The hearing to consider a Federal Milk Marketing Order for California ended on Nov. 18, 2015, after 40 days of various witnesses presenting testimony and exhibits and being cross-examined. Now it is up to the secretary of agriculture, based on the hearing record, to issue a decision recommending or not recommending a California federal order.
If an order is recommended, then California dairy farmers have the final say. Individually or through their cooperatives, they will vote to approve or disapprove a final decision calling for the implementation of a federal order in their state.
Whether a federal order is or is not implemented in California, I see the California hearing and some of the proposed order provisions influencing future changes in other federal orders. Let me share with you four areas of potential influence.
First, prior to the hearing, the USDA issued a report titled “Preliminary Regulatory Impact Analysis of Proposals to Establish a California Federal Milk Marketing Order.” This analysis looked at the impact of the order proposals on California and the rest of the country in terms of milk supply, product demand, commodity and federal order prices.
According to the analysis, a California order, as proposed, would increase milk prices to California dairy farmers. However, it would lower milk prices to most dairy farmers in the rest of the country. The exception is dairy farmers in parts of Idaho, Nevada and Utah, where farm prices would increase.
In addition, the analysis projected that under one of the proposals milk production would increase, nationally, about 500 million pounds. Almost all of the increased production would come from California, Idaho, Utah and Nevada as dairy farmers in those states respond to higher farm prices.
I, as well as others from outside California, presented testimony at the hearing asking the secretary of agriculture to take into consideration the impact a California federal order may have on farm milk prices and milk production outside California. Let me interject that some at the hearing challenged the results of the analysis, especially in regards to increasing California milk production.
Whether one agrees or disagrees with the analysis projections, the main point is: Milk marketing continues to become more national in scope. What happens in one area of the country can impact milk prices or milk production in other parts of the country.
The USDA recognized this point by issuing the report, as well as those of us outside California who testified. In the future, I anticipate more attention to be paid to the impact a proposed change in one order has on the rest of the country as milk marketing continues to be more and more a national issue.
Second is the California state milk quota system. In 2014, Congress re-authorized legislation in the 1996 Farm Bill to allow California to promulgate a federal order and keep its quota system in place. Quota or base plans within federal orders are not new.
At one time, several orders had some type of base plans. Some of the base plans were used to distribute Class I revenue to producers, and other plans encouraged production of milk when fluid milk was most needed. However, legislation no longer authorizes base plans in federal orders, except for allowing a potential California order to have a quota plan.
Today, there is increased interest in base or quota plans to help reduce seasonality in milk production and better align milk production with consumer demand and plant capacity. In the Northeast, one cooperative announced its own base plan, effective Jan. 1, 2016, to encourage production more in line with demand and its own plant capacity.
A few years back, California cooperatives implemented their own base plans to do likewise. If a California federal order is recommended and approved with a quota plan, will this make it easier to request quota or base plans in other orders? I think it would.
The third area of interest is the plants regulated under a proposed California order. First, a little background. Federal orders establish minimum prices regulated buyers of milk must pay. Generally, a milk buyer regulated under a federal order is a plant that processes and distributes fluid milk in consumer packages or, in other words, a fluid milk plant.
On the other hand, a plant that purchases milk to manufacture dairy products (cheese, butter, powder) and does not bottle fluid milk is not required to be regulated under a federal order and is not subject to the minimum price requirement.
Under three of the four California proposals, all plants purchasing milk from producers or cooperatives would be regulated. Manufacturing plants could not opt out of being regulated under these three proposals.
This is different from provisions in the other federal orders, as explained above, but it is similar to the current California state order which requires all plants purchasing Grade A milk to pay the state order’s minimum prices. The argument used by the order proponents in requiring regulation of all milk buyers is to help preserve the quota system and prevent disorderly marketing conditions.
The ability for manufacturing plants to participate or not participate in a federal milk order is a frequent discussion topic. The California proposal sheds new light on the discussion. Requiring all milk buyers to be regulated and pay minimum prices has its advantages and disadvantages.
Regulating all milk buyers, not just fluid processors, in an order does promote orderly marketing and stability – and could improve producer prices – but such a requirement gives cooperative-owned manufacturing plants an advantage over proprietary plants. Cooperatives are not required to pay their members the minimum federal order price.
On the other hand, federal orders require all regulated proprietary plants to pay the minimum price for milk purchased. Another disadvantage is balancing the market. It is common in times of surplus milk production for surplus milk to be sold to manufacturing plants several dollars below the federal order minimum price.
This is done in order to find a market for that milk. If all plants are regulated, proprietary plants would no longer be able to do this. A California federal order requiring the regulation of all plants will create additional discussion on this topic.
The fourth area of influence is the shift from predominantly fluid to manufacturing milk, under the federal order system. Adding California to the order system will accelerate this shift. A primary purpose of federal orders is to ensure consumers an adequate supply of fresh, wholesome fluid milk. This is why federal orders regulate fluid milk plants. In 1960, more than 64 percent of the milk marketed under federal orders was Class I or fluid. In 2014, only 32 percent of all federal order milk was Class I.
If California is added, the Class I percent is estimated to drop to about 27 percent. The continuing shift from fluid to manufacturing will add to federal order challenges, especially in regards to pooling and sharing of Class I revenue.
In conclusion, we should expect a recommended decision from the secretary regarding a California federal order sometime in 2016. If a California order is recommended and approved by dairy farmers, it will be the largest order in the system with some of the proposed order provisions influencing future changes in the other 10 orders. PD
Calvin Covington is a retired dairy cooperative CEO and now does some farming, consulting, writing and public speaking.
