Decision Time

By Geoff Vanden Heuvel

 It is crunch time – the decision on whether California joins the Federal Milk Marketing Order (FMMO) system will be made within the next few days. Because the three major cooperatives operating in California have decided to block vote for their members, the election results could become clear very soon.

Over the past three weeks there have been many meetings and much discussion about what an FMMO could mean for the California dairy industry. Here are a few things that strike me as significant differences between the FMMO and our current California state system.

 First, the California system establishes a mandatory minimum price for all grade A milk produced and marketed in the state. That sounds good to producers, no one can pay less than the minimum, but the consequence of having the state government enforce a minimum price is that they have deliberately set those prices at lower levels than the prices paid for milk outside of the state. The FMMO system sets prices at higher levels, but if that milk is not associated in some way with the class 1 market, it does not enforce those higher prices on manufacturers. For producers to receive those higher prices, they and their cooperatives will have to contractually negotiate those higher prices from the buyers. Is it reasonable to expect that this will happen? All we can rely on is the experience of producers in the current FMMO system. What that experience tells us is that if the milk supply is in balance with demand, then those prices and more are attainable.

 The second big difference is the ability of the FMMO to regulate milk coming into California from out of state. Over the years there has been a measurable amount of the milk used for class 1 in California that completely escaped state regulation because of the constitutional prohibition of states regulating interstate commerce. The California FMMO also does away with the producer funded transportation subsidy program. There is a location differential system used in the FMMO system to attract milk to the population centers which will have implications for how milk moves in California. On balance, it seems that the ability of the FMMO system to capture the value of that class 1 revenue for the California pool will mean more dollars for California FMMO participants.

Another difference is our milk checks would look different. Payment is based on butterfat, protein, and other solids instead of butterfat and solids-non-fat. There is a Producer Price Differential and a location differential that comes into play when calculating milk checks that will also alter the way things look. The big question is will there be more money? I have seen and heard a number of different estimates made by economists. All these estimates show higher milk prices under an FMMO system. The ranges vary depending on the assumptions, but collectively we are talking about tens of millions of dollars more revenue for California producers annually.

The author, a dairyman in Chino, Calif., is a board member and economics consultant for the Milk Producers Council.  This piece appears in the MPC newsletter dated Apr. 27 and is used here with permission.