California milk cap.
December 18, 2019

​​​​​​​California Quota Quagmire Offers Lesson for All

 |  By: Dairy Talk

As California dairy producers struggle to resolve the quagmire in which they find themselves, it behooves all U.S. dairy farmers to pay attention. There are both immediate and longer-term lessons to be learned here.

Only about 22 percent of California’s milk production is covered by quota. That quota is owned by a larger percentage of dairy farmers, however, because they typically are the smaller herds. Nevertheless, every single dairy farmer contributes 32.5₵/cwt on all milk they ship each month. For a 1,000 cow farmer, that can equate to $10,000 per month.

In turn, quota owners receive $1.70/cwt on the quota they own. In addition to that monthly payment, the quota itself has value. While that value has dropped by half over the past year, it still amounts to some $500 million. That money undergirds many a balance sheet, and its loss could make some farmers less able to borrow money.

If the quota program was terminated suddenly, California milk production could decline by as much as 4.2%, or nearly 1 billion pounds, according to analysis by Marin Bozic, a University of Minnesota dairy dairy economist and Matt Gould, a private dairy analyst. That’s less than half of one percent of U.S. milk production, but still the equivalent of the annual production of Kentucky. It could have a short-term market impact.

The bigger lesson, though, is the unintended consequences of any quota program—however well-intentioned initially or through the inevitable course corrections over its history.

California’s quota program certainly started out that way. Back in the 1960s, California was primarily a fluid milk market, with more than 80% of its production going into the bottle. (Today, it’s about 11% Class I.) It had handler pools, not market-wide pooling. This inevitably put producers at the mercy of milk processors.

Yes, the farmers signed contracts for fluid premiums with handlers. But some of these contracts were as short as 30 days, and there were stories (many of them true) of outright handler corruption. One farmer reports his field man demanded a $5,000 kickback (the equivalent of $35,000 today) to sign a one-year contract.

To solve this problem, the state of California set up market-wide pooling. But some farmers, who had full-production contracts, were reluctant to support the program because they would have to share the fluid premiums with neighbors who didn’t have contracts. To entice fluid shippers to do that, the state offered the quota program—at 110% of their milk production. So for a time, some fluid shippers were receiving quota payments for 10% more milk than they actually delivered.

In the 1970s, fluid consumption did not increase as fast as overall milk production. Plus,  the 1977 farm bill made automatic 50₵/cwt increases to the dairy support price every six months. This encouraged massive expansion in both cows and plants to produce cheese to sell to the government. These high support prices, coupled with economies of scale and cheap feed, made overbase milk production profitable.

The quota payment also fluctuated with market prices, so in 1994 California went to a fixed Class I differential. That worked for a while, but soon Arizona and Nevada milk poured across the border to take advantage of the higher Class I price. This caused even more disruption, leading to a U.S. Supreme Court case.

California’s milk pricing system has been under fire ever since. It’s what led to a number of California dairy farmers to pursue a California Federal Milk Marketing Order (FFMO) in 2014. This past fall, the California FMMO began operation.

But USDA declined to include the quota program within the Federal Order, telling California it had to operate the quota on its own. For the first time, California farmers were told each month how much was deducted and how much they received from the quota. The numbers are stunning: $12.5 million is deducted from milk checks each month to fund the program.

One dairy farmer, Peter DeBoer who milk 1,100 cows 20 mile north of Bakersfield at McFarland, Calif., has $10,000 deducted from his milk check each month. He owns no quota, and estimates he’s paid $3 million into the program over his 25-year career.

Quota owners, in turn, net about $1.35/cwt on the quota they own. They argue they invested in the quota, and are legally and fairly entitled to the payment. For many, it capitalizes their businesses. For some, it undergirds their retirement.

In the end, it’s easy to empathize with producers on both sides of the debate. There are very real dollars—even livelihoods—at stake. If there’s any good news, California has started a process to resolve the issue—and if the courts don’t get involved—farmers themselves are being asked to resolve it.

For dairy farmers outside of California, the quota program is an object lesson in how such programs can create discord and controversy for decades—and for multiple generations of dairy farmers. There are no quick fixes to dairy markets that operate in state, national, and now international, environments.