For people in the California dairy business, Nov. 1 marks the beginning of a new era.
After more than 80 years of operating under a state-regulated milk pricing system, California will join the majority of states in the nation and operate under a federal milk marketing order.
Beginning in November, the U.S. Department of Agriculture will take over responsibility for milk pricing that had been done by the California Department of Food and Agriculture since 1935. The change was set in motion earlier this year when California dairy farmers approved the federal milk marketing order, or FMMO, in a referendum.
Those who have been involved in the transition or have been following it closely say implementation of the order appears to be on track, though they acknowledged that as with anything new, there may be some minor, unforeseen issues in the beginning.
“Everything is going well, though I hesitate to say that because you don’t know what’s around the next corner,” said Dana Coale, deputy administrator for the USDA Agricultural Marketing Service Dairy Program.
Though it was farmers who voted to join the federal order, the order regulates processors, she noted, and that’s who USDA has been working with during the last several months to get them comfortable with operating under the new regulatory environment.
The most common question about the new system deals with pooling, she said. The state system required mandatory pooling of all classes of Grade A milk, but under the federal order, only Class 1 fluid milk is required to be pooled.
“In essence, the federal order is a less regulatory system, and so one of the challenges is that the industry has to now negotiate buying and selling milk and determining when is it best for them to pool milk if they are a manufacturer (of dairy products),” she said.
It will “take a bit,” she said, for dairy-product manufacturers to figure out when it is advantageous for them to participate in the pool, as they evaluate market conditions and what they need to pay to be competitive and to ensure they’ll have a sufficient milk supply.
It means manufacturers of dairy products such as yogurt, ice cream, butter, powder and cheese will now have options and a new set of decisions to make, said Rachel Kaldor, executive director of the Dairy Institute of California, which represents processors. She noted only about 10 percent of the state’s milk goes to Class 1 bottlers, which will not have those options under the federal order.
“The California system was a lot more locked down because we all had to pay regulated minimum prices,” she said. “I think (dairy-product manufacturers) see challenges and opportunities where none existed before. A lot of them are interested in the opportunities of not being fully regulated.”
As someone who’s been monitoring the progress of the transition, Geoff Vanden Heuvel, director of regulatory and economic affairs for the Milk Producers Council, said he thinks everything has been “moving in a very orderly fashion,” although he added there may be some “hiccups along the way.”
Any potential hiccups, he said, might be related to the hauling of milk from farms to large urban centers where there’s not much milk production. Under the state system, Class 1, 2 and 3 milk shipped to those regions is eligible for a transportation subsidy, which goes away under the federal order.
“When there is no subsidy, then you’re going to make a different decision about what milk goes where,” Vanden Heuvel said.
Considering the scale of the state’s dairy sector, with thousands of loads of milk being produced every day that must be shipped to buyers, he said, elimination of the subsidy will ultimately change the economics of milk hauling and where milk trucks go.
Under the federal order, milk delivered to milk-deficit regions is given a higher value, to encourage milk to be hauled to those urban areas. What this means for dairy cooperatives, which market the majority of the state’s milk, is that they will now ship milk to the closest plant, said Rob Vandenheuvel, senior vice president of member and industry relations for California Dairies Inc.
“Our goal is to be as efficient as possible so that we can bring the hauling cost as low as possible,” he said.
Because CDI membership spans as far south as San Diego County and as far north as Sacramento County, Vandenheuvel said the cooperative won’t be able to pay the same price to all its producers. This is a change from the state system, which paid all producers—regardless of where they are—a blended overbase price. Under the federal order, the cooperative will regionalize its pay-price system so that it mimics the federal order pricing structure in order to be competitive in the marketplace, he added.
“It will be different pay prices for member farms, depending on which region of the state their farm is and where their milk is predominantly delivered to,” he said.
Melvin Medeiros, a Fresno County dairy farmer and board member of Dairy Farmers of America, said it will be up to the cooperatives to negotiate transportation costs with buyers. From that standpoint, he said DFA has done all its negotiations and has logistics worked out on where milk will go. The biggest unknown, he said, is pool participation from month to month and how that will affect producer prices.
The other big changes for farmers will be in the appearance and timing of their milk checks, Medeiros said. Producers will now receive two checks instead of three each month, and the timing will be slightly different. There will be a quota deduction that they’ve never seen before. Component pricing also will be different: They will be paid based on butterfat and protein, whereas they used to be paid based on butterfat and solids-nonfat.
Case van Steyn, a Sacramento County dairy farmer and chairman of the DFA Western Area Council, said he thinks the new system will be positive for California dairy farmers, many of whom are struggling financially and “potentially looking for an exit strategy.”
“Overall, I think dairymen are satisfied that this is where they want to go and that this is the right answer,” he said of the federal order. “At least we’ll be on a level playing field with the rest of the country.”
Medeiros said he hopes farmers understand the federal order is not necessarily “a lifesaver for the industry.”
“We need dollars, not cents,” he said. “It takes the control out of the state, which we weren’t very happy with. We’ll see where it goes.”
Source: California Farm Bureau Federation