Wednesday, April 23, 2014

California Dairy Farmer Organizations and Dairy Cooperatives Propose Changes to Milk Price Formulas

Groups propose changes to milk price formulas By Ching Lee

December 26, 2012 - Dairy farmer organizations and dairy cooperatives presented a variety of proposals for temporarily amending the state milk pricing formula, during a hearing held by the California Department of Food and Agriculture in Sacramento last Friday. Each proposal intends to give dairy farmers a boost in revenue as they struggle with high production costs and other financial woes.

The hearing was called by CDFA Secretary Karen Ross to consider whether market conditions support short-term price adjustments to all classes of milk that would last no longer than six months.

Producer organizations Western United Dairymen and California Dairy Campaign each submitted their own proposals, while Milk Producers Council said it supported the WUD proposal. Dairy cooperatives California Dairies Inc., Land O'Lakes and Dairy Farmers of America each submitted separate proposals, as well.

Each of the five proposals tweaks the state milk pricing formula to give farmers a price increase for six months. For example, the CDI proposal would raise producer pool prices by 31 cents per hundredweight, while the DFA proposal would have an 86 cent per cwt. increase in the pool price.

Testimony from the producer groups and cooperatives all cited the financial crisis facing California dairy farmers in light of record-high feed costs that have pushed a number of them out of business this year.

Michael Marsh, CEO of Western United Dairymen, noted that 50 dairy sellouts have occurred in the last eight months within the organization's membership. Tom Wegner, director of economics and dairy policy at Land O'Lakes, testified that 43 of its dairy farmer members have discontinued milking this year "in large part due to the financial distress."

"Conversations with a few dairy producers seeking bankruptcy protection revealed that attorneys cannot keep up with the dairy demand," Marsh said. "You know there's an issue when bankruptcy attorneys can't keep up with the number of requests they are getting from a specific industry."

Lynne McBride, executive director of the California Dairy Campaign, also pointed to the "grim reality" dairy farmers face, noting that "it is widely estimated that more than 100 dairies will close their doors in 2012."

"The impact of the closure of a dairy operation has a ripple effect on the local, regional and state economy and the social fabric of these affected communities," she said. "The evidence points to the urgent need for CDFA to act to increase producer prices to provide much-needed relief to dairy producers across the state."

Both Wegner and Eric Erba, senior vice president and chief strategy officer for CDI, noted how dairy farmers' financial pressures have been partly responsible for slowing the state's milk production—a dropoff that Erba characterized as "unnerving."

"We are beginning to question how well we will be able to follow our various milk and dairy product marketing plans if milk production continues to fall well below our projections," he said.

The state's dairy processors, by and large, said at the hearing they do not favor making any changes to the milk pricing formulas, saying that real relief for producers must come from the marketplace, not from government mandated increases to regulated prices.

However, the Dairy Institute of California, which represents the majority of the processors in the state, submitted a proposal for "a modest and temporary increase to the state's regulated prices without too much market disruption," which the organization's economist, William Scheik, said "would be acceptable in light of the financial difficulties California dairymen have faced this year."

The Dairy Institute proposal would increase prices for Classes 4a and 4b milk by 10 cents per cwt. for three months beginning in February. It mimics a proposal the organization presented in a 2009 hearing.

Rob Vandenheuvel, general manager of the Milk Producers Council, said that while processors have "hinted" that dairy farmers and their cooperatives should simply negotiate better prices for their milk rather than asking CDFA to raise the regulated minimum price that processors are required to pay, he noted that producers and marketing cooperatives often sell their milk supplies under long-term contracts for economic stability.

"These contracts are typically—if not exclusively—pegged to the regulated prices announced by CDFA," he added. "Modest service premiums are often attached, mostly to compensate for balancing costs and encourage higher quality standards."

He said MPC supports the Western United Dairymen proposal because it includes a significant increase in the Class 4b price, or whey factor—what cheese manufacturers pay for milk—while proposing no change to the Class 4a price.

In the past year, California dairy farmers have repeatedly asked CDFA to amend the whey factor, saying that the current formula underpays them compared to what dairy farmers in other states earn under the federal milk marketing orders.

Last week's hearing came nearly seven months after CDFA held a hearing to consider changes to the state milk pricing formula for Class 4b. After that hearing, CDFA modified the formula by raising the cap on whey value by 10 cents per hundredweight, an adjustment that fell short of the changes producers had sought.

The department denied a petition earlier this month from the three California dairy cooperatives seeking temporary changes to the Class 4b pricing formula.

The department has 52 days after the hearing to announce its decision. It then has 10 days to implement any changes to the milk price formulas.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at  This e-mail address is being protected from spambots. You need JavaScript enabled to view it .)

Reprinted with permission: California Farm Bureau Federation 

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