Dairy Market Eyes Milk Prices

November 11, 2015 02:34 AM
Dairy Market Eyes Milk Prices

Federal rule in California could hurt or help Midwest

California produces 20% of the nation’s milk, so when the state hiccups, the rest of the country gets queasy. 

That’s why four Federal Order proposals for the Golden State generated almost as much interest nationally as within state borders when hearings began Sept. 22. One calls for a $1 per cwt higher milk price in California to incentivize higher production averaging 540 million pounds, which led one state, Minnesota, to host a forum assessing potential impacts in the Midwest. 

In the run-up to the hearings, USDA ratcheted up anxiety levels with a 45-page econometric analysis of the four proposals. The analysis not only looks at potential effects for California but also at what could happen nationally and for imports and exports with each Federal Order.

Debatable Price Implications. Producers are concerned because higher milk prices in California reflect higher milk production, which can depress prices in other regions. USDA estimates the higher California milk prices under the co-op proposal—submitted by California Dairies, Inc., Dairy Farmers of America and Land O’Lakes—could bring an additional 540 million pounds to market, on average, from 2017 to 2024. 

Some observers take issue with this logic. First, they argue, those co-ops market 80% of the state’s milk and have base plans in place, which should keep a lid on production. That’s true, to a point. For example, California produced 42 billion pounds of milk this past year, yet production for 2015 is down 3%. Even a milk production increase of 540 million pounds in the final six months of the year would not make up for losses in production.

Second, price forecasts are speculative, and independent economists have not yet had the chance to see “what the model is and isn’t” from USDA, says Mark Stephenson, a dairy economist with the University of Wisconsin. “Some of the impacts seem awfully large,” he says. 

Third, the final rule could differ from the four proposals. It could take a year for USDA to issue a proposed rule and another year to implement the changes if California dairy farmers approve them.

What Does It Mean To Me?
  • All-milk prices could fall in many states if a federal rule is added in California. 
  • Yet costlier milk would hike cheese prices, giving other states a production edge.
  • It could take two years for the decision to be implemented. 

Midwest Might Benefit. It’s clear the Federal Order discussion ends in more questions than answers at this time. Yet while some speculate milk prices outside California could head lower, others argue a Federal Order might present an advantage. Among proponents of the latter outlook is Mike Brown, director of dairy economics and policy for Glanbia Foods, a cheese and whey protein manufacturer based in Evanston, Ill. The reason: Higher milk prices could make California cheese less competitive nationally, particularly if the state’s cheese costs go up 6¢ or 6.5¢ per pound.

Once those higher prices are in the marketplace, California will not be able to catch up because of a phenomenon known as National Agricultural Statistics Service [NASS] circularity, Brown says. Here’s how it works: Federal Order prices are based on the value of components such as cheese, butter and dry whey. Component values, in turn, come from a weekly NASS survey of cheese plants. 

If California milk prices rise because of a Federal Order, cheese prices will also increase and be fed into the NASS database, boosting Federal Order minimums across the U.S. and consequently raising prices for cheese and other components.

Plus, cheese has location value, meaning products made and eaten in the Midwest could enjoy a 5¢ premium to California cheese, which must be trucked farther to market. Brown thinks a rule change could push cheese production east. 

Midwest Milk Prices Might Dip Under California Proposal
All-milk price shortfalls are possible under a California Federal Order. Here’s how two of the proposals could affect the price per hundredweight. “Co-op” is a joint proposal of three groups. “Dairy Inst.” is processors’ proposal.  

Editor’s note: Jim Dickrell is editor of Dairy Today magazine, part of the Farm Journal Media family.

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