy between the whey value in the state’s Class 4b formula and the federal orders’ Class III level.
On March 2, major producer groups petitioned CDFA for a public hearing to consider adjusting the 4b formula. On March 16—over opposition from dairy processing interests—CDFA Secretary Karen Ross agreed to grant the hearing. It will take place May 31 to June 1 in Sacramento, and all interested parties may offer testimony.
Among those petitioning for the hearing was Western United Dairymen (WUD). “California dairy families are suffering financially under the current formula,” says Michael Marsh, the group’s CEO. “The department must amend the formula to accurately capture whey value.”
Also requesting a hearing was a coalition comprising California Dairies, Inc.; Dairy Farmers of America–Western Area Council; Land O’Lakes; Security Milk Producers Association; the California Dairy Campaign; the Alliance of Western Milk Producers; and Milk Producers Council (MPC). The coalition represents 1,087 of the state’s 1,700 dairies and 78% of its milk production.
The price disparity is “a systematic fleecing of the entire California dairy producer community,” says MPC’s general manager, Rob Vanden Heuvel.
Whey, a cheesemaking byproduct, has become a critical part of producers’ milk checks in the last two years. Its value has risen with growing global demand. Food manufacturers are adding increasing amounts of whey into higher-protein products such as nutritional foods and be

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verages. Whey is also used in animal feed.
A re-adjusted 4b formula, believe the coalition and WUD, would bring pricing into line with the requirements of the California Food and Agricultural Code.
In its petition to CDFA, the coalition contended that the current formula caused the dairies it represents to lose $300 million in 2011.
“California law doesn’t address how whey should be valued in the formula,” Vanden Heuvel says. “The law simply states that the ultimate Class 4b price—however it’s determined—shall be in a ‘reasonable and sound economic relationship’ with the national value of manufactured milk products. We look at the Class III price as a great indicator of the national value of milk going into cheese plants, since the Federal Orders regulate about 80% of the U.S. milk produced outside of California.”
In February, the Class 4b price averaged $13.42 per cwt. compared to the Federal Order Class III price of $16.06 per cwt., Vanden Heuvel says. “It’s difficult to imagine anyone saying with a straight face that those two prices are in a ‘reasonable and sound economic relationship,’” he adds.
The state’s dairy processors say another change in the 4b formula is unneeded and would be detrimental to the industry’s competitiveness. Among those urging CDFA to deny requests for a hearing were Kraft Foods, Saputo, the Dairy Institute of California and Hilmar Cheese.
California’s 4b price is only a regulated minimum price, says David Ahlem, vice president of procurement and policy for Hilmar Cheese. Many California processors, including Hilmar, pay premiums well above the 4b price to their producer-suppliers. “When the regulated minimum price is increased, many of our producers lose as their premiums fall,” Ahlem adds. “This was the outcome of the last hearing decision.”
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The state’s dairy processors oppose the 4b formula change, saying it’s unneeded and would be detrimental to the industry’s competitiveness. The California Dept. of Food and Agriculture will decide.
CDFA addressed the formula and modified its pricing calculation after a June 30, 2011, hearing. It raised the whey factor from 25¢ per cwt. to 65¢ per cwt.
Yet WUD and the coalition don’t believe 2011’s adjustment provided “a fair or legally sufficient means” of determining the whey value in the formula. In fact, Marsh says, California whey value has averaged $1.93 per cwt. below Federal Orders since the formula was adjusted last year with a new sliding scale.
On Dec. 2, following the mid-2011 adjustment and before its March 2 request, WUD petitioned CDFA to hold a hearing to remedy the disparity. CDFA denied this first request.
Many producers involved with the coalition regularly negotiate supply agreements with buyers of 4b milk, points out Hilmar’s Ahlem. “This is the proper place for these discussions to take place,” he says. “Instead of going to the marketplace and asking their customers for a higher price, they have chosen to delegate this responsibility to CDFA. This is not the intended function of the regulatory system. The regulated minimum price should be a market clearing price, not a market making price.”
Other processors agree. “Why don’t these producers merely go to their customers and raise their price?” asks Michael Shotts, vice president and general manager of Farmdale Creamery in San Bernardino, Calif.
In addition, Ahlem says, the petitioners failed to acknowledge California’s oversupply of milk, which exceeds the state’s processing capacity.
“The bottom line is that California prices for manufacturing milk classes must balance milk production and plant capacity in California and not be set at levels that arbitrarily reference regulated milk prices in other parts of the country with different supply-and-demand dynamics,” says Rachel Kaldor, executive director of the Dairy Institute of California.
“Producers, processors and [CDFA] should come together to devise a new system that best serves the long-term interests of all constituents and resist the temptation to continually fiddle with what has always been,” says R. Gregory Dryer, Saputo’s executive vice president for industry and government relations. 
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