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California producers call for pricing fairness at public hearing

Cecilia Parsons Published on 28 June 2012

California dairy producers and cheese makers filled the room and faced off at a Sacramento public hearing called to determine if adjustments are needed in the pricing structure for Class 4b milk.

On May 31 and June 1, dairymen and their trade association leaders emphatically called for fairness in pricing that more closely tracks the Class III whey value.

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Cheese makers speaking at the hearing claimed changes that result in higher prices set for the milk used in cheese production would drive more production out of the state, discourage investment in California cheese plants and leave them at a competitive disadvantage.

Petitions for higher returns from Western United Dairymen and a coalition of dairy organizations and processors including Milk Producers Council, California Dairy Campaign , Dairy Farmers of America , Land O’Lakes and California Dairies Inc . were presented to a Dairy Marketing Branch board from California Department of Food and Agriculture – the agency charged with setting minimum prices paid to producers.

WUD and the coalition asked CDFA to replace the current sliding scale used for setting whey value with a new formula for calculating whey value using the market direction followed by the federal milk marketing order for Class III. They asked CDFA to use the average Dairy Market News price range for dry whey with no floor price and a $4-per- hundredweight (cwt) cap.

An alternative proposal by San Bernardino-based Farmdale Creamery asked that the whey value be returned to 25 cents per cwt, the value that was last in place on August 31, 2011.

In testimony before the board, WUD CEO Michael Marsh said that the gap between what California dairy producers are paid for milk by cheese processors and what dairy producers outside the state are paid is considerable.

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In the petition, the variation between the state’s milk pricing formula and the federal milk marketing orders was 31 cents to 58 cents per cwt in 2008 and 2009. In 2012, the discrepancy grew to $1.24 and in 2011 to $2. Over the past two years, the California price averaged $1.62 less.

The deviation is caused by several factors, Marsh said. The prices are based on different market sources, the CME versus the NASS, but the whey value creates the most variance between the two class prices and is a significant concern.

Since the current class formula was implemented in Sept. 2011, Marsh said revenues to producers from the current whey value compared to the proposed value were $212 million lower.

Marsh said economic and regulatory pressures unique to California dairy producers make it imperative they receive fair value for their milk. In addition, escalating feed costs have wiped out any traction dairy producers made with higher milk prices.

Producers lost significant value in their operations during 2009 and although prices showed signs of improvement, they haven’t been at high enough levels for a sufficient time for producers to regain their equity.

Forty percent of California milk goes to cheese production, pointed out Milk Producers Council general manager Rob Vandenheuvel in his testimony. What dairy producers are asking will still leave them 42 cents below the national price, he added.

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“California dairy producers can’t afford to discount milk to attract cheese plants. It’s the business climate here (that keeps plants out), not the milk prices,” he said.

Vandenheuvel said that much of the raw milk sold in the U.S. is priced with formulas that use market value. That allows the supply/demand signals for producers.

There is no logical reason, he added, that California’s regulated price be significantly lower than national values for the same products.

He also took issue with CDFA Marketing Services Director Kevin Masuhara, who wrote to milk processor California Dairies Inc. stating that 4b milk must be set at a level that will “clear” the market.

“That’s not in the ag code,” said Vandenheuvel. Orderly marketing must be considered, he added, but the only mandate is that the prices derived from the state’s pricing formula be in a reasonable and sound economic relationship with the national value of manufactured milk products.

Small-scale cheese plants are struggling in California, testified Farmdale Creamery controller Scott Hofferber. These plants make up two-thirds of the cheese makers and process about 15 percent of California’s 4b milk.

Costs of whey disposal from the cheese-making process are a challenge for small plants. Plants took a hit last year with the implementation of the 25-cent to 65-cent sliding scale for 4b milk. Investors will back off on any new plants or expansions, Hofferber said, if they believe there will be higher costs for milk.

Setting the price back to the 25-cent level will allow the market to sort out the varying values of the whey streams, he testified. The current oversupply of milk will only be exacerbated if prices are raised. Steps to manage supply have failed and supply is out of whack with demand, Hofferber added.

Dairy producers in the audience disagreed. WUD President Tom Barcellos said the past 20 months of mild weather created a perfect situation for high milk production this spring but, once normal summer heat kicks in, production will drop. Tracy dairy producer Kevin Ornellas and Turlock dairyman Tony Machado testified that while they are taking steps to cut back on feed costs, total production costs leave slim or no margins.

“We’re doing our best to compete, but we need a fair return on the value,” said Jeff Wilbur of Tulare.

Economist William Schiek from Dairy Institute of California said he opposed the petition to raise the price of 4b milk. California dairies’ propensity for overproduction must be helped by a low price to clear the market.

Higher value will help producers in the short term, he said, but high prices tell producers to produce more milk.

“Plants can pay more (than minimum price) and most do so if the regulated price is truly a minimum price, “ said Schiek.

Hilmar Cheese VP David Ahlem said producers responded to the Sept. 2011 price increase for 4b milk with more milk. Dairies are closing, he said, but total cow numbers are up with California outpacing all other dairy states with 23,000 more cows. The consolidation trend here is not curtailing production, he said.

High prices distort the market and premiums many cheese plants now pay producers for their milk will end, Ahlem said. Hilmar’s 200 producers lost money when prices were adjusted upward in 2011, he said.

Increasing the price does not increase the value of the milk, Ahlem warned, and it does not reward investment or innovation in new products.

Cheese plants outside of California are not always required to pay the Class III prices that California dairy producers are seeking, he noted.

Adjustment won’t solve the problem, Ahlem said. “Instead, let the market signals reign.”

Following a second day of testimony on June 1, CDFA has 52 days to issue a response to the petitions and, if necessary, 10 additional days to implement a pricing plan. PD

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