Farmers await potential change in dairy pricing

Issue Date: May 23, 2018
By Ching Lee

People in the dairy business say they're quite certain the state will be changing to a federal milk pricing system this fall, but they're holding out on making any long-term business decisions in anticipation of this move.

In a producer referendum that ended earlier this month, California dairy farmers voted whether to join a federal milk marketing order for the state. Though the U.S. Department of Agriculture has yet to announce the results of the vote, the state's three largest dairy cooperatives, which represent the majority of the state's milk, reportedly bloc-voted on behalf of their members, indicating approval of the order.

USDA has said implementation of a California federal order, if it is approved, is expected no later than Nov. 1. Currently, California dairy farmers operate under a state milk pricing system administered by the California Department of Food and Agriculture, while the majority of farmers in other states operate under a federal-order system.

Exactly how the change would affect each individual farmer remains unclear, Tulare County dairy farmer Frank Mendonsa said, though he noted some are "very optimistic," while he and others are taking a "wait-and-see approach."

"They think it's going to help, but they don't know exactly to what degree," he said.

Some believe moving to a federal-order system will improve their milk prices, but Mendonsa said not too many farmers are taking that assumption to the next level by making big changes such as expanding their operations. Prospects of joining the federal order may stop some producers from exiting the business, he added, "because they have hope that we're going to have a brighter future with a federal order."

Tom Barcellos, who also operates a Tulare County dairy, said he thinks most dairy farmers are using this time to understand better what opportunities they may have with dairy futures, forward contracts and other risk-management tools that are more difficult to implement under the current state system.

"I haven't heard anybody say, 'I'm going to sell out' or 'I'm going to buy another dairy' because of the federal order," he said. "I think, for the most part, everybody is going to coast into it and see how it works a little bit before they start making any changes."

Like others in the business, Barcellos said he would prefer to "get a little more comfortable" with operating under a federal order before trying anything different in his operation.

Gary Genske is a certified public accountant at Genske, Mulder & Co. in Costa Mesa. His firm represents dairy farmers who produce 25 percent of the state's milk. He said he thinks the state should have joined the federal order years ago, but this move is a "nonissue" when it comes to decisions producers are making on the farm.

"I don't see dairy farmers changing anything in the way they do business with one system over the other—not one thing whatsoever," said Genske, himself a dairy operator in New Mexico.

Whether under a federal order or a state order, he said marketing orders determine only minimum milk prices that processors must pay farmers. Under a federal order, California milk probably would be valued 20 to 30 cents per hundredweight higher than under the state order, but such an increase "isn't what's going to help agriculture in California," he said, adding that reduced production would have more impact on prices.

Chris Atten of Illinois-based Atten Babler Commodities, which provides risk-management consulting and brokerage services in agricultural commodities, said moving to a federal-order system would help California dairy farmers in hedging, specifically their milk.

He said many of them already hedge or manage their price on feed commodities such as corn, cottonseed, canola and soybean meal. Those are easier to do because farmers know the cost and the basis, he said, but hedging their milk "has been a learning curve for a number of dairies."

California dairy farmers for years have said the pricing disparity between the state order and federal orders—the index they use to hedge their milk—makes the use of risk-management tools such as dairy futures difficult because they can't predict the differential between the two. Moving to a federal order, Atten said, will help "narrow those relationships, so they know they don't have that basis risk."

"It's going to give them more opportunities because it's going to give them more confidence in what they're doing," he said.

Switching to a federal-order system not only would increase producers' confidence in risk management, but it would make it easier for processors to hedge on markets as well, said Leslie "Bees" Butler, a dairy economist at the University of California, Davis. This could mean that processors might be able to offer producers more long-term price contracts, which is one way to manage risk. Those prices would be offered with much more confidence, he said, and they may even be a bit higher than what they would be now.

"Certainly, hedging on the futures market is going to be simpler for both producers and processors," he said.

One significant change under a federal order would be the disappearance of the transportation allowance, which producers now receive from a pool they pay into to ship milk to milk-deficit areas such as Los Angeles. How the cooperatives will deal with this change and pay producers remains a question, Mendonsa said.

"Those are real costs," said Geoff Vanden Heuvel, a San Bernardino County dairy farmer and economics consultant for the Milk Producers Council. "It costs a lot of money to move milk that far. That subsidy has existed for 30 years or more, and that's the biggest single thing for the co-ops to figure out."

Vanden Heuvel said he considers it "a bit premature to try to guess how this is all going to turn out and go make major business decisions based on what is speculation at this point."

"We are quite confident that there's going to be quite a bit more money available to producers. But how that money is going to get divided up and how it's all going to flow—they've got to figure that out,"he said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at

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