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February 17, 2017

California Faces an Intractable Milk Price Conundrum

 |  By: Dairy Talk

By Jim Dickrell

It’s pretty clear that a Federal Milk Marketing Order (FMMO) for California isn’t going to fix milk pricing in the nation’s largest dairy state. See "California Federal Order Not What Farmers Wanted."

I spent the good part of a Saturday afternoon  reading (OK scanning) USDA’s 213-page recommended decision on the California Federal Order petition. It summarizes 40 days of testimony from 98 witnesses.

There are three main issues that California dairy farmers and processors are grappling with:

• Low prices. It’s been well-documented that California dairy farmers have received lower mailbox prices than much of the country for at least the last decade. Most recently, between August 2012 and May 2015, California farmers received on average $1.85/cwt less than their counterparts in the Upper Midwest or Pacific Northwest. The range was from 43¢/cwt to as much as $4.27/cwt less.

Remember, though, California’s dairy industry was built on the premise of cheap milk to attract processors to the state. Cheap corn from the Midwest, low-priced irrigated alfalfa and abundant commodities coupled with low cattle housing costs and economies of massive scale made California extremely competitive. But ethanol subsidies, drought, hay exports to the Far East and a movement to bring dairy cows into freestall housing changed all that.

All of a sudden, especially given the shock of $7/bu corn and $200-plus per ton alfalfa, California’s COP came to mirror other regions of the country. And its state pricing system didn’t adjust very well, hampered by processors addicted to cheap milk.

• Distance to market. The state produces 20% of the nation’s milk, but its 39 million residents make up just 12% of U.S. consumers. Some 16 billion lb of surplus milk, the equivalent  of the combined annual milk output of Pennsylvania and Ohio, has to go somewhere. And somebody has to pay to get it there.

Testimony in the recommended decision shows that it costs anywhere from 10 to 15¢/lb of cheese (or $1 to $1.50/cwt of milk) to move cheese from California to East Coast markets. So if raw milk prices were raised to those in the Midwest, transportation cost to get milk to consumers east of the Mississippi River would make California mozzarella uncompetitive.

• Quotas. Back in the late 70s, California moved from a Class I quota to one based on solids-not-fat. Each producer received a quota share based on 95% of his/her production base regardless of Class I sales. At the time, about 72% of California production was covered by quota.

With no more new quota being sold while production continues to increase (2015 and 2016 not withstanding), quota is held by 58% of California dairy farmers on about 21% of all milk produced. The kicker is that the quota is still worth an estimated $1.2 billion.

Every month, quota holders receive 19.5¢/lb for every pound of solid-not-fat quota they own, the equivalent of $1.70/cwt. That money has to come from somewhere, and it comes via a deduction of 37¢/cwt from all Grade A milk produced in the state.

A Federal Order might be able to fix part of California’s problem, i.e. adjusting price formulas to better reflect the true value of cheese. But any such fix is swimming upstream against the strong currents of location marketing economics and an entrenched quota program.

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