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1209 PD: Milk can skirt marketing borders; examples of how it's done

Ben Yale Published on 05 August 2009

Defending the player with the ball in basketball is easier when the player is between you and the out of bounds line, better yet when he’s in a corner.

What is one-on-one in the open court is two-on-one along the boundary and three-on-one in the corner. There is a lesson there for milk regulation. Poured onto a table with an even and unobstructed surface, milk will flow naturally to the edges and corners. Milk markets do the same. Without obstacles, milk will move everywhere freely and efficiently.

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Historically, the obstructions to the flow of milk include natural boundaries, health regulatory boundaries, transportation limits, state and national borders and trade barriers. Natural borders have restricted that movement through mountains, rivers, oceans and great distance. But modern transportation, refrigeration, container ships and super highways have shortened the distances, dried the oceans, bridged the rivers and flattened the mountains.These no longer obstruct the flow of milk.

The pricing and pooling regimes so prevalent in the U.S. have relied upon these borders to assist in enforcing the regulations. These political and geographical obstructions are the out-of-bounds that enhance the effectiveness of the regulations. Without such barriers, most such regulations based upon limited access to its markets from outside milk cannot survive. The laws of economics are too powerful. Rules and laws are simply unable to stop the flow of milk seeking its own level or to alone fully isolate the industry from outside competition.

Likewise, health regulations are no longer the barriers to the movement of milk they once were. Decades of cooperative efforts between academia, federal, local and state governments and the industry created and maintain the Interstate Milk Shippers (IMS) list and the Pasteurized Milk Ordinance (PMO). The PMO with its universal rules has eliminated health regulation as a barrier impeding the flow of milk into a locality. Instead the PMO aids milk as it readily flows unimpeded by local health laws throughout the nation. Now it aids in milk traveling internationally into the U.S.

1. Last year, an Ontario provincial court enjoined a few Ontario farmers from marketing milk into New York. The basis of the injunction was that the Ontario farmers were bound by the province’s quota system, which dictates how milk produced there is marketed. The imports into the U.S. ended but only because Canadian regulations, not domestic state or federal law, curtailed them. Domestic pricing regulations, political borders or other regulatory authority in the state or federal government could not stop this import of milk. The state of New York was required to accept milk that had passed IMS inspection. Had the Dairy Farmers of Ontario wanted to market milk into New York, it would have happened and could begin any day.

The IMS and PMO programs provide no border to protect American dairy interests from foreign sources. Mexican or Canadian plants can obtain IMS approval for their farms and plants just like the producers in Canada did.

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2. The oceans do not provide barriers, either. The state of New York permits Greek dairies and plants to market Greek-style yogurt as Grade A in the U.S. Florida inspectors are certifying Spanish dairy farms and facilities. Simply stated, plants and farms anywhere in the world can obtain IMS status. The IMS lists eight milk shippers located out of the U.S. – four in Canada and two each from Spain and Greece. But there is a question as to whether IMS listing is even required. Recent developments within the FDA have suggested that foreign plants that meet the milk definition of the CFR, or the Codex for standards of identity for milk and their countries’ regulations, can import milk without complying with the PMO.

3. Stores in ethnic sections of New York City are selling bottled milk products from places such as Russia.

State borders provide even less limitation to cross-border movement of milk. A single, large California dairy farmer contracted to meet the full requirements of a Nevada bottling plant. California has a pooling and pricing plan that includes a quota/overbase payment to producers. The milk in this contract would have been classified as “overbase” if it had been marketed in California. Nevada has its own state pricing order. California cannot regulate out-of-state sales by its producers; Nevada cannot regulate purchases of out-of-state milk by its plants.

4. A new bottling plant near Reno began to supply packaged milk into California using California producer milk. The border between the two states failed to keep California milk out of the Nevada plants and Nevada sales out of California.

The opportunities for this “border crossing” avoidance of regulatory pricing is not limited to these states. The potential exists in international transactions. For example, a plant could be built in the vicinity of Sarnia, Ontario, which is located just across the St. Clair River from Port Huron, Michigan, which is located next to one of that state’s high milk-production areas and is nearby Detroit and a large population south on I-75. Milk bottled in Sarnia and marketed exclusively in the U.S. would not be subject to the FMMO system. Under NAFTA, Ontario officials would have difficulty regulating milk purchased from out of the country. Another, plausible, northern exposure would be a plant located in Abbotsford, British Columbia, obtaining milk from Whatcom County, Washington.

5. Years ago serious considerations were made to locate plants near Nuevo Laredo, Coahuila, in Mexico. Though conditions in Mexico make such ideas beyond any serious or reasonable consideration today, the idea was that milk from New Mexico and central Texas farms, and possibly Mexican farms, would supply the plant. The distance from that region to the populated areas of Texas are closer than most of the milk plants within the U.S. supplying those markets. This milk could not be subject to pricing regulation. What was once thought unlikely has been given new life.

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A Mexican company, which owns dairy farms in Mexico, recently purchased National Dairy Holdings, which has plants in Texas. The LaLa deal increases the potential for an out-of-country supply of fresh milk to U.S. bottling plants. The border disappears and so does the regulation.

International challenges to our almost sacred, higher-value milk products to provide higher income to producers supplying milk used in a lower class are not new either. The European Union has long claimed the FMMO system is a violation of the World Trade Organization (WTO). In a challenge by U.S. dairy interests, the Canadian Optional Export Programme export class was found to be a violation of the WTO. In the past, the challenge to the U.S. program was more theoretical as virtually all milk produced in the U.S. was marketed and consumed here. That is no longer the case. Demands to “level the playing field” will increase as the U.S. is a world competitors fighting for market share.

What fuels these movements of milk is the classic arbitrage, wherein commodities or goods move between markets because the prices are unbalanced. The movement equalizes them. The disparity in market prices is created by regulatory pricing. Without other walls from health regulations, political boundaries and trade barriers, the milk regulatory system is less able to protect itself from dilution of its power through the movement of milk from across geographic borders.

These opportunities have always existed. What has changed is that the size of units, both producer and plant, have made the opportunities more individually valuable. The larger the units, the more to be made, and the more attractive the other risks become. An opportunity for a producer who markets 12 loads of milk a day, or 6,000 hundredweights to obtain another 75 cents by avoiding the limits of the marketing orders or cooperative, means $4,500 per day or $1.6 million per year. At the same time, the size makes the deal easier to make happen. At the farm it was one decision to make, not many. Even in the case of the Ontario producers shipping into New York, they had to be big enough that four of them could fill a load of milk.

Other regulatory circumstances may force milk production to move out of the country. For example, the immigration issue and the failure of Congress to provide sufficient workers on farms may force farms in the Southwest to move to Mexico. Tighter environmental laws are restricting milk production, too. These forces, independent of the pricing and pooling, may force milk production in part to relocate outside of the U.S. and, in the end, become a quality supply of milk that competes against the regulated supply.

The movement of milk from the California dairy farm to the Las Vegas bottler, export contracts for NFDM, Ontario farmers selling milk in New York, the price of condensed skim milk and Nuevo Laredo are examples of classic arbitrage as products seek efficient movement from supply to market.

Natural, regulatory, political and tariff boundaries no longer support pricing and pooling schemes. In the future, regulations in that arena must not only recognize the wider world within which they operate and the limits of their influence, but should also be ready to recognize that the regulations themselves may set off the kind of movement they were intended to prevent. Whatever programs we create, we will have to defend in the open court of the market place. PD

Ben Yale
Attorney at Yale Law Office

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