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Decision time: USDA ‘recommends’ California join FMMO

Progressive Dairyman Editor Dave Natzke Published on 13 February 2017

An effort to move California into the Federal Milk Marketing Order (FMMO) system took a major step forward with USDA’s “recommended decision,” published Feb. 14. Meanwhile, a separate petition from the state’s dairy processors, seeking to adjust manufacturing allowances under the state milk marketing order, was denied.

USDA published the recommended decision in the Federal Register on Feb. 14. Next on the docket, USDA’s Agricultural Marketing Service (AMS) will conduct a public meeting on the recommended decision on Feb. 22, in Clovis, California. The meeting will review the rulemaking process and outline how the proposed California FMMO will operate.

Those unable to attend the meeting may submit questions, via email, until Feb. 16. Interested parties will have the opportunity to watch the meeting live via webcast, and a recording will be posted to the AMS website. A transcript of the meeting will also be made part of the record of the proceeding.

A 90-day public comment period, closing May 15, will accept written input on the recommended decision. After a period to review public input and make any alterations, USDA will issue a “final decision.”

Once the final decision is released, California dairy farmers covered by the order must vote on whether to adopt it. A “yes” vote by more than two-thirds of the dairy farmers or dairy farmers representing two-thirds of the milk produced is needed to approve the order.

Process started in February 2015

USDA’s recommendation to establish a California FMMO came almost exactly two years after it was first proposed. Three major California dairy cooperatives, California Dairies Inc., Dairy Farmers of America and Land O’Lakes, originally submitted a petition to USDA on Feb. 3, 2015, seeking a public hearing to consider the creation of a California federal milk marketing order. After considering the petition and accepting other proposals from dairy producers and processors, USDA held a 40-day public hearing in September-November 2015. USDA estimated about 8,000 pages of transcripts, not including exhibits, were entered into the hearing record. The hearing conclusion kicked off more than a year of administrative review, culminating with the recommended decision.

What the proposal says

In releasing the recommended decision, USDA said the California FMMO was warranted and would provide more orderly milk marketing conditions.

According to the 213-page report, the proposed FMMO incorporates the entire state of California and would adopt the same dairy product classification and pricing provisions used throughout the current FMMO system. The proposal also recognizes California’s unique producer quota program, administered by the California Department of Food and Agriculture (CDFA).

Uniform FMMO end-product price formulas for cheese, butter, nonfat dry milk and dry whey would replace current CDFA price formulas used to calculate minimum milk prices.

California milk classifications, based on end use, would align with FMMO Class I, II, III and IV classifications. California farmers would receive prices for pooled milk reflective of the national market for commodity products.

Consistent with existing FMMOs, California FMMO Class I prices would be computed using the “higher of” the Class III or IV advance prices announced the previous month, and would be adjusted by the Class I differential for the county where the plant is located.

Pooling regulations under the proposed FMMO would mandate pooling to cover Class I (fluid) needs, but allow handlers to elect not to pool milk used in manufacturing. Dairy farmers whose milk is pooled on the order would receive a pro rata share of the pool revenues through the California FMMO uniform blend price.

The FMMO would not provide for the quota and non-quota milk pricing tiers found under the state order. Instead, regulated handlers would be allowed to deduct monies, in an amount determined and announced by CDFA, from blend prices paid to California dairy farmers for pooled milk, sending those monies to CDFA to administer the quota program.

Under the recommended FMMO, all Class I milk processed and distributed in the marketing area would be subject to FMMO pricing and pooling regulations, regardless of its origin. Under the current state order, milk purchased by California handlers from out-of-state sources and processed into fluid products – estimated at 425 million pounds in 2014 – was not counted in the state pool. If California handlers elect to continue processing out-of-state milk into Class I products under the FMMO, they would be required to pay the order’s classified minimum price for that milk.

State continues to manage quota

Under the recommended FMMO, California handlers would no longer receive credits for fluid milk fortification. Instead, accounting for fortification would be uniform with other FMMOs, as the classification of the fluid milk equivalent of the milk solids used to fortify fluid milk products would be classified as Class IV and the increased volume of Class I product due to fortification would be classified as Class I.

View all documents on USDA’s California federal milk order rulemaking website.

Processor association responds

Rachel Kaldor, executive director of the Dairy Institute of California (DIC), said a provision of the proposed California order reflected the organization’s request for voluntary pooling.

Under the recommended decision, participation outside of Class I utilization would not be mandatory.

“We are heartened that USDA’s recommended decision reflects the FMMO we proposed,” Kaldor said. “If California dairy farmers approve a FMMO based upon the recommended decision, the same basic milk pricing and revenue pooling structure in place in the other FMMOs would apply to California farmers and processors as well.”

DIC also commented on the continuation of California’s unique quota system.

“This provision of the proposed FMMO will likely be of keen interest to California dairy farmers, as it rightly should be. We are hopeful that our farmers will pay close attention to all the provisions of the recommended decision, its impact on each of them, and the industry at large,” Kaldor said.

Processors petition for higher state "make allowances" denied

USDA’s release of the proposed FMMO came just days after DIC submitted a petition to CDFA seeking to raise manufacturing (or “make”) allowances under the state milk marketing order. However, citing the FMMO process, CDFA Dairy Marketing Branch chief, Don Shippelhoute, denied the hearing request on Feb. 15.

“It is in the best interest of the California dairy industry and the department to obtain clarity on the meaning and the impact of the recommended decision prior to holding such a hearing,” Shippelhoute wrote in a letter to DIC.

DIC’s proposal sought to raise make allowance (the amount processors can deduct from the price it pays to producers for milk to cover costs) to align with CDFA’s latest annual data covering 2015 costs to convert milk to cheese, butter and nonfat dry milk.

Kaldor said the state petition was submitted even though the organization was aware release of USDA’s recommended decision on the proposed California FMMO was imminent.

“We've had a consistent position – the manufacturing cost data is a key factor in maintaining functional end product pricing formulas,” Kaldor said.

DIC’s proposal noted the make allowance for cheddar cheese were last updated in late 2007, with butter and nonfat dry milk make allowances updated in 2011. In its petition letter, DIC said those allowances no longer represented the true costs to convert milk into dairy products, squeezing processor margins and hurting their ability to maintain plant capacity.

Under DIC’s request, the make allowance increases matched results of the 2015 cost survey and would have been raised as follows:

• Cheese – from 19.88 cents to 23.94 cents per pound.

• Butter – from 16.35 cents to 18.42 cents per pound.

• Nonfat dry milk – from 17.63 cents to 20.78 cents per pound.

Current FMMO make allowances are: cheese – 20.03 per pound; butter – 17.11 cents per pound; and nonfat dry milk – 16.78 cents per pound.

According to Geoff Vanden Heuvel, California Milk Producers Council (MPC) board member and economic consultant, the increased make allowances would have reduced the milk prices paid to dairy producers by about 36 cents per hundredweight (cwt) on Class 4a milk (used in production of butter and nonfat dry milk) and 41.5 cents per cwt on Class 4b milk (used to manufacture cheese). The total reduction on the California overbase price would be about 33 cents per cwt, he said.

MPC joined the California Dairy Campaign and Western United Dairymen in a letter to CDFA secretary Karen Ross, urging denial of the DIC petition.

While acknowledging the economic challenges facing dairy processors, the letter said California’s dairy producers have endured two years of milk prices below the cost of production, with no recourse to pass those costs along. With increasing environmental and labor regulatory pressures, producers are being forced to take on additional debt at the same time lending institutions are becoming more reluctant to fund dairy operations.

“California dairy producers are routinely the lowest paid of any regulated dairy region and a increase in the make allowances would further depress mailbox prices, leading to dairy closures or dairies moving out of state,” the letter said.

In addition, the letter said efforts to adjust state make allowances would undermine the final stages of the process to create a California FMMO. end mark

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