California’s ‘Deal-Breakers’

May 6, 2015 06:51 AM
California’s ‘Deal-Breakers’

Without these two provisions, California dairy producers aren’t likely to approve a Federal Milk Marketing Order.

California’s quest for a Federal Milk Marketing Order (FMMO) could reach a dead end if USDA rejects two key components of the proposal.

Eric Erba, senior vice president and chief strategy officer for California Dairies Inc. (CDI), said if there’s a “significant departure” from the two FMMO provisions that call for retaining California’s quota program and prohibiting voluntary de-pooling of any class of milk, it could be a“deal-breaker.”

Erba, who helped craft California’s historic FMMO petition, offered his “deal-breaker” remarks in response to an audience question during his presentation March 19 at Western United Dairymen’s (WUD) annual convention in Yosemite, Calif.

CDI is one of three joint petitioners seeking a hearing from USDA to consider a Federal Order pricing system in the Golden State. The others are Land O’Lakes and Dairy Farmers of America.

California dairy producers’ insistence on retaining the California quota program is why a Federal Order effort has never progressed in the state, Erba said. None of the nation’s 10 FMMOs includes quota. But the current farm bill grants California the authority to promulgate an FMMO and to address quota preservation, he added.

California’s milk pool quota is an asset that brings its owners a higher milk price. Valued statewide at
$1 billion, quota has been part of California’s milk pricing system since it was established in 1969.

In March 2015, 58% of the state’s dairies owned quota. California dairy producers can only obtain quota by purchasing it or receiving it through transfer. A unit of quota entitles the owner to a higher solids-not-fat price. Today, that amounts to 19.5¢ per pounds per day. The actual price a dairy producer receives depends on the dairy’s location.

Under the co-ops’ FMMO proposal, the California Department of Food and Agriculture (CDFA) would continue to administer a similar quota program.

The other crucial FMMO component, which prohibits voluntary de-pooling of any class of milk, is referred to as “inclusive pooling.” All California plants that purchase California Grade A milk from dairy producers would be required to pay the regulated minimum price, similar to current California regulations.

“That’s a significant departure from historic FMMO administration,” Erba said. “Inclusive pooling is a big ask of USDA. No other FMMO has anything like inclusive pooling.”

The co-ops’ proposal won’t be the only plan discussed at USDA’s California FMMO hearings, expected to be held over the next year. In April, the Dairy Institute of California, the California Producer HandlersHowever, he added, the 1937 Agricultural Marketing Agreement Act does not expressly prohibit mandatory pooling of all classes of milk. De-pooling is when milk normally associated with a market is not pooled during a particular month, according to USDA. Currently in all Federal Orders, only Class I milk is required to be pooled. Handlers may opt to not pool Class II, III or IV milk when manufacturing class-use values are higher than the uniform price.

Association and Ponderosa Dairy each filed counter proposals to the co-ops’ formal hearing petition.

The Dairy Institute, a trade  association that represents the state’s milk processors, has had a rocky relationship with the state’s producers in recent years over changes to the state’s 4b (cheese) pricing system. It believes “there are no significant disorderly marketing conditions that warrant” a hearing or a California Federal Order proposal. But recognizing that USDA may proceed with an FMMO hearing, the Institute has proposed a federal plan patterned after the other 10 FMMOs now operating in the U.S.

“If a new FMMO is adopted for California, it should be structured and operated like all the other FMMOs,” said Rachel Kaldor, the Institute’s executive director. “But the co-ops are proposing a plan that ‘cherry picks’ from the current state system, creating a hybrid federal system that would put California’s dairy industry at a competitive disadvantage with other states.”

Open to the public, USDA’s FMMO hearings will record everything provided by witnesses testifying both for and against the petition. The process will also include “attorneys, attorneys, attorneys,” Erba said.
California’s FMMO proposal “won’t be a slam dunk,” warned Dana Coale, USDA deputy administrator of dairy programs, who also spoke at WUD’s March meeting.

“This is a huge, important process,” that doesn’t happen very often, Coale said. “It’s important for producers to participate in the hearings,” she added. “It will be an opportunity for you to learn what the proposals are intended to do.”

Combined, CDI, Land O’Lakes and Dairy Farmers of America operate 12 plants in California and market milk to a significant majority of the state’s milk buyers. 

A Federal Order’s Long, Long Road

Submitted to USDA on Feb. 4, 2015 by the state’s three largest dairy cooperatives, California’s Federal Order petition had been 20 months in the making. “We didn’t understand how complicated this would be,” co-architect Eric Erba of California Dairies Inc. (CDI) said.

CDI, Land O’Lakes and Dairy Farmers of America wrestled with the details and complexities of reconciling California statues with Federal Order objectives. They pondered data-sharing between USDA and CDFA, “what if?” scenarios and precise definitions for words such as “plant” and “producer.”

With the co-ops’ petition in play, USDA just completed three public outreach meetings May 5-7 in California to explain the FMMO rulemaking process and allow proposal sponsors the opportunity to explain the technical details of their submissions.

Looking ahead, Erba laid out a possible timeline for California’s FMMO petition process, underscoring that the schedule has not been sanctioned by USDA. If USDA agrees to an FMMO hearing, that series of meetings could take place in California from September to December of 2015, Erba said. USDA could then deliberate the merits of the hearing from January through the fall of 2016.

Allowing for required post-hearing briefs, commenting periods and review, USDA could issue a final decision on the California FMMO proposal in May 2017. A producer referendum would then follow in July 2017. 

Opposing Views

Producer Perspective:

“The failure of our state system to pay a fair price has cost California’s dairy families nearly $2 billion just since 2011. California dairy farmers deserve to be paid a price for their milk that is in line with prices paid around the country. Joining the Federal Order will restore equity to dairy pricing in California.”

  • Lynne McBride, executive director,  California Dairy Campaign

“Shifting to an FMMO from a statewide milk pricing plan supports the desire of these cooperatives’ dairy farmers to receive more equitable, market-based milk prices. Changes made to the California state order before 2011 resulted in California’s dairy farm families enduring unsustainable pricing for their milk.”

  • Eric Erba, senior vice president and chief strategy officer, California Dairies Inc.

Processor Perspective:

“Creating a different set of rules for California would make our state’s dairy industry even less competitive in national and international markets, ultimately hurting producers and processors alike.”

  • Rachel Kaldor, executive director, Dairy Institute of California

“A California FMMO does not guarantee higher payouts to producers. Higher pay prices will only come through increased competition and value creation. This process will only perpetuate uncertainty and further delay investments needed to create competition and keep California competitive.”

  • David Ahlem, Chief Operating Officer, Hilmar Cheese Co.
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Spell Check

willard, WI
5/29/2015 07:15 AM

  Your article talked about opting out of a pool. Doesn't at least some orders only allow you to pool up to 110% of the month before so you need to stay in the pool if you want to gain the next month. It addressed the "depooling" issue.


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