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. 13 and is used here with permission.
Editor’s note: See the video of Geoff Vanden Heuvel’s comments on the meeting here
On Tuesday, April 10 in Clovis, Calif., USDA officials held a public meeting to explain to the industry the features of the Proposed California Federal Milk Marketing Order (FMMO). Video of the public meeting is available. FMMO materials related to producers, handlers and the referendum process were distributed at the meeting and are available.
USDA Dairy Program Deputy Administrator Dana Coale stressed that while she understood the inclination to focus on a number, what producers really needed to consider is that the decision before us is about whether to go to a new system of milk regulation.
The FMMO system is significantly different from the familiar California state system. While the state system enforces the regulated minimum prices on ALL grade A milk produced and marketed in California, the FMMO system only price regulates pooled grade A milk, and the only milk that must be pooled is Class 1 milk. This fact can be challenging for California producers to comprehend. The mandatory nature of our current system is something that we have supported for decades because of our perception that if the government did not enforce a minimum price, then processors would not pay us that price.
This perception is the result of decades of living in an industry with a surplus milk mentality. Our historical experience in the California dairy industry is always having too much milk and therefore having concerns about where we would ship our milk, and how much we would be paid for it. Our answer was to have the state government strictly regulate the marketplace. The result of that was a state government policy that took a very conservative view on how much they could stress the processing sector with minimum price requirements since they were using the power of the government to require the processors to pay that minimum price. For many years, the state set prices at levels that would allow even the least efficient manufacturing plants to make money because we needed the plant capacity to process the growing milk supply.
The FMMO system has an entirely different approach. Its primary function is to make sure that the Class 1 needs of the market are met. It regulates manufacturing plants only to the extent that they can demonstrate some connection to the Class 1 market. If those manufacturing plants meet the criteria spelled out in the FMMO regulations for connection to the Class 1 market, which in the California FMMO means they need to divert 10% of their supply to a Class 1 distributer, they can share through the pool in the added revenue that comes from the Class 1 market. If they seek to do that, then they are regulated and must pay the regulated price.
So why would they do that? In a word, competition. Milk in California is a valuable commodity, not just a chronically surplus by-product of dairy farming. The FMMO system sets up the dynamics for processors to compete for a milk supply in a way that the tightly regulated current state order never could.
The much less regulated FMMO system creates opportunities for innovation and competition, but with that also comes the risk that some will do better than others. The reason most people think milk prices in California will be higher under a FMMO is because the regulated prices for the various classes of milk, even though not enforced on non-pooled milk, become the benchmark prices that producers compare against when selling their milk. Once the lower state order prices are no longer in effect in the marketplace, the higher FMMO prices become the standard starting point for contracts with milk processors.
This has been the 80-year experience of our colleagues in the other FMMOs in the country. Yes, milk can and does get sold under class in the FMMO system, but typically only during surplus periods and only on that surplus volume. Compare this to our state system, where ALL the milk gets discounted, ALL the time, so that no milk gets discounted when surplus occurs.
Over the next couple of weeks, the cooperatives and others will be having meetings to provide more details about the mechanics of the FMMO plan and the economic modeling work prepared by the various economists who have looked at this issue. I will do my best to share what I learn along with you in this space. We have until May 5, 2018 to get our ballots mailed to USDA. If you are a member of a cooperative that has chosen to block vote, your cooperative board members need to finalize their vote before May 5 as well.