Turmoil Continues after California Dairy Pricing Decision

Amid producers’ disappointment over whey factor ruling, all agree California’s dairy pricing system needs overhauling.

Overruling a state panel’s recommendation, California’s agriculture secretary recently gave dairy producers what seemed to be a small victory by slightly raising the whey-factor price cap they had sought.

But California dairy producers aren’t pleased. In fact, some are incensed.

“The increase was not substantial,” says Tom Barcellos, a dairy producer from Porterville, Calif., who serves as president of Western United Dairymen (WUD). “While the Secretary announced a change in the sliding scale, it fell far short of what was requested.”

“To say the results were disappointing doesn’t begin to capture the emotion felt on the producer side of the industry,” says Rob Vandenheuvel of Milk Producers Council (MPC), based in Ontario, Calif.

WUD and MPC were among the petitioners who asked the California Department of Food and Agriculture (CDFA) in March to amend the state’s 4b pricing formula. The two groups contended that California’s dairy producers were losing hundreds of millions of dollars each year because the whey factor in the state’s milk pricing system was under-valued compared to federal order levels. They wanted CDFA to replace the 4b formula with one that more closely tracked the market direction of federal orders’ Class III whey value.

California’s Class 4b price is what handlers pay for farm milk for cheese and whey production. California law places the responsibility for establishing minimum prices for the state’s five classes of milk on the CDFA Secretary.

The petitions led to a two-day hearing May 31-June 1 in Sacramento. Petition supporters and opponents testified before a panel about the proposed change. Weeks later, on July 20, the panel handed down its verdict: no change in the whey factor formula.

But that same day, CDFA Secretary Karen Ross ruled that challenging times for dairies, compounded by drought-fueled feed costs, compelled her to reject the panel’s no-change decision. Instead, Ross gave the green light to a modest increase in the whey-factor value in the Class 4b formula.

Beginning Aug. 1, CDFA will increase the cap to $0.75 per cwt., up from the $0.65 per cwt. that had been in place since last year. For each five-cent step in the dry whey commodity price, the corresponding whey factor will increase in increments of $0.0625 per cwt. The effect of the new sliding scale is an increase in the Class 4b price of approximately 10 cents per cwt. when the dry whey commodity market is at the upper end of the new scale.

At whey’s current price of 49.5 cents per lb., the increase will add 6.25 cents per cwt. to the Class 4b price. WUD says that the sliding scale it sought would have generated an extra $1.09 per cwt. to the Class 4b price.

In fact, the new whey factor will likely add just 2.5 cents per cwt. to producers’ August milk checks, Vandenheuvel says.

“We were thrown a pacifier,” Barcellos says. “That ruling incensed many. Earlier, there was a huge disparity in the past between federal order and California whey prices. Now, with whey prices down, the increase amounts to just pennies per cwt., if even that. It won’t save us.”

In her July 20 letter explaining her decision, Ross said: “Clearly, this is a smaller adjustment than requested by the petitioners, but to increase it more at this time would likely have a negative impact on the other segments of the industry,” said Ross.

For the state’s dairy processors, Ross’ decision “made a lot of sense,” says Bill Schiek, economist for Dairy Institute of California, the non-profit trade association that represents milk and dairy processors on legislative and regulatory matters.

“The California market is very different from the federal market,” Schiek says. “A regulated price is more binding in California than in federal orders, and because of that and the general market situation, milk supply has grown faster than plant capacity. We just couldn’t see a strong economic argument for an increase in the regulated price.”

Processors are aware the decision has not ended the turmoil among producers, who are struggling with record-high feed costs and poor margins. “We know producers are frustrated,” Schiek says. “One problem with a system that has an end-product pricing formula is that you can’t have one side winning without the other side losing. It creates an ‘us-against-them’ dynamic.”

In her July 20 letter, Ross said the industry needed to attack “the larger and longer term issue: the overall pricing structure for California milk and dairy products.” As a result, she created the California Dairy Future Task Force to develop recommendations for structural change in the state’s dairy pricing formula and other milk marketing regulations.

“It is imperative that we all work together – processors, producers, cooperatives and [CDFA]—to evaluate and resolve the critical issues facing the dairy industry,” Ross said. “We must work as one and not in factions.”

Dairy processors and producers do need each other to be economically healthy, Schiek says. Processors agree California needs to take a more strategic look at its regulated pricing system. “I don’t know how a new system would be structured,” he says. “But I do think growth at the farm level has to match what’s happening in the market in terms of customers, products and value.”

As the long, troubled summer of 2012 unfolds, dairy producer groups are searching for options. While it will support CDFA’s task force efforts, WUD plans to hold a series of meetings among its members over the next several weeks to explore the possibility of moving California from its own pricing structure into a federal order system. It’s been several years since California’s dairy industry considered such a move.

“But times have changed,” Barcellos adds. “The system we have is not going to save us. We need to reevaluate it. We need to look at what it will take for producers and processors to be profitable equally.”

The move to a federal order, however, can’t come soon enough since it would take years for evaluation and a referendum. “How many producers are we going to lose by then?” asks Barcellos.