California’s Quota Quandary

April 2, 2013 09:03 PM
California’s Quota Quandary

When you have a $1 billion asset, you don’t give it up easily

As California’s dairy producers consider adopting a Federal Milk Marketing Order (FMMO), they’ve made one thing clear: They’re not willing to relinquish their quota entitlements, valued statewide at $1 billion.

Quota has been part of California’s state milk pricing system for more than 40 years. Owning quota entitles producers to as much as $1.70 per cwt. of additional income.

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"[Quota] selling prices move with each transaction made," says Eric Erba, senior vice president with California Dairies Inc. (CDI). Most recent prices are about $420 per pound, but typically range from $400 to $500.

But how to incorporate quota into California’s FMMO has raised questions, since no other federal order area except Virginia, includes a similar pricing entitlement.

"There’s nothing in the federal system that looks like California’s quota system," Erba says.

The state’s three major dairy cooperatives—CDI, Land O’Lakes and Dairy Farmers of America—have agreed they won’t pursue an FMMO unless there are assurances that California’s quota system is protected. In fact, they’re seeking legislation that would allow California’s quota to continue. The three organizations represent more than 80% of California’s milk production.

"Many dairymen have counted on the value of quota persisting," Erba says. "If it went to zero, that would greatly impact their plans for their operations. A value of zero for quota would be a poor outcome in the eyes of many California dairy producers."

Adopting a federal order with quota has generated numerous questions. For example, Erba says, quota can be held today only by dairy operators in California. If California becomes part of the federal order system, could those outside of the state hold quota?

Some 60% of the state’s dairy producers own quota. California’s producers can only obtain quota by purchasing it or receiving it by transfer. A unit of quota entitles the owner to a higher solids-not-fat (SNF) price. That now amounts to a maximum of 19.5¢ per pound. The actual price a dairy producer receives depends on the area where the dairy operates.

California’s quota came into being for a reason, Erba says. The quota program was an inducement to encourage the state’s dairy producers to vote for the state pooling system in 1969. Before that, there was no sharing of milk sale revenue. Milk pricing was handled by individual contracts.

"At that time, it was thought that quota would be allocated to all dairy producers, and eventually they would become equalized," Erba says. "As quota continued to be distributed, its value would decrease. But because Class 1 sales did not increase, less quota was allocated than anticipated, and quota took on value. It didn’t work out as expected."

Today, the entire state pool funds the quota payout as a redistribution of milk sale revenues. Quota is no longer funded only by Class 1 revenues, as some believe.

California’s industry is awaiting a study, conducted by dairy economists Mark Stephenson and Chuck Nicholson, of how a federal order might impact the Golden State. In the meantime, producer interests are starting the groundwork for a pro-posal asking USDA to consider a California federal order—with a provision to allow the continued existence of quota.

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