California considers Class 4 milk pricing changes

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click image to zoomCalifornia State Capitol buildingCalifornia State Capitol building A bill put forward by California Department of Food and Agriculture (CDFA) Secretary Karen Ross would index California minimum prices for Class 4 milk closer to federal order counterparts – while transitioning away from minimum pricing formulas toward  “self-regulating marketing practices.”

The legislation—Assembly Bill 2730—comes after days of negotiation last week between producer and processor representatives, who were working from a draft proposal Ross had distributed to the parties earlier this month. But time is running short to get the bill through the agriculture and appropriations committees of the Senate and Assembly and then passed by both chambers of the Legislature before Aug. 31, when lawmakers recess.

"It's got to really move," said Michael Marsh, CEO of Western United Dairymen (WUD).

Marsh described the final language of the bill as "a mixed bag." WUD’s board of directors voted last week to support the legislation if it is amended "to enhance the protection of producers' interests in the bill," he said.

What's attractive to dairy farmers, he said, is that the legislation would allow the state's Class 4a and 4b prices to be indexed, over three years, closer to federal order prices. Dairy farmers have long contended that the state 4b price, which applies to milk used to make cheese, is too low compared to what dairy farmers in states under the federal order are paid.

Specifically, the change would be phased in beginning July 2015 by indexing the state 4b price the same as the federal order equivalent Class III price, minus $1 per hundredweight, and the 4a price the same as the federal Class IV price, minus 35 cents per cwt.

In July 2016, the 4b price would be indexed equal to the federal Class III price, minus 50 cents per cwt., and the Class 4a price would be indexed no greater than the federal Class IV, minus 50 cents per cwt.

After January 2017, Class 4a and 4b prices may be adjusted, through a hearing process, to no more than minus 50 cents of the federal Class III and Class IV prices.

The price differential between California Class 4b and FMMO Class III milk – both used for cheese production – has been a major point of contention between producers and processors in recent years. For example, the July 2014 Class 4b price was $2.91/cwt. less than the comparable FMMO Class III milk price. Year-to-date, the 2014 average Class 4b price was $2.17/cwt. less than the Class III average.

Going forward, what has caused "some trepidation" for farmers regarding this bill, Marsh said, is that the legislation would also allow 4a and 4b milk to be sold under the agreements that do not obligate processors to pay farmers the state-regulated minimum prices. Instead, that milk would be covered by a contract between a handler and producer specifying payment terms, duration and price or contract pricing formula. A spot purchase contract may be implemented on milk volumes that would exceed the volumes specified in the contracts already in force.

The CDFA secretary would have the authority to enforce these contracts. Under the bill:

• The dairy producer must file the alternative milk marketing agreement, and any amendments, with CDFA.

• The handler must provide monthly information regarding any alternative milk marketing agreements with milk producers.

This change would also be phased in. Starting in July 2015, handlers would be allowed to market up to 50% of their 4a and 4b milk purchases under individual contracts with producers; up to 75% by January 2016; and 100% by July 2016 and thereafter.

Under the current system, dairy farmers pool their milk and processors pay for it based on the different classes of use. The milk revenues are then distributed equitably among farmers. But with the proposed change, handlers would be able to keep all 4a and 4b milk, after the transition period, out of the pool, Marsh said, noting that 75% to 85% of the state's milk goes to 4a and 4b use.

Dairy farmers negotiated a referendum into the final language that allows them to repeal the changes in 2020 if they decide they want to discontinue the program. At least 25% of of California's dairy producers, producing at least 25% of the state's milk, would be necessary to sign a petition requesting a referendum. A minimum of 51% of the state's producers, producing at least 51% of the state's milk, would have to approve the repeal petition.

Marsh said AB 2730—co-authored by Assemblywoman Susan Eggman, D-Stockton, and state Sen. Cathleen Galgiani, D-Stockton—could potentially provide "a substantial amount of relief" on 4b pricing that farmers have long sought. "The tradeoff to farmers," he said, is that their milk would be allowed to "depool" after they have "enjoyed years of relative protection of the pool, have seen the value of milk in California grow from $400 million a year to almost $8 billion a year at the farm gate."

The Milk Producers Council announced its support for the bill, saying that it "sees significant progress represented in the proposal." The Dairy Institute of California, which represents dairy processors, remained neutral.

California Dairies Inc., the state's largest dairy cooperative, had not announced its position. The state's two other dairy cooperatives, Dairy Farmers of America-Western Area and Land O'Lakes, oppose the bill, as does the California Dairy Campaign.

Dennis Rodenbaugh, senior vice president and chief operating officer of DFA-Western Area, said the bill lacks analysis "and contains so little detail that it would be impossible to reasonably conclude that it offers beneficial results."

Lynne McBride, executive director of California Dairy Campaign (CDC), said AB 2730 would deregulate the largest class of milk in the state and shift more risk to producers. She said her group also objected to the way in which the legislation came together, adding that proposed changes of this magnitude should be put to a vote by farmers to allow more input and consensus.

"Milk prices are relatively high right now, but when prices aren't, dairy producers really rely on the pooling system and the minimum pricing system, and to take it away in such a sweeping fashion in a bill rushed through the Legislature in the final hours is really concerning to us," McBride said.

CDC President Joe Augusto called on members of the California State Legislature to vote against AB 2730, critical of how the proposal was constructed, and what it contains. CDC is a member organization of California Farmers Union (CFU), a 1,300-member policy advocacy organization.

“Few have seen the final language of CDFA Secretary Ross’s bill, AB 2730, and that is by design,” Augusto charged. “Secretary Ross is waiting until the final days of the California State Legislative Session to introduce a bill that would eliminate milk pricing regulations that dairy producers rely upon as a lifeline when prices drop.”


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