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June 18, 2018

Will The California Federal Order Cut Your Milk Price?

Top Story  |   |  By: Jim Dickrell

See also USDA Readies California for Federal Order.


On February 3, 2015, California Dairies, Inc., Land O’Lakes and Dairy Farmers of America proposed enacting a Federal Order in California. This spring, those cooperatives and producers voted in favor of a Federal Order, and come November 1, it will become operational.


Because California produces almost a fifth of the nation’s milk, the impact of the Order will cause ripples in the surface of milk prices from Los Angeles to Minneapolis and on to Boston and Miami. Whether those ripples grow into waves remains to be seen. California’s new Federal Order will be implemented at the same time world markets continue to churn and Trumpian trade wars potentially disrupt U.S.  exports.


It’s difficult, then, to predict what California’s new Federal Order will have on California and the rest of the country. Geoff Vanden Heuvel, a former dairy farmer and economic consultant for California’s Milk Producer Council, sums it up this way: “We think it will be better. We know it will be different.”


For starters, California processors will have to learn how to move milk around the state without the millions of dollars in transportation credits California’s state order provided. The Federal Order provides no such incentives.


Two of the major players in the state, Land O’Lakes and Dairy Farmers of America, have very little milk production in the Los Angeles basis where the bulk of California fluid milk is consumed, and they have little or no fluid processing. The trick, says Vanden Heuvel, is to get fluid milk buyers to contribute dollars to aid that movement.

“Longer term, quite a lot of cheese milk will never be pooled,” Vanden Heuvel says. But non-pooling plants will still have to pay competitive prices to attract milk, he says. And therein lies the hope of better prices for farmers.


In March, USDA provided an updated Regional Econometric Model that estimated a whole host of possible production, product utilization and price changes that could result from the implementation of the Federal Order in California. The projections were compared to current baseline numbers, and went out for a decade as the industry in both California and states across the country adjusted to the new conditions. You can read and see all the numbers here. https://www.ams.usda.gov/sites/default/files/media/FinalDecisionRegulatoryEconomicImpactAnalysis.pdf


USDA’s model projected a 57¢/cwt bump in the California all-milk price in the first year of implementation of the Order. Those prices decline to 30¢ to 40¢/cwt above baseline levels as time moves on and more of a supply/demand equilibrium is reached.


Annie AcMoody, an economist with Western United Dairymen, say those estimates appear to be “realistic and in the ballpark. But there could be a restructuring of pricing as markets adjust.” Because of California’s tight milk market, plants are having to bid for milk and farmers are currently receiving fairly strong premiums, she says.


While milk production has been up slightly in recent months due to good weather, cow numbers continue to lag. In April, they were down 19,000 head from a year, down 45,000 from 2014, and down 86,000 head from 2009. Those falling cow numbers have been good for premiums. But if one more major plant closes, the supply/demand dynamic currently in place could be changed in an instant, says AcMoody.


Both she and Vanden Heuvel say that in the end, it might be impossible to say what impact a Federal Order will have on California milk prices. But both also say farmers were frustrated with the State Order, and that it was no longer responsive to their needs.


“The State Order generated a lot of processing capacity, but our cost-of-production advantage has slowly disappeared and maybe even evaporated,” says Vanden Heuvel. “We need to be on the same playing field as everyone else, and a Federal Order does that.”


National Impact. The initial fear in the rest of the country was the enactment a Federal Order in California would ramp up California milk production, causing prices to decline nationally. But because California is so distant from the population centers of the Midwest and East Coast, California cheese makers will still be burdened with the cost of getting that product to those markets.


Consequently, cheese prices in the Midwest could actually increase. That, in turn, could cause an increase in the Class I mover and generally raise Class I prices nationally. But increasing milk production will also affect other classes, reducing those prices. So farmer revenue will depend on the product mix and class utilization within each order. Economists say predicting regional effects is incredibly difficult and is nowhere near an exact science.


Having said that, USDA is projecting the all-milk price to average 8¢/cwt higher nationally over the next decade with a California Order in place. The Upper Midwest, with its heavy reliance on cheese production and sales, is expected to see its all-milk price increase an average of 16¢/cwt over the next decade. The irony is that the former Western Order, which dairy farmers voted out of existence in 2004, would see a 36¢/cwt bump in its all-milk price. Florida might see a nickel rise in its all-milk price over the next 10 years, starting out with a 30¢/cwt increase initially but then see a decline as the decade wears on. The Northeast could see a 20¢/cwt average drop in its all-milk price.


National milk production is projected to rise, likely due to increasing milk prices in California, Idaho, and the Midwest.  Total U.S. milk production is expected to see milk production rise 150 million lb in the first year and 830 million lb per year by 2026. California is expected to increase production 48 million lb in the first year and be up nearly 600 million lb per year by 2026. The Upper Midwest is expected to see flat production the first year but increase 274 million lb per year by 2026. The Northeast would likely see no effect the first year but decrease milk output by 70 million lb/year by 2026. Florida production remains largely unaffected, increasing by a few million lb each year.


Because prices changes will affect every class and category of dairy products, imports and exports will be also affected marginally. Only cheese other than American cheese types are expected to enter the U.S. at larger volumes, up about 3.6 million pounds on average. Because of higher cheese prices, however, American exports of cheese are expected to decline by about 20 million pounds per year. But butter exports are expected to increase by some 32 million pounds per year and nonfat dry milk powder sales by 46 million pounds.


The bottom line—in terms of producer revenue—is that there will be winners and losers. Nationally, producer revenue is expected to increase $284 million per year on average over the next decade. California producers will see the bulk of this increase, with revenues up an average of $269 million per year. The Upper Midwest is the next biggest beneficiary, up an average of $106 million per year and the former Western Order could see $90 million per year in additional revenue.


But USDA is also projecting producers in five Federal Orders will lose revenue: Mideast, $81 million/year; Northeast, $66 million/year; Central, $35 million/year; Pacific Northwest, $24 million/year, and Arizona, $13 million/year.


Economists we spoke with for this story say the prices projected by USDA are likely in the right direction. But they add prices will be buffeted by world market conditions as we proceed through the next decade, with one price change or shock affecting the next market move.


Finally, keep in mind these are merely econometric model projections. As Mark Stephenson, a University of Wisconsin dairy economist, is fond of saying: “All econometric models are wrong. But some are more useful than others.” 

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