Our Big Decision: Geoff Vanden Heuvel offers this perspective on the evolution of milk marketing regulations in California

Geoff Vanden Heuvel

Geoffrey Vanden HeuvelThe author, a dairyman in Chino, Calif., is a board member and economics consultant for the Milk Producers Council.  This piece appeared in the MPC newsletter dated Apr. 6 and is used here with permission

The fundamental question facing California producers regarding whether to join the Federal Milk Marketing Order (FMMO) system – given what we know about the history of the California State Order and the FMMO as we have witnessed it in the rest of the country – is which system gives us the best opportunity for a prosperous future? To answer this question, we should look at why the California State Order is what it is. When the current structure of the State Order was established in 1969, the main concern of producers was being abused by the processors.

So, we set up an order that used the power of the government to enforce strict requirements on processors to pay the regulated minimum prices. In the late 1970s there was a significant increase in the federal government’s support price for milk. The support price went from $8.76 per cwt. in 1977 to $13.49 in 1982.

This rapid increase in the support price made dairy farming in California very profitable. With our ability to develop large dairies, with ample feed, hay and silage grown in the West, and cheap grain from the Midwest, California production skyrocketed. The one limiting factor was the lack of processing capacity to process all that new milk.

We had an answer: Establish a big make allowance so our plants would make money and expand. Yes, that meant our prices were lower than other areas, but our cost of production was lower and that was where we were making our money. And it worked. California became the number one dairy producing state by the mid-1990s.

But things changed. Our cost of production advantage began to evaporate. This was due partly because there were competing uses for California agricultural land and water, partly because of imposition of aggressive environmental regulations and partly because large scale dairy techniques developed in California were adapted and adopted by dairy producers in other regions of the country.

About 10 years ago, California producer sentiment began to change. More pressure was being put on the California Department of Food and Agriculture (CDFA) to modify their very processor-oriented milk pricing policies. But CDFA was resistant to change. Two factors weighed heavily on CDFA’s thinking; one was that they had witnessed a nearly 30-year steady increase in California milk production and despite what producers were telling them in hearings, they never seemed to believe that the relative position of California dairy farmers to our competition in the rest of the country was changing and producers were no longer were willing to support state mandated lower prices.

The second factor that also played a significant role in CDFA thinking was that because the California Order REQUIRED all processors of Grade A milk to pay the regulated minimum prices, they needed to set those prices at a level that all processors could afford to pay.

The confrontation between producers and CDFA became intense, with producers forging a unity among themselves that was unprecedented in the history of the California dairy industry, and the Department and the processors continuing to be unwilling to make any meaningful moves in the producer’s direction. This confrontation played out in hearings, in the legislative arena and in the courts. Finally after feeling like all these avenues were closed to meaningful change, the cooperatives – who for years had been concerned about finding enough plant capacity to process an ever increasing milk supply, but had become genuinely concerned about the financial health of their members and what that would mean to the California milk supply – decided to take the very difficult, time consuming and costly step of petitioning for a Federal Milk Marketing Order.

What do we know about the Federal Order System? It’s been around a long time – over 80 years. We have witnessed over the past 20 years that regions can grow and prosper under the FMMO system.

Right now, Texas, the I-29 corridor in the Dakotas and Colorado are all examples of FMMO areas that are growing. FMMO areas can also stumble. Right now, we have a good example of a stumble in Michigan. 10 years ago, Michigan dairy producers were enjoying very good mailbox prices under their FMMO. None of the FMMO rules or prices have changed over the past 10 years, but today Michigan mailbox prices are below California levels. Why? Too much milk relative to their processing capacity. A lot of milk in Michigan is being sold at a discount with large transportation costs to find a processing home. Selling non-class 1 milk for less than regulated Page 5 of 8 prices is legal in the FMMO system.

 

So, what is the take away lesson? If you think you are going to be in a chronic over supply situation, then the FMMO will allow milk to be discounted resulting in lower milk prices. How did we handle that situation in the California State Order? The regulatory system discounted all the milk (compared to the regulated prices established in the FMMO), all the time, to make sure none of the milk was discounted when there was too much. What is the most efficient way to handle milk surpluses? It seems the FMMO does have an answer to that question.

As we look forward in California, is the milk supply going up, staying about the same or going down? The trends show that the milk supply is declining. It seems very unlikely that this trend will reverse itself. None of the challenges facing California dairy farmers are going away. Water and land competition for other agricultural uses is not lessening, labor costs and shortages will continue to plague the industry, environmental regulations and the cost of energy and feed will continue to escalate.

 

Under this scenario, the risk of a chronic milk surplus seems remote. Yes, our plants will have to pay us more for our milk under the FMMO system, but those costs from a regulatory standpoint will not be higher than their regulated competition in the rest of the country. For many of our dairy processors, their competition is other California processors who will face the same regulatory price increases with the FMMO as they do, so no doubt when the FMMO gets implemented they will blame the government or the farmers or both, but they will raise their product prices by a few cents per pound to cover the higher milk cost and move on.

In the weeks ahead there will be information outlining the details and the mechanics of how the California FMMO would work, but for now it seems to me that we have a once in a lifetime opportunity to put ourselves on a level playing field with producers in the rest of the country. That seems like a risk worth considering.

Watch for our video interview with Vanden Heuvel to be posted at dairybusiness.com on Friday, Apr. 13, when he comments on the USDA information meeting held Apr. 10.