By Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
It was a privilege to testify for Milk Producers Council at the FMMO hearing this week. In addition to fully supporting the package of proposals submitted by National Milk Producers Federation, I had a few other points I wanted to emphasize at the hearing.
The role of the government in regulating milk prices is as a referee. Milk is a highly perishable product that long ago our country decided was an essential staple of our national diet. It requires lots of capital to produce, and a dairy farmer must sell that milk every day to a buyer that does not have to buy it every day. This fact makes milk unique and the FMMO system was devised over 85 years ago to undergird and support the structure of our industry. For government economic regulation to be successful it must be based on market principles or distortions will occur that will cause the system to fail.
I wrote the MPC testimony with the objective of setting the context for what this hearing is all about. I encourage you to read it and welcome any feedback.
2023 National Federal Milk Marketing Order Pricing Formula Hearing
Testimony of Geoff Vanden Heuvel, Director of Regulatory and Economic Affairs
Milk Producers Council – California
Milk Producers Council is a nonprofit organization representing dairy families throughout California. Since 1949, our board of directors and staff have worked on behalf of our members on local, state and national issues, with topics ranging from milk pricing policies to environmental regulations and any other regulatory and policy challenges facing dairy families today. My name is Geoff Vanden Heuvel, and I have been the Director of Regulatory and Economic Affairs for MPC since June of 2018. Prior to that I was a dairy farmer, operating for nearly 39 years in Southern California. I also served as a board member of MPC since the early 1990s and prior to that served on the board of another dairy farmer trade association. I was an active participant in the California State Milk Order, testifying at nearly every milk pricing hearing held by the California Department of Food and Agriculture since 1985. I testified at the Federal Order Reform formulation hearing in Alexandria, Virginia in May of 2000 as a witness for Select/Continental and Elite cooperatives and the Western States Dairy Producer Trade Association. My expertise was on the California pricing system, which utilized a product value formula to establish minimum pricing for the State Order. Since federal order reform was moving the FMMO system to a product value formula system in 2000, I was able to provide some knowledge and experience about how that system worked in California.
Before I get too far into this testimony, Milk Producers Council wants to thank USDA for responding positively to the California producer community’s request to come under the jurisdiction of the FMMO program. The California FMMO hearing was long. It lasted nearly 40 days and required a significant investment of time, money and effort by all concerned. I am here to report that the California Federal Milk Marketing Order has had a significant impact on the mailbox price of California producers. The chart below is a visual demonstration of that impact.
Bottom line: Multiplying the $1 plus increase in average California producer mailbox prices that occurred after the establishment of the California FMMO in November of 2018 times the over 40 billion pounds of annual California milk production results in an increase of over $400 million in annual California producer income. In addition, and even more important, is the fact that California producers are now on a level policy playing field with our colleagues in the rest of the Federal Order system. That fact has benefits not only for California producers, but also supports the ability of USDA to sustain a national, coordinated dairy pricing policy and regulation. It took a tremendous amount of effort by many people in the industry and many people at USDA to get this result, and we are profoundly grateful.
Moving on to the subjects that are part of the call of this hearing. The government is involved in milk price regulation because long ago we decided as a nation that an ample supply of fresh and wholesome milk at prices that were affordable for consumers was in the public interest. The perishable nature of milk and the inherent imbalance in market power that that perishability creates is what leads to a role for the government to become the referee between milk processors and producers. In a normal business relationship, sellers do not have to sell, and buyers do not have to buy. A transaction occurs when a willing buyer and a willing seller agree to a price. When it comes to milk, because it is highly perishable, the producer cannot hold his product. The processor does not have to buy, at least not that day. And so, this leads to an imbalance in marketing power between producers and processors.
What we have today in the Federal Milk Marketing Order program is the result of over 85 years of the government playing the role of a referee amongst the various actors in the dairy industry. What has made this system work for so long has been the fact that the FMMO system discovers the value of milk – it does not bureaucratically establish that value. It then transmits that market value though the regulation to establish appropriate minimum prices for the various uses of milk.
The starting point for building a market-based regulatory system is finding a competitive value for milk. For decades the Minnesota-Wisconsin price series provided this price discovery. Dairy plants buying raw unregulated grade B milk in Minnesota and Wisconsin were surveyed and reported what they paid for milk in an unregulated market. There were no explicit make allowances or yields in the pricing series. Simply a hundredweight value and a components test. This milk price then became the building block for establishing regulated Grade A milk prices in the FMMO system. Eventually, there was not enough unregulated Grade B milk in Minnesota and Wisconsin to confidently use this price series to accurately determine the market value of raw milk. The alternative was to move one step away from raw milk and use basic products made from milk as the starting point, and then back into a milk value by adjusting for yields and conversion costs. This is the system we have today, and this hearing is about updating the various parts of the conversion formulas that are used to discover the competitive value of milk.
The understanding that we are trying to discover the value of milk, shapes our positions on the various proposals that are part of this hearing. There are a number of competing interests that have to be balanced as these adjustments are considered.
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