By Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs Geoff@MilkProducers.org Anyone following the California dairy producer community over the past number of years realizes that the issue of quota has been – and continues to be – a point of controversy. For the nearly 50 years that California operated a state milk marketing order, the impact of the quota system was not necessarily obvious to producers. How the revenues were collected that formed the basis for the announced quota and overbase milk prices was not well understood. Quota had been in place since the beginning of the system and people relied on it and made business decisions for their operations based on it. When Congress gave California producers the opportunity to come into the Federal Milk Marketing Order (FMMO) program and continue to recognize quota value, a new mechanism was needed to fund the quota program.
Back at the beginning of the State Order in 1969, quota was directly tied to Class 1 (fluid milk) revenue in the order. The quota differential changed from month to month with the movement of prices for all the classes of milk. But Class 1 revenue always belonged to the quota.
In the early 1990s there was unrest in the producer community over quota. By this time, a large amount of the growing California milk supply was not covered by quota. It took a few years, but a change was made in the system to fix the differential between quota and overbase at $1.70 per cwt., which had been the most recent average differential in the system. Fixing the quota differential at $1.70 per cwt. would enable Class 1 revenues in excess of what was needed to fund the $1.70 to be distributed to non-quota holders. When this change took place, the California Department of Food and Agriculture dramatically increased the Class 1 price in California with the goal to improve income for all producers. There was room to increase Class 1 prices because, relative to Class I prices in the FMMOs at the time, California prices were much lower. This did work as designed for a time, but higher Class 1 prices in California did encourage nearby out-of-state milk to seek to capture that Class 1 revenue.
Because California was prohibited from regulating out-of-state milk, this milk could receive the Class 1 price in California and keep that revenue from becoming part of the California state milk pool. The state responded to this challenge in a couple of ways. They adopted regulations for the out-of-state milk, for which they were sued by the out-of-state interests, and they began lowering the Class 1 price to diminish the incentive for out-of-state milk to come in. Eventually, the U.S. Supreme Court put an end to the attempt to control out-of-state milk by regulation and reducing Class 1 prices was about all that could be done (short of becoming a Federal Milk Marketing Order) to discourage out-of-state milk from taking the California Class 1 business. Meanwhile, the volume of Class 1 sales began a long-term decline.
In 2017, when the major California cooperatives decided to pursue the adoption of an FMMO, USDA made it clear that the federal government was not willing to operate a state quota program. USDA was willing to acknowledge a state program, but not run it as part of a California FMMO. The California Department of Food and Agriculture worked with the Producer Review Board (PRB) to develop the Quota Implementation Plan (QIP) that would operate if and when California became an FMMO. The program that was developed was to fund the $1.70 quota differential (the $1.70 is specifically established in California law) with an assessment on all California production as opposed to funding the quota differential before announcing the milk prices. When California became an FMMO in November of 2018, that quota assessment showed up on producers’ milk checks, and for many producers the financial impact of the quota program became visible for the first time.
In the five years since California became an FMMO, as I testified at the national FMMO hearing in November, mailbox prices for California producers are up well over $1 per cwt. when compared to mailbox prices under the State Order. But the QIP assessment continues to be controversial, with organized efforts by some California producers to eliminate the program as well as organized efforts to defend the program.
All this background to get to the PRB meeting this week. Some months ago, PRB member Frank Konyn, a dairyman from San Diego County, shared with the PRB information on how much revenue is generated in the California FMMO from Class I sales. His method of calculation was to take the Class I differential applicable in the various regions of California and multiply that by the pounds of Class I milk accounted for in the California FMMO monthly pool report. Calculating Class I revenue that way reveals that in 2023, an average of $7,412,000 per month was generated into the California FMMO pool for a total of $88,944,000 in Class I revenue for the year. Quota payments under the QIP for 2023 averaged $11,852,000 per month for a total of $142,225,000. Frank proposed to the PRB in the meeting this week (you can read his presentation here) that it recommend to CDFA Secretary Karen Ross that CDFA provide assistance in moving in the direction of tying the quota differential to the Class I revenue and eliminating the differences in the quota differential caused by the Regional Quota Adjusters.
PRB board member Will Dyt from Riverside County had a different proposal. He acknowledged that because the FMMO already has a location differential embedded in the producer price, further adjusting quota pay prices by region should be eliminated. Will proposed making the -27 cents RQA that applies in Tulare, the RQA everywhere in the state. Will also had a different way than Frank to calculate Class I revenue, but at this week’s meeting did not have detail on that alternative method. There was also discussion about the likely increase in Class I prices that may result from the recently concluded national FMMO hearing. But others observed that the same hearing was also likely to increase make allowances and therefore reduce Class III and IV prices by at least 50 cents per cwt. The proposed FMMO Class I increases were designed to help offset the negative impact to all producers of the increases in make allowances.
After a lot of robust discussion, a motion was made to move in the direction of changing the quota differential to be tied to California Class I revenue and eliminate the difference in quota prices caused by the RQAs. This motion passed with 9 yes votes and 3 no votes. Encouragement was given to Frank and Will to work together to understand the different approaches for calculating California Class I revenue and report back to a future meeting of the PRB. This motion represents significant concessions by both sides of the producer divide on quota. Quota holders acknowledge that quota payments should be tied to Class I revenue and non-quota producers on the PRB accepted that Class I revenue should go to quota holders. This represents a very significant step in hopefully finding a resolution to this issue which has so divided the California producer community.
As for the rest of the meeting, Cal De Jager from Bakersfield and Jim Viera from Turlock were welcomed as new committee members. Art Van Beek of Tulare was re-elected chairman and Will Dyt was re-elected vice chairman. The minutes of past meetings were approved. CDFA staff gave a presentation on how they update and maintain a current producer list, which is done on a monthly basis using multiple information sources. The results of an audit of the QIP fund were reported. All the money from the beginning of the QIP in November of 2018, through June 30, 2021, was accounted for. They did find nearly $300,000 in outstanding checks some handlers had not cashed.
As for the question raised in prior meetings about what happened to the remaining money in the State Order Equalization Fund, it turns out that those funds were rolled into the QIP fund back in November of 2018 and had been there the whole time. There had been confusion about this, but all the money has been accounted for.
There were 10 hardship requests on the agenda. All of them were seeking relief from paying the QIP assessment, arguing that the actual language of the QIP has this definition: “‘Hardship’ means a challenge to the management and operation of a dairy due to the operation of this Plan.” The requesting producers claimed that the financial condition of their farms was creating a hardship that justified a request to get relief from paying the QIP assessment. Under the Pooling Plan in the old state milk order, “hardship” was understood to involve various challenges producers might have with the quota ownership and transfer rules. The PRB narrowly passed a motion to defer a decision on these hardship requests and ask CDFA for more clarification of what a “hardship” means in the context to the QIP.
When the agenda for this meeting came out, it had the meeting start time at 10 a.m. and a note that there would be no lunch break. I packed a PB &J sandwich just in case. Good thing I did. The meeting went on for 5 hours and ended at 3 p.m.
Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs