July 18, 2019

California Federal Order Brings Growing Pains

 |  By: Mike Opperman

California adopted a Federal Milk Marketing Order (FMMO) system last fall and brought greater pricing balance between California and the rest of the United States. A new report from CoBank’s Knowledge Exchange division states the FMMO did not change the underlying market forces that determine what milk produced in California is worth. It only nudged the regulated price higher and added safety valves to pay milk under class prices if supply exceeds demand. 

Processors gained flexibility while producers gained access to higher regulated prices, according to the report. The traditionally stable landscape of milk utilization in California has changed as processors make monthly pooling decisions, which has led to some concern among producers. 

The regulated system added a regional pricing component that did not exist in the previous California system. The one-state, one-minimum blend price was replaced by five pricing zones, which values milk based on where it is received. The transportation allowance system was eliminated with the FMMO, and along with it went strong incentives to move milk to certain markets. 

California’s quota system under the California Department of Food and Agriculture remains relatively intact, but it faces uncertainty as some non-quota holders would like to see it go away.   

The transparency of the FMMO gives California producers hope that they are finally on a level playing field with the rest of the country. In the short term, it may appear so for many. In the long run, with additional transportation costs no longer subsidized, processors will have incentives to move milk around differently, make different processing decisions or charge additional hauling costs. 

Until USDA launches a national hearing to change the pricing formulas, both producers and processors now have a new system that gives them something they were looking for.  

Read the full report, How the California Dairy Industry is Faring Under its New FMMO, by clicking here.