The California Department of Food & Agriculture (CDFA) denied a dairy cooperative request for a hearing to consider raising manufacturing (or “make”) cost allowances on Class 4a milk.

In its petition filed June 17, California Dairies, Inc. asked CDFA Secretary Karen Ross to hold a hearing to consider a proposal to amend the Class 4a pricing formula by increasing the butter and nonfat dry milk manufacturing cost allowances to the weighted average cost for both commodities.

Make allowances are the amount of money that can be deducted from the price of milk paid to dairy farmers to cover dairy product manufacturing costs. According to Rob Vandenheuvel, general manager of California's Milk Producers Council (MPC), the proposal would have decreased the state’s monthly Class 4a price by about 23¢/cwt. With Class 4a making up about 35% of the California overbase price, the proposal would ultimately reduce the overbase price by approximately 8¢/cwt.

Vandenheuvel calls make allowances a “zero sum gain,” complicated by the fact some dairy farmers receive income from the sale of milk, as well as from their investment in manufacturing plants through their cooperative.

Under California's state milk marketing order, Class 4a milk goes into the production of butter and nonfat dry milk powder, comparable to Class IV milk under the federal milk marketing order system.

In denying the petition, CDFA said efforts are already underway to find alternative milk pricing formulas in California.

“The Secretary does not want to impede the ongoing efforts of the California Dairy Future Task Force in developing potential alternative pricing scenarios that address the issues of our state’s antiquated pricing system,” Candace Gates, chief of CDFA’s Dairy Marketing Branch, said in a June 27 letter to Dr. Eric Erba, CDI senior vice president and chief strategy officer.


CDC opposed petition

One group, the California Dairy Campaign (CDC), filed a letter opposing the petition, saying the higher make allowance would add financial hardship to the state's dairy farmers.

“Dairy producers have undergone unprecedented financial hardship in recent years and should not be required to pay higher 4a manufacturing cost allowances given the profitability of that class of milk in the domestic and international market,” said Joe Agusto, CDC president. “Increasing the manufacturing cost allowances in the 4a formula as called for in the petition would significantly increase the differential between the 4a price and the federal order Class IV milk price creating even greater inequity in our state dairy pricing system than already exists.

“As a result of the historic drought, California dairy producers continue to pay record high feed costs, face looming feed shortages, and have incurred a range of additional costs due to the lack of water availability,” Augusto continued. “Yet these cost increases are not factored into the milk pricing formulas.”

Augusto said 2013 data from USDA’s National Agricultural Statistics Service (NASS) showed California ranked last among all 50 states states in terms of the average return to dairy producers.

“Although dairy producer prices have improved, the future for many dairy producers is uncertain due to the tremendous losses suffered up until this point,” he said. “According to CDFA data, dairy producer income fell below dairy producer production costs in all but one of the last five years. As dairy producers recover from the financial losses sustained over many years, they simply cannot afford to pay more in manufacturing cost allowances.”

In its request, CDI had cited CDFA’s November 2013 manufacturing cost estimates, indicating the average cost to manufacture butter was 16.88¢/lb., 0.53¢/lb. more than the current butter manufacturing cost allowance. Similarly, the November 2013 estimate showed the cost to produce nonfat dry milk was 19.99¢/lb., 2.36¢/lb. more than the current manufacturing cost allowance for nonfat dry milk.

CDI noted manufacturing cost allowances for butter and powder and the butter f.o.b. price adjuster were last changed on Sept. 1, 2011. Manufacturing cost data published by CDFA since then indicates “the trend is toward high costs, and further adjustments to the butter and powder manufacturing costs allowances are both warranted and justified,” Erba said.

CDI, which is represented on the California Dairy Future Task Force, said CDFA should not wait on task force recommendations, or a manufacturing cost study update anticipated in November.

“As the largest butter and milk powder manufacturer in the state, we cannot simply ignore the fact our processing costs are higher than the manufacturing cost allowances in the Class 4a pricing formula might suggest,” Erba wrote. “We also cannot overlook the implications that static manufacturing cost allowances have on all California Class 4a and 4b operations.”

CDI is the No. 1 dairy processing cooperative in California. The member-owned milk marketing and processing cooperative is co-owned by 430 California dairy farmers, covering an area from San Diego County in the south to Sacramento County in the north. CDI members produce about 18 billion lbs. of milk annually (43% of California's total), and manufacture fluid milk products, butter and milk powders, with annual sales of more than $3 billion.

To read the petition, denial and related documents, click here.