The 2014 Agricultural Act (2014 Farm Bill) addresses both of these concerns directly. With respect to California's state milk marketing order and it's method for milk pricing and revenue pooling the 2014 Farm Bill provides the authority for the entire state of California to abandon the existing state system and petition to join the FMMO program while keeping a form of their unique pool quota system. By adopting a FMMO in California dairy producers in the state hope to narrow the gap with FMMO farm level prices thereby increasing the overall milk price received on the farm. With respect to dairy farm profitability, the 2014 Farm Bill includes a dairy producer margin protection program. The margin program has been covered extensively here on farmdoc daily (see here, here, and here). In today's post we will consider potential implications of a California FMMO, including how altering classified milk prices may change the competitive position of California cheese processing facilities, and if the financial returns from a California marketing order post quota and de-pooling could be lower than anticipated.
California's competitive position
California is the nation's largest dairy producing state, accounting for approximately 21% of U.S. milk production (41 billion pounds of milk) during both 2012 and 2013, and is a surplus milk production state. As a result of being long in milk a large portion of the farm milk produced is used to manufacture storable dairy commodities such as cheese, butter, and milk powders. Of the 41 billion pounds of milk produced in California each year approximately 44% goes into cheese and dry whey production. According to USDA data California accounted for 21% of U.S. cheese production in the U.S. during 2012 (excluding cottage cheese), and was second only to Wisconsin at 25%. The built-in price advantage associated with the California 4b price being lower than the FMMO class III price, combined with processing plant efficiency, has provided an opportunity for California produced cheese to compete with cheese produced elsewhere in the U.S. by partially offsetting the transportation and marketing costs needed to serve a national market.
Historically the FMMO classified prices and the California state order prices followed one another closely. The FMMO class IV price and the California 4a price (milk used to produce butter/powder) are highly correlated and have an average difference of only $0.31 per hundredweight over 2000-2013. However, in recent years the FMMO class III price and the California 4b price (milk used to produce cheese and whey) have begun to diverge, Figure 1. Prior to 2009 the per hundredweight difference in the two prices series averaged $0.42 and post-2009 this difference increased significantly, reaching a high of $3.63 in December 2011, and averaged $1.43 from 2010 to 2013. These large differences are driven almost exclusively by the value of whey, a by-product of cheese production, in the price of solids-non-fat in the 4b formula.