Published March 2021 Edition
Special by Geoff Vanden Heuvel
In the 1960s – at the urging of producers – a statewide milk income pooling plan was adopted in California. It established regulated minimum prices for all Grade A milk and required the pooling of income from Class I (fluid milk) and some Class II (soft dairy products), while also allowing the pooling of income from the other classes of milk. At that time, California was not eligible to be part of the Federal Milk Marketing Order (FMMO) program since geographic isolation meant there was little interstate shipment of milk.
Prior to the adoption of the California Marketing Order, a contract system between producers and milk buyers existed, where producers were paid based on the use of their milk at an individual plant. Obviously, contracts with Class I bottlers were sought because of the higher prices those buyers could pay. This led to abuse, and often illegal activity, as some bottlers used this leverage to extract concessions from producers who competed for those Class I contracts. The new California Order was designed to take away this power from the processors and equalize revenue to producers across the Golden State.
The birth of a $1 billion asset
In the political deal struck to implement the California Order, “quota” was created and allocated to producers based on the percentage of their milk sold as Class I in the period just prior to the start of the California Order. This compensated those who had high Class I contracts but were giving up those higher milk checks to establish a market-wide pooling of milk revenue. The plan also included mechanisms to allocate new quota as the Class I market expanded to those who were short of quota at the beginning.
As milk production in California grew above Class I usage, more and more milk not covered with quota came into existence. From the beginning, quota was transferable, and producers bought and sold it to each other as they structured their businesses to fit their individual circumstances. Eventually, quota was an asset worth more than $1 billion.
Enter California’s federal order
As California grew to become the nation’s largest dairy state, the inability of its state order to regulate interstate commerce became an issue. Milk supplies were developed just out of state and shipped into California to take advantage of the state’s inability to protect its own market. But of more significance was the fact that California’s nearly 50-year-old order enforced minimum prices on all buyers of Grade A milk, regardless of usage.
For decades, the California Order generally aligned to FMMO prices across the country. However, when policymakers at the California Department of Food and Agriculture (CDFA) established minimum prices for milk that were substantially below FMMO prices — particularly for cheese (known as Class 4b milk in California or Class III in the FMMO) — California producers suddenly faced a significant competitive disadvantage and lower milk checks compared to their fellow producers across the nation.
Repeated efforts by California producers to get CDFA officials to narrow the gap between California Class 4b and FMMO Class III prices were unsuccessful, leading producers to look at the possibility of joining the federal order system. By this time (the mid-2010s), Class I utilization in California was under 20%, and quota covered less than 40% of California’s production. However, the asset value of quota still represented more than $1 billion, and a significant majority of producers owned at least some quota.
For many producers, a prerequisite to joining an FMMO was protecting the value of quota. So, Congress was approached and legislation was passed allowing USDA to establish a California FMMO that recognized the quota’s value. With a viable path forward for quota, the major California cooperatives petitioned USDA for the establishment of a FMMO.
California officials worked with producers to design a Quota Implementation Plan (QIP) that would operate after California entered an FMMO. Under the QIP, the $12 million per month needed to fund quota payments would be collected as an assessment on all Grade A milk produced in California rather than out of market-wide milk pool revenues.
The California-based co-ops had made it clear they would only support a FMMO if a referendum establishing QIP passed by a vote of the producers. That hurdle was cleared, with producers overwhelmingly approving the QIP in 2017.
When the FMMO began in November of 2018, producers began to see the actual cost of quota since it now appeared as an assessment on their milk statements. There was no difference between the quota costs prior to the FMMO . . . the costs were just more transparent, showing up on a milk statement rather than being paid out by the former California pool.
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Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs