The Great Divide

California dairy producers, processors clash over proposed regulatory pricing changes.

Hit hard by record feed costs and frustrated with milk prices that lag behind the national average, California dairy producers continue to seek pricing system changes they hope will lead them back to profitability.

At least three propositions to alter how milk prices are determined have appeared in recent months. All are opposed by the state’s dairy processors.

Among the proposals is the controversial quest to adjust the whey factor in the state’s Class 4b pricing formula. Producer groups have sought for two years to have the California Department of  Food and Agriculture (CDFA) change the formula for the cheese byproduct so it more closely tracks the higher Class III levels in the Federal Milk Marketing Orders.

CDFA has approved two increases, but producer groups argue they are inadequate. They maintain that dairies are losing hundreds of millions of dollars from the undervalued 4b formula.

In the latest whey round, California Dairies, Inc. (CDI), Dairy Farmers of America–Western Area Council (DFA) and Land O’Lakes (LOL) petitioned CDFA in early December to again consider modifying the 4b formula. CDFA Secretary Karen Ross quickly denied that request but called for a Dec. 21 hearing to consider temporary price increases, not just for the 4b price but for all five classes of milk regulated by her agency.

The hearing drew testimony from some two dozen producer and processor interests. Producer groups proposed increases in California’s overall pay price of 75¢ to $1 per cwt. for the February to July 2013 period.

The Dairy Institute of California, which represents the state’s processors, proposed a three-month increase of 10¢ per cwt. for Classes 4a and 4b milk beginning in February. Bill Schiek, testifying for the Dairy Institute, said dairy plants simply don’t have the margins to support large unilateral revenue transfers to producers. He added that processors can’t get such revenues from the market in today’s competitive environment.

"Milk prices are not, and should not be, determined by milk production costs alone, but by supply and demand in the marketplace," Schiek said. "There is no way to raise California’s regulated minimum prices without doing some damage to the processing side of the industry and consequently hurting producers in the long run."

The 4b price is the minimum price handlers must pay. According to David Ahlem, vice president of dairy procurement and policy for Hilmar Cheese Company, nothing prevents handlers from paying more for 4b milk and co-ops from asking for more.

"Many processors, such as Hilmar Cheese, pay much more than the minimum 4b price for milk," Ahlem says. "When the 4b price increases, our producers who receive premiums see their pay prices decrease as their premiums are redistributed to producers around the state via the pool. Almost all of our producers made less money in 2012 as a result of the last two 4b increases."

At press time, CDFA’s decision was expected by late January for a Feb. 1 start of short-term price adjustments. Those would be in effect for no more than six months. [Update: On Jan. 22, CDFA announced an average increase of 25.1 cents per cwt. among the state's five classes of milk . Read more here.]

Processors have staunchly opposed regulated whey price boosts—arguing that milk prices are not, and should not be, determined by milk production costs alone but by supply and demand in the marketplace.

Still, dairy producers hope a temporary price boost may buy enough time for a second whey-value effort to take effect. That endeavor is a legislative proposal introduced Dec. 3 in the California State Legislature. Assembly Bill 31 would keep the whey value in California’s 4b formula within 80% of the regulated minimum price for whey in surrounding states. Western United Dairymen (WUD) sponsored the bill, which was introduced by Assemblyman Richard Pan (D-Sacramento).

That alignment could give California producers a price increase of 25¢ to $1.50 per cwt., "which would have kept people in business," says dairy producer Tom Barcellos, who also serves as WUD’s president.

"Too many of our dairy families have fallen victim to a milk pricing formula that has failed to capture the true value of the milk and its components in the face of extraordinary feed costs," Barcellos says. "Without dairy producers, California has little need for dairy processors."

Processors oppose Pan’s bill. "It would be a disaster for the cheese industry," Schiek says. "We will see cheese plants close down or move out of state. They won’t be able to recover the revenue they would have to pay into the pool."

The third major push for change involves a proposal to move California’s regulated dairy pricing from a state-governed system to a Federal Milk Marketing Order. CDI, DFA and LOL have jointly commissioned a study to investigate the impacts of adopting federal milk pricing regulations in the Golden State. The three dairy cooperatives represent 80% of California’s milk production.

The Federal Order study, by Mark Stephenson of the University of Wisconsin–Madison and Chuck Nicholson of Pennsylvania State University, won’t be finalized until March. A Federal Order would require producer approval and take at least a year to be implemented.

Processor interests say it’s not a regulated pricing system that’s causing California’s dairy challenges. High feed costs, fueled by 2012’s drought and growing global demand, are the
primary culprit behind dairies’ financial difficulties, Schiek says.

Financial pressures facing dairies aren’t unique to California but are playing out in other parts of the U.S., Europe, South America, Australia and "any region where grain concentrates are fed," he adds.

"Unfortunately, our regulated pricing system is not capable of mitigating such events, nor was it designed to do so," Schiek says. "Real relief must come from the market."

Proposed price relief for California’s dairies won’t come soon enough for some producers. "Unfortunately, another wave of producers is going out and selling off their dairies," Barcellos says. "There are more horror stories that are going to hit."