CDFA orders long-term change on milk pricing


Issue Date: May 25, 2016
By Ching Lee

Milk prices paid to California dairy farmers, specifically the portions related to dry whey, will continue to be calculated based on a state milk pricing formula that's been in use since last August.

The California Department of Food and Agriculture ordered a permanent change to the dry-whey scale used to determine the whey-factor value in the state pricing formula for Class 4b milk, which relates to milk used to manufacture cheese and its byproduct whey.

The decision comes after CDFA held a hearing in April to consider changes to the dry-whey scale. The department held a similar hearing last June, after which it implemented a temporary change to the dry-whey scale that was to be in place for one year, expiring in August. The current decision makes that temporary scale a permanent part of the formula, effective in June.

In her letter to stakeholders, CDFA Secretary Karen Ross said she still believes modifying the state's milk pricing formula is not an adequate way "to address long-term structural challenges facing the dairy industry," but that the department "must continue to respond to changing conditions in our industry by using the only tools available through the current milk pricing system."

"Once dairy product markets improve, this adjustment will provide a needed increase in revenue to producers to promote a stable milk supply," she said.

Ross further noted that strong global milk production, high inventories of dairy products and decreased dairy-product sales to key importing countries have dropped milk prices and eroded incomes for producers in California and across the nation (See story, CDFA orders long-term change on milk pricing).

She said she also realizes California dairy processors have made "significant investments" in the state and that "they are operating within a much more competitive environment due to weakened global demand."

"Milk prices and marketing conditions are not expected to recover until the balance between global supply and demand improves," Ross said.

Given current weak dry-whey prices, the now-permanent dry-whey scale does not generate more value than the state's previous scale and likely will not impact dairy farmers' milk checks in June, said Annie AcMoody, director of economic analysis for Western United Dairymen.

"However, as whey markets recover, the value generated by this updated Class 4b formula should enhance producers' paycheck a bit," she said.

She noted that in futures markets for November and December, dry whey settled at 29 cents per pound; therefore, the updated dry-whey scale would result in approximately 8 cents more per hundredweight in producers' overbase pool price.

"While we are disappointed this (hearing decision) will not provide immediate relief, we are appreciative that this decision has the potential to generate more value for producers, hopefully in the near future," AcMoody said.

Lynne McBride, executive director of the California Dairy Campaign, said while the permanent change in the whey scale will not have immediate impact on milk prices while the whey market remains depressed, it will put dairy farmers "in a better position once whey prices improve."

Dairy farmers—represented by Western United Dairymen, California Dairy Campaign and Milk Producers Council—had asked CDFA for more aggressive changes to the state whey scale, one that closely models the values found in the federal milk marketing order Class 3 pricing formula. It was the same scale the groups proposed last June, a change that would have resulted in a five-year monthly average increase of $1.38 per cwt. in the state 4b price and a 64-cent per cwt. increase in pool prices, if it had been in effect from March 2011 through February 2016.

Cheese processors—represented by the Dairy Institute of California—had proposed replacing the current dry-whey sliding scale with one based on the price of the weekly "Central and West 34 percent Whey Protein Concentrate-Mostly" published by the U.S. Department of Agriculture. The Dairy Institute's proposed scale would have resulted in a five-year monthly average increase of 31 cents per cwt. in the 4b price and an increase of 14 cents per cwt. in pool prices.

Bill Schiek, an economist for the Dairy Institute, said the organization is disappointed in the CDFA decision to continue using dry whey as the basis for establishing the milk price paid to cheese makers, rather than WPC-34, which he said is more representative of the products marketed by cheese plants operating in the state.

"We remain concerned that the new formula will put some cheese plants out of business and cause others to lose market share when whey prices move higher," he said. "These outcomes will lead to industry job losses and a reduction of markets for dairy farmers' milk."

Schiek added that the institute agrees with Ross "that tinkering with the pricing formulas does not address the challenges facing our industry" and that a "comprehensive reform" of the pricing system is needed.

How to set the 4b pricing formula so that it is fair to dairy farmers and cheese processors has been an ongoing debate. The April hearing was the seventh CDFA held during the last five years to consider changes to the 4b pricing formula.

Producer groups have emphasized the need to better align the state 4b price with the federal equivalent Class 3 price. The state's largest dairy cooperatives petitioned USDA last February to establish a federal milk marketing order for California. A hearing was held last fall to consider such a move. USDA may issue an initial decision later this year.

Tulare County dairy farmer Joe Augusto, president of the California Dairy Campaign, said he interprets CDFA's latest hearing decision as recognition by Ross "that our prices should be closer to prices in the rest of the country," though he added the changes instituted in the decision "will not make up for the losses that dairy farmers here have endured under our state system."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.