By Geoffrey Vanden Heuvel
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. 20 and is used here with permission
Dr. Andy Novakovic from Cornell University in New York and Dr. Mark Stephenson from the University of Wisconsin, two of America’s leading academic dairy economists, made presentations at three events this week sponsored by Western United Dairymen on the proposed California Federal Milk Marketing Order (FMMO).
Dr. Novakovic started the meeting with an interesting history of the development of what ended up becoming the federal milk marketing order program with the depression era passage of the Agriculture Marketing Agreement Act of 1937. The FMMO that USDA has now proposed for California finds it legal justification in this 80-year old federal law.
Dr. Novakovic made the point that the FMMO’s are very supportive of dairy farmer cooperatives. They use the power of the government to support the efforts of cooperatives to effectively market dairy farmers’ milk. That doesn’t mean they don’t pay any attention to the public interest – they do – but protecting processors is not a FMMO priority. He pointed out that this reality had implications.
He said that the National Milk Producers Federation, to which two of our three major California cooperatives belong, is very influential in national dairy policy development. He pointed out that some changes to FMMO rules can be made by the local market administrators, but the big decisions to make
modifications would be national in scope and those decisions would be made in Washington DC and be influenced by the views of cooperatives and producers from the whole country and not just California.
Actually, I find this to be one of the most attractive selling points of the FMMO. What I seek as a California dairy farmer is a level playing field with our fellow producers in the rest of the country.
For many years California state officials have established milk pricing polices deliberately designed to make milk cheaper in California than everywhere else. For a while, our cost of production advantages made this cheap milk policy effective in allowing us to grow as an industry, but when those advantages
began to evaporate, the State was unwilling to change their ways. Having an opportunity to get into a system where milk pricing rules in California will be the same as the milk pricing rules effective for most of our out of state competition seems like a good thing.
emphasized last week in their meetings – that FMMO’s main purpose is to regulate milk for the class I market and milk that has no connection to the class I market is not regulated by them.
Dr. Stephenson then went through his presentation on the economics that function in the American dairy industry. A major point that Dr. Stephenson emphasized is that milk has a location value. Where milk is produced is not usually where that milk or the dairy products made from that milk will be consumed. This reality has a big impact on the actual economic value of milk. These differences in value are explicitly reflected in the class I regulated prices in effect in the FMMO system.
For example, the class I differential in Miami, Florida is $6 per cwt. Because there is high demand for class 1 milk in Miami and the milk supply that is needed to meet that demand has to travel a long way to get there, the FMMO sets a very high class I differential as an incentive for milk to be marketed in that area. By contrast, the class I differentials in areas where milk production is concentrated can be as low as $1.60 per cwt. which is the class I differential that would apply in the lower Central Valley of California.
Dr. Stephenson also did some work to estimate what the potential differences in producer prices might be in California under a FMMO rather than our current State order. He did warn that since California prices would no longer be calculated if California went into the FMMO system, we would never really know what those differences were. However, using 2017 pricing data he did calculate what regulated price might be both assuming all milk was pooled and then he ran scenarios where quite a bit of milk was not pooled. For 2017 under a scenario where all of the milk is pooled his estimate was that the uniform blend price at standard test for California would be $16.11. The California overbase price for 2017 was $15.05 which would mean that the California blend price at standard test was probably about $15.43 since about 22% of California’s milk is covered with quota.
Dr. Stephenson then made an informed guess, based on class price relationships to the blend price, how much milk would not have pooled in a California FMMO in 2017. He assumed that none of the class II would pool and most of the class III cheese milk would not pool and then he recalculated the blend price. Interestingly, the blend price only dropped to $16.07 a four cent per cwt. drop. Dr. Stephenson also made the point that these are estimates that will not be exactly correct. And of course, we know that whey prices in 2017 were significantly lower than they had been in previous years and it is the whey portion of the FMMO class III price formula that has generated much of the difference over the past number of years between the California state prices and the FMMO prices.
Dr. Stephenson also spent some time talking about the function of the Producer Price Difference (PPD) and location differentials which both play an important role in what producers actually get paid. I will not attempt in this article to try to explain these complicated, but important details, but watching the YouTube video of Dr. Stephenson’s presentation could be helpful in getting more clarity on this subject.
We thank the two good professors for coming out and sharing their knowledge with us. Thanks too, to Western United Dairymen for sponsoring these events and opening them up to everyone. I know that during this coming week the cooperatives are continuing with their member meetings and I understand the boards of directors for the three major cooperatives who have decided to block vote will be held late in the week. So, the time for decision is nearing.
Featured Image: The author is shown center with the two professors… Dr. Mark Stephenson, left, Director of Dairy Policy Analysis at UW Madison and Dr. Andy Novakovic, right, professor of ag economics at Cornell University.