Citing the severe economic hardships they have suffered in 2009 due to low milk prices and high production costs, California dairy farmers have asked the California Department of Food and Agriculture (CDFA) to provide some relief by raising milk prices.

The issue was the focus of an emergency hearing held last month by CDFA to consider whether to adjust pricing formulas used to determine milk prices paid to dairy farmers.

Opinions vary on what to change and how much, with different proposals pouring in from dairy groups that represent producers and processors. On one side, dairy farmers, who have seen slumping demand for dairy products since the recession hit, want CDFA to increase on-farm milk prices. On the other side, processors say price relief needs to come from the market rather than regulatory changes in the pricing formulas.

The hearing came at a time when California milk production has dropped off significantly and milk prices are moving up. Producers say that with modest recovery in the markets, a uniform boost in milk prices could help restore their financial health.

"We're simply trying to get some relief to dairy farmers as quickly as we can," Michael Marsh, chief executive officer of Western United Dairymen, said in his testimony.

Emergency hearings are rare. Since 1988, only six such hearings have been called, including the current one, which drew a full house. The last emergency hearing was in 1995, when CDFA raised the milk price by 13 cents per hundredweight for six months on all classes.

Higher increases are sought now. The Alliance of Western Milk Producers, an association of dairy cooperatives that includes California Dairies Inc. and Dairy Farmers of America, proposed to permanently increase the current Class 1, 2 and 3 prices—50 cents cwt. for Class 1 and 26 cents cwt. for Classes 2 and 3.

The proposal is meant to offset changes that CDFA made to the pricing formulas last October, when it reduced Class 1 milk by 35 cents cwt. and Classes 2 and 3 by 26 cents cwt.

"We weren't happy with that result, as you know," testified William Van Dam, executive vice president of the alliance. "We did not think that that was needed but we understood that the pressures were great. There were a lot of negative things going on. They're gone now. We just want to go back to square one, plus 15 cents."

Western United Dairymen, which represents more than 60 percent of the milk produced in the state, initially asked for a temporary 50 cent cwt. increase for all classes of milk. But after hearing from some of its members who expressed concern that an across-the-board increase would put the state in a less competitive position against out-of-state milk, WUD threw its support behind the alliance's proposal.

Other producer groups also weighed in with their own alternative proposals. Milk Producers Council, with members located primarily in Southern and Central California, took issue with how the current system calculates the value for nonfat dry milk and dry whey.

For example, the organization proposed moving to a national index to determine the value of California nonfat dry milk and dry whey.

Two other producer organizations, California Dairy Campaign and California Dairy Women Association, said they would like to see CDFA incorporate producers' cost of production into the pricing system.

Emphasizing the need for California processing plants to remain competitive, William Schiek, an economist from Dairy Institute of California, which represents the state's milk processors, testified that the market is already "moving prices to more sustainable levels for producers" and asked CDFA not to make any permanent changes to the formulas or large temporary price increases.

In his post-hearing brief, Schiek said, "When government sets prices that are not supported by market fundamentals, the wrong economic signals get sent to industry and producers are ultimately harmed."

But Schiek said the institute's members also recognize "how bad it's been for a lot of dairymen" and offered a proposal that gives short-term assistance to producers—a 20 cent cwt. increase for three months for all classes of milk, provided that both the Class 4a and Class 4b prices in the second prior month do not exceed $13 cwt.

CDFA has until Dec. 22 to make its decision. Analysts said any changes to the pricing formula are expected to have relatively little effect on the retail prices that consumers pay.

Source: California Farm Bureau Federation