CDFA announces it will temporarily raise milk prices

California dairy farmers, who have been devastated financially by low milk prices brought on by the global recession, will get a temporary boost in the minimum price of milk starting in January.

The California Department of Food and Agriculture announced its decision to change the state's milk price formula last week after considering numerous proposals made by dairy farmers and processors at an emergency hearing in November.

Producers say while the price increases will be helpful, they last for only three months and fall short of what they sought. California dairy farmers say they are also disappointed by how $290 million in federal assistance will be distributed. The U.S. Department of Agriculture announced implementation of that program last week.

As a result of the hearing, CDFA will raise the Class 1 milk price by 35 cents per hundredweight; Classes 2 and 3 by 25 cents per cwt.; and Classes 4a and 4b by 10 cents per cwt. On average, these changes will increase California dairy farmers' monthly pool prices by about 15.5 cents per cwt. Analysts said the changes to the pricing formula would likely have relatively little impact on retail prices for dairy products.

"This is called a Band-Aid," said Margo Souza, a producer in Stanislaus County. "It'll take the edge off a few of our bills, but it won't help anybody going out of business. It's not going to make a great difference, but every little bit helps."

Eligible dairy farmers will soon receive a one-time payment from USDA as part of the new Dairy Economic Loss Assistance Payment program, which includes $290 million in direct aid to dairy farmers and $60 million to cover purchases of surplus cheese.

But California dairy producers contend the way the program is structured unfairly penalizes dairies in Western states that typically have larger herds. That's because the program limits payments to a maximum annual production of 6 million pounds of milk for each dairy operation, at a rate of 32 cents per cwt.

With average milk production per cow at 22,344 pounds in 2008, the 6-million-pound limit amounts to what a California dairy with about 270 cows would produce in a year, according to CDFA. The average herd size in California stands at about 1,000 cows.

The federal assistance, along with the milk price increase set by CDFA, come at a time when markets are beginning to rebound. The statewide average price for Class 1 milk will increase to $18.37 per cwt. in January, an increase of $2.18 from December that includes the new, temporary pricing formula. California dairy farmers' cost of production has been $16.44 per cwt., according to CDFA.

Michael Marsh, chief executive officer of Western United Dairymen, said the higher milk prices will bring some much-needed revenue to the state's milk producers, but won't be enough to rebuild what they lost this year.

"This is nice relief," he said, "but it's not going to be nearly what they need because the hole that was created in farmers' equity is so huge. They're going to need years of higher prices and lower costs to fill up that hole. All indications are that we're going to still have some attrition of farms into the first half of 2010."

Ray Prock, a dairy farmer in Stanislaus County, said he would have liked "to see more done to allow dairymen to recoup their costs," but he appreciates getting the price increase, even if it's just temporary.

"Hopefully the prices will turn around in three months and we can start recovering from this and save as many family farms as we can," he said.

Producers originally asked CDFA to raise the Class 1 milk price permanently by 50 cents per cwt. and 26 cents per cwt. for Classes 2 and 3, among other proposals.

William Van Dam, executive vice president of the Alliance of Western Milk Producers, said even though producers received less than that, they weren't necessarily "wedded to the 50 cents" per cwt. on Class 1 milk. What they really wanted was for CDFA to restore the minimum price levels to what they were prior to the department reducing them in October 2008, he said. Those reductions were 35 cents per cwt. on Class 1 and 26 cents per cwt. on Classes 2 and 3.

That CDFA went one step further and raised the price levels for Class 4a (butter and powder) and Class 4b (cheese milk) is a concern, said Van Dam, whose organization represents producer-cooperatives that own the plants that process butter, powder and cheese.

"Messing with those formulas really gives us heartburn," he said. "I don't want to say it's only a dime, because that dime comes out of the pockets of the guys who own those plants, who have made the investment."

He said what the new formulation does is give farmers who are not members of cooperatives the full benefit of the 15.5 cents per cwt. average monthly pool price, while the cooperative member gets less.

"We're not pleased with it, but we won't raise a big stink," Van Dam said, "because it's only for three months."

Robert Vandenheuvel, general manager of Chino-based Milk Producers Council, said CDFA's decision to raise prices on all classes of milk "is a step in the right direction," but it wasn't "what we were hoping for."

The organization had asked CDFA to change the way nonfat dry milk and dry whey is valued in the state.

"One of the things that was often said in the hearing was producers need to get a recovery by getting money out of the market, not mandating a price increase," Vandenheuvel said. "If you look at dry whey, there's money in the market that producers are entitled to, that they're not getting because of the way our formula works, and that's different from the rest of the country."

He said the Milk Producers Council would have preferred CDFA to change the Class 4a and 4b formulas fundamentally, so that producers can get "a fair share of the revenues" derived from cheese, powder and butter rather than to raise those price levels "an arbitrary 10 cents."

But William Schiek, an economist at the Dairy Institute of California, which represents the state's processors, said he thinks CDFA set the prices it did "to strike a balance between the need to help dairymen and the need to keep processors competitive."

"The market reality is, if you increase price too much, you begin to lose sales because competitors from out of state could come in and undercut California processors," he said.

Even with that balance, Schiek said there's still a risk that California will lose some market share, but because of the temporary nature of the increases, and because the increases are relatively modest, "it limits the potential competitive damage that a price change would bring."

Van Dam said the Alliance of Western Milk Producers may still consider petitioning for a later hearing to make the price increases permanent.

The Dairy Institute's Schiek said such a move "would be of great concern to the processors, because then we really would be at risk of losing sales to competitors from out of state."

"And that would be, in the long run, not in the dairymen's best interest," he said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

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