Federal Milk Marketing Order Has Finally Started in California

After three years of discussions, the largest producer of milk in the country is finally joining the Federal Milk Order. ( Alison Fulton )

California’s Federal Milk Marketing Order officially began operation today after three long years in the making.

USDA Under Secretary Greg Ibach joined dairy farmers and other dignitaries yesterday on Rancho Teresita Dairy near Tulare in California Central Valley to mark the occasion. He made the claim that the Federal Order actually reduces regulation of California’s dairy pricing system, moving from a state regulated system to a federally-based system.

“This new Federal Milk Marketing Order decreases regulation for processors, moving industry into a less regulatory system, and also helps put California’s producers on equal footing with producers across the country,” he said yesterday.

The claim of less regulation is supported in that participation is voluntary for non-fluid handling processors. Under California state pricing system, all dairy processing plants were required to participate in the system. Now, cheese and powder manufacturers can decide whether to participate or not. If they choose not to, they are not governed by minimum pricing requirements.

All processors, however, are required to participate in California’s dairy quota program. Under the state program, these quota deductions for non-quota holders and quota payments to quota owners were blended into pay prices. Now, they will appear as separate line items on most milk checks and could prove to be an eye-opener for dairy farmers who own no quota but will be required to pay into the system.

The move to have California join the Federal Order system was begun in 2015, led by California Dairies, Inc., Land O’Lakes and Dairy Farmers of America. The hope was that joining the federal system would improve state milk prices, which had for years been tilted toward processors. California dairy farmers were frustrated state officials were no longer being responsive to farmer concerns and needs, with California milk prices often the lowest in the nation.

A 40-day hearing was held in the fall of 2015, generating 8,000 pages of hearing transcripts, 200 exhibits and 30 post-hearing briefs. USDA published a recommended decision to go forward with a California Order in February 2017, and final rule was published on June 7, 2018 after California farmers overwhelming approved the measure.

Price Impact

USDA’s econometric model projects a 57¢/cwt bump in the California all-milk price in the first year of implementation of the Order. Those prices decline to 30¢ to 40¢/cwt above baseline levels as time moves on and more of a supply/demand equilibrium is reached.

The initial fear in the rest of the country was the enactment a Federal Order in California would ramp up California milk production, causing prices to decline nationally. But because California is so distant from the population centers of the Midwest and East Coast, California cheese makers will still be burdened with the cost of getting that product to those markets.

Consequently, cheese prices in the Midwest could actually increase. That, in turn, could cause an increase in the Class I mover and generally raise Class I prices nationally. But increasing milk production will also affect other classes, reducing those prices. So farmer revenue will depend on the product mix and class utilization within each order. Economists say predicting regional effects is incredibly difficult and is nowhere near an exact science.

Having said that, USDA is projecting the all-milk price to average 8¢/cwt higher nationally over the next decade with a California Order in place. The Upper Midwest, with its heavy reliance on cheese production and sales, is expected to see its all-milk price increase an average of 16¢/cwt over the next decade. The irony is that the former Western Order, which dairy farmers voted out of existence in 2004, would see a 36¢/cwt bump in its all-milk price. Florida might see a nickel rise in its all-milk price over the next 10 years, starting out with a 30¢/cwt increase initially but then see a decline as the decade wears on. The Northeast could see a 20¢/cwt average drop in its all-milk price.

The bottom line—in terms of producer revenue—is that there will be winners and losers. Nationally, producer revenue is expected to increase $284 million per year on average over the next decade. California producers will see the bulk of this increase, with revenues up an average of $269 million per year. The Upper Midwest is the next biggest beneficiary, up an average of $106 million per year and the former Western Order could see $90 million per year in additional revenue.

But USDA is also projecting producers in five Federal Orders will lose revenue: Mideast, $81 million/year; Northeast, $66 million/year; Central, $35 million/year; Pacific Northwest, $24 million/year, and Arizona, $13 million/year.           

Economists say the prices projected by USDA are likely in the right direction. But they add prices will be buffeted by world market conditions as we proceed through the next decade, with one price change or shock affecting the next market move.              

You can read more about California’s Federal Order here.