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Ben Yale was right – well, sort of

Ryan Miltner Published on 06 November 2015

Ben Yale, my mentor and a former Progressive Dairyman contributor, firmly believed that the Federal Milk Marketing Order system was a benefit to producers. He also believed that the existence of a separate state-run California marketing order served as a detriment to producers outside of California.

During his life, Ben’s beliefs about the merits of California’s state order led to a fair number of colorful disagreements between professionals that otherwise would have little problem getting along just fine.

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With the USDA now in the middle of a marathon hearing to consider the adoption of a federal order for the state of California, I thought it might be interesting to look back at one of Ben Yale’s submissions to Progressive Dairyman wherein he discussed some of the challenges facing California and to consider, now six years later, the proposals now being debated.

All of the references herein are to Ben’s article titled, “California State Order Faces Challenges.” It appeared in the April 24, 2009, edition of the magazine. It can found online here.

When Ben wrote his article, the California Department of Food and Agriculture (CDFA) had just reduced Class I prices and transportation allowances and credits. As an aside, Ben rarely, if ever, thought it was a good idea to reduce minimum price formulas. But in 2009, California was reducing prices at the same time the USDA was increasing prices. This helped to create a spread between the minimum prices paid by plants in California versus the prices in the federal system.

That trend has continued over the past six years. During that period, the whey factor in California’s Class 4b price formula (used to price milk used in cheese manufacturing) has been adjusted on no fewer than three occasions. Testimony in the current FMMO hearing describes a spread between the federal Class III price and the California Class 4b price of approximately $2 per hundredweight over the past four years.

Ben’s article opined that the reason California had to maintain its competitive position vis-à-vis milk from outside the state was the inherent limitations of state regulation, or as he described it, “the relative impotency of the California system to protect minimum prices in its market compared to the federal system.”

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Oversimplifying a bit, California only has the ability to regulate milk produced, marketed and processed entirely within its borders. The U.S. Constitution prohibits individual states from regulating commerce that crosses state lines absent express approval from Congress. As Ben wrote, “In short, [only] USDA [has] the ability to make all of the buyers play by the same rules.”

After so many years trying to have the CDFA rectify the pricing issues in the states, the three largest cooperatives came to agree with Ben’s assessment and are actively seeking federal regulation of the industry.

Presciently, Ben also identified several of the principal points of discussion and differentiation involved with the change from a state-regulated California order and a federal one.

Ben wrote in 2009 about California producers opting to give up their Grade A status so they could market milk directly to cheese manufacturers outside of the CDFA pricing regulations. The California state order requires all dairy plants to pay minimum prices, colloquially known as “pooling.” By comparison, federal orders only mandate the participation of Class I handlers, although each order has different provisions that create various incentives and disincentives for other handlers to pool their producers.

The imposition of mandatory pooling in a California federal order had become one of the more contentious aspects of the cooperative’s proposal. While this pooling model closely tracks what already exists in the California state order, it is a departure from other FMMO provisions. The appropriate pooling provision to adopt, should the USDA determine that a California federal order is appropriate, will be an important aspect.

Ben also wrote that, “Going from the state order to a federal order will have other challenges. … But the real deterrent to the California dairy industry adopting a federal order is California’s ‘quota system.’ Federal law prohibits that in milk orders.”

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No doubt. Figuring out how to incorporate California’s quota system into a federal order is a truly unique challenge. Ben described quota as follows: “Holders of quota get the first $1.70 per hundredweight out of the producer pool. Only a minority of the milk is entitled to receive quota (about 20 percent). The value of quota on the balance sheets of producers who own quota rights goes into the billions of dollars. Termination of the state order would no doubt end quota and remove that value.”

Ben was right about everything – except the final sentence. In the absence of congressional intervention, he would have been correct about the end of quota. But in the most recent farm bill, Congress provided a gift to the advocates of a California federal order.

That gift said that California can petition for a federal order, and the USDA shall recognize the value of California quota. Previously, that language was included during the 1996-1999 federal order reform process. That authority, however, expired when California did not proceed to adopt a federal order.

Finally, Ben spoke about the importation of milk from outside of California to supply California handlers. In the context of Ben’s article, he was writing about the inability of California to regulate these interstate transactions, as I explained earlier. This was a topic in which Ben was well versed.

As a matter of fact, Ben and I, along with our other partner, filed a brief in the Supreme Court on behalf of a client that opposed California’s attempt to regulate the sales of milk across state lines. The Supreme Court ultimately ruled that the efforts of the CDFA to regulate those sales were unconstitutional.

Under a federal order, the combination of a continued quota system and continued shipments of milk from other areas creates an inequity to the out-of-state producer. Under California law, only farms located in California can own quota rights.

And under the principal proposal, quota value gets paid from the pool and the remainder gets distributed to all producers. What that means is that milk from out-of-state can never receive the same regulated price as milk produced on a quota-holding farm from California.

Is there a lot to figure out with respect to California? Oh, yes. The first is whether a federal order is even an appropriate answer. Ben certainly thought it was the only appropriate answer. But as Ben explained then, and we again see now, even if a federal order is the answer, it remains only one answer to multiple tough questions that need to be – and are being – asked.  PD

Ryan Miltner
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