FMMOs incorporate wholesale whey product prices in the class III price formula directly while California indirectly incorporates the whey price per pound using a whey factor value formula. The formula is capped at $0.75 per hundredweight and makes the California price much less responsive to changes in whey prices. For example, under FMMOs the average whey value during 2013 was $0.59 per pound and contributed approximately $2.30 per hundredweight to the class III price. Meanwhile, a similar average whey price in California would contribute only $0.6875 per hundredweight to the 4b price. FMMO price formulas can be found here and California price formulas can be found here. At a time when whey has become a major value-added product in both domestic and international markets this large difference in the whey contribution to the milk price results in a lower regulated price per hundredweight for California dairy farmers and has caused many producers to re-evaluate the State system. What's commonly overlooked in the debate over the milk price divergence are the implications of imposing higher FMMO classified milk prices on California's competitive position in the dairy processing sector.
These differences in the classified prices, in addition to differences in product yields and processing costs, are longstanding and over the years have more than likely influenced optimal plant locations and product mix, not only in California, but across the U.S. Adopting FMMO provisions in California may significantly alter this existing price advantage. While higher FMMO classified prices may lift regulated farm level milk prices, it may adversely impact the value or frequency of premium payments to dairy farmers over and above the regulated minimum prices. Additionally, California cheese processors would have similar processing cost credits and pay similar classified prices as their out-of-state competitors while also paying transportation and marketing costs to meet the demands of long-distance customers. Thus, if higher prices paid by California cheese processors manifest along the supply chain cheese makers could become less competitive in milk procurement and product sales. Such a shift could provide long-run incentives to modify investment decisions and adjust processing capacity away from cheese into other dairy ingredients and alter the allocation of resources in the state's dairy processing sector.
What's left after quota and de-pooling?
Among the most important issues of a California FMMO is the ability of a FMMO to accommodate a quota system. The 2014 Farm Bill permits California producers to keep some form of their unique quota system if a FMMO is adopted. The California quota does not strictly limit production, as the long and impressive growth record for the state attests. Rather, the quota provides a separate source of revenue for dairy producers in the state. Producers in the state are paid on the basis of their allocated quota, base, and over-base production at prices which reflect the utilization of milk in the California market (see here). One concept with respect to the operation of a California FMMO with quota is that the USDA would first estimate the market-wide pool value for California, then from this value deduct the quota value and transfer the monies to the California Dept. of Food and Agriculture for distribution to only producers holding quota (similar to the previous Oregon quota plan).The remaining dollars in the California FMMO pool would then be distributed according to the provisions of the order. Approximately 60% of California dairy farmers own quota and the value of the California quota state-wide is estimated to exceed $1 billion dollars, and entitles quota holding dairy farmers to as much as $1.70 per hundredweight in additional milk price revenue. In light of recent market difficulties in California, i.e. high purchased feed costs, the quota value is the only stable and sustained value on farm balance sheets.