A Federal Order in California Raises Tons of Questions
Apr 07, 2014
A new analysis by a dairy economist with the University of Illinois tells a tale of caution.
A new Federal Milk Marketing Order for California has been held out as the salvation for producers there, beleaguered by less-than-competitive pay price minimums established by their state order. But a new analysis by John Newton, a dairy economist with the University of Illinois, tells a tale of caution.
California producers need to go into such a change with their eyes wide open. The cure might not be any better than the disease, and if the new order is designed badly, could be worse. At the very least, it could create unintended consequences that could reverberate within the state with the force on a mild earthquake. And dairy farms across the country could be jolted by its aftershocks years afterwards.
Currently, the disparity in California and Federal Order pricing mechanisms means California producers often receive a lot less than farmers who market milk under Federal Orders. Much of that comes from the disparity between California 4b cheese prices and Federal Order Class III prices, which can differ by as much as $3.63/cwt. The average difference has been $1.43 from 2010 to 2013, says Newton.
And much of that comes from whey prices. California’s system caps the whey contribution to 75¢/cwt. The Federal Orders have no caps. During 2013, whey values contributed $2.30/cwt to the Class III price.
If the Federal Order system of price formulas is adopted, California farm prices would likely rise. "Thus, if higher prices paid by California cheese processors manifest along the supply chain, cheese makers could become less competitive in milk procurement and product sales," says Newton. That, in turn, could cause a change in milk processing away from cheese into other products.
Already, with either brilliant foresight or a simple reaction to world markets, Hilmar Cheese is breaking ground on a new whole milk powder plant. Dairy Farmers of America is already producing whole milk powder in its Fallon, Nev., plant, which is just a hop, skip and jump over the Sierra Nevada Mountains from California.
Perhaps the bigger problem is California’s quota, reportedly worth more than $1 billion. It currently contributes as much as $1.70/cwt. to quota owners. It’s not at all clear how quota would be handled under a new Federal Order in California, since no other state has had the same type of system. Like all things involved with Federal Orders, it gets quite complicated quite quickly. But the bottom line is this: Quotas could mean fewer dollars available for non-quota milk being shipped to pooling plants.
And then there’s the issue of pooling, i.e. when plants participate in the program and when they are allowed to "depool."California’s state program has stricter pooling rules than Federal Orders. If less stringent rules are written into the California’s Federal Order, they could allow plants to jump out of the pool more easily when prices are favorable for such a move. That, in turn, would mean less dollars available, which mean farmers still shipping into the pool would receive less.
The bottom line in all of this is California dairy farmers and their co-ops will have to carefully study these new rules before voting in a Federal Order. Even then, predicting outcomes in the complexity of national and global milk markets offers no certainty.
Yes, Federal Orders can be amended if things aren’t done correctly. But that process is arduous—even more arduous than the California’s state order amendment process. And the outcome can be just as uncertain.