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Producer Review Board Recommends Referendum to Change Quota Differential to $1.00 per cwt.

On May 1, 2024, the Producer Review Board (PRB) held a meeting in Tulare. There were 12 Board members and 2 voting alternate Board members in attendance. After approving the minutes and getting some routine updates from California Department of Food and Agriculture (CDFA) staff, the Board turned to an agenda item titled: QIP 5-Year Effectiveness Survey Follow-Up Update.


Over the past year, PRB member Frank Konyn has been reporting information to the PRB about how much Class I revenue is generated each month into the California Federal Milk Marketing Order (FMMO) pool and how much money is being paid out for quota payments every month. The way Frank calculates Class I revenue is by taking the reported pounds of Class I milk that the Federal Market Administrator reports each month and multiplying that number by the effective Class I differential that applies in California. The Class I price in California varies by region. In Southern California, the Class I differential is $2.10 per cwt. In the Bay area, it is $1.80, and in Tulare, the Class I differential is $1.60 per cwt. The statewide weighted average Class I differential is just under $1.90 per cwt. Class I sales have been in a steady decline for nearly 30 years. With that reality, the extra revenue that the Class I differential provides has also been declining. By the way, this method of calculating the Class I value is the same methodology Dr. Marin Bozic used a few years ago when he was working for the United Dairy Families to develop options for modifying the QIP. See his paper here


At the PRB meeting on February 5, 2024, Frank provided detailed information which showed the Class I revenue, by month and year, going back to November of 2018 when the California FMMO started. The amount of Class I revenue was then compared to the amount of the payments to quota holders. At the February 5 meeting, there was significant and robust discussion about this issue, which I wrote about in an article. You can read that article here.  In short, the amount of Class I revenue is now slightly over $7 million dollars per month and the quota holders are receiving just under $12 million per month in quota payments. Back in 2019, the Class I revenue was just under $8.5 million per month with the fixed quota payment being about the same as today. When you total up how much Class I revenue has been paid into the pool since the California FMMO started in 2018, and compare that to total payments to quota holders in that same time frame, the quota payout has exceeded the Class I revenue by more than $247 million. The outcome of this discussion at the February PRB meeting was a motion to move in the direction of tying the quota to Class I revenue and eliminating the Regional Quota Adjusters that create different quota payments in different parts of the state. That motion passed at the February meeting by a vote of 9 yes to 3 no. Frank Konyn and PRB member Will Dyt were encouraged to review the data and develop proposals to further this motion.


What came before the PRB this week was a specific proposal by Frank Konyn. The proposal has three parts. Part one is to change the quota differential from $1.70 per cwt to $1 per cwt., which is just higher than what Class I revenue contributes today. We know that there are proposals being considered by USDA that would both raise Class I differentials and reduce Class III and IV prices, meaning in the future, Class I revenue is likely to increase. Reducing the quota differential to $1 would reduce the assessment to pay for the quota program to about 22 cents per cwt. from the current 35 cents.


Part two of the proposal is to eliminate the Regional Quota Adjuster, thereby equalizing quota payments throughout the state. And the third part of the proposal is to place language in the QIP that defines a “hardship” as it was historically understood in the old California pooling system. I would encourage you to read Frank’s entire proposal here.


Before Frank had the opportunity to present his proposal, a motion was made and seconded to not allow a vote on Frank’s proposal at this meeting. Frank was allowed to make his presentation and there was discussion and debate about it. A vote on the motion to delay a vote on Frank’s proposal to the next meeting of the PRB was then held. That motion failed: 10 no to 4 yes. A motion was then made to support Frank’s proposal and send it to the Secretary as a recommendation to be submitted to a referendum of producers. After more debate, some of which centered on the hardship language, the motion passed 9 yes to 4 no with 1 abstention.


Next on the PRB agenda was the issue of hardships. PRB member Jim Viera had submitted a hardship request before he was appointed as a member of the PRB. He along with 9 other hardship requests have been on the agenda of the PRB since last November. The substance of these requests is similar. They point to financial stress on the dairy and cite the specific language of the QIP which defines a hardship as: “Hardship means a challenge to the management and operation of a dairy due to the operation of this plan.” The PRB has struggled with what to do with these requests and has tabled them since November. PRB member Jim Viera has been very strong in asserting that producers without quota should be able to opt out of paying the assessment because of this hardship language. Of course, the whole QIP program depends on all milk paying assessments into the program for there to be money to pay the quota premium. So, granting hardships to exempt certain producers from paying the assessment would likely lead to a collapse of the entire system.


A motion was made to deny the 10 hardship requests based on a lack of merit to their request. This motion passed: 9 yes to 4 no (one of the PRB members was called out of the meeting and left). A second motion was made to have the PRB adopt as hardship policy guidance that a hardship is: “A challenge to the management and operation of a dairy due to conditions beyond the control of the producer such as fire, floods, storms, and other acts of God, or from Federal and State eradication programs for disease control, and that hardship requests will be limited to provisions regarding: (a) eligibility for pool quota; (b) pool quota allocations and assignments; (c) provisions regulating transfer of pool quota; (d) loss of pool quota; and (e) other matters relating to assignment or use of quota.”  This is the language used to describe hardship in the old pooling plan. This motion passed: 8 yes to 5 no.


Following this, there was a discussion with CDFA about a referendum and voting. There were questions about who could vote. CDFA explained that they have, and update monthly, a current list of eligible producers, identifying who is authorized to vote for each dairy. Each individual ownership has a vote in a referendum. So, a person with identical ownership in multiple dairy facilities would have one vote. A person with multiple dairies that have different ownership for those different dairies would have a vote for each of the different dairies. CDFA reported that as of March 2024, there were 1,048 Grade A dairies in California. There was also a question to CDFA about having either industry observers or a third-party independent entity handle the opening and tabulation of the ballots. CDFA stated that because of confidentiality rules, it needed to conduct the referendum. They said that they conduct between 10-15 referendums per year for other ag industries. They also said that they would include members of the independent State Auditor in the tabulation process and believed that, particularly with the involvement of the State Auditor, they were confident that an accurate tabulation of a referendum vote could be made.


This was an incredibly significant meeting of the PRB and for the future of the California dairy industry. Clearly, there is a split in the producer community. What the PRB is recommending will not satisfy everyone, but it is a path forward that is respectful of the historical role quota has played in the California dairy system. A separate method for dividing Class I revenues has been embedded in the system since California adopted a classified pricing regulation in the early 20th century. Time will tell if this is the solution for this time in history, but the PRB has put something forward and the next decision is up to the Secretary on whether to call for a referendum, and then the producers will have their opportunity to vote it up or down.

Geoff Vanden Heuvel

Director of Regulatory and Economic Affairs

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