Dairy farmers press for changes to price formula

Issue Date: June 6, 2012
By Ching Lee

California dairy farmers came out in force last week at a hearing to urge the California Department of Food and Agriculture to change how whey is valued in the state's current milk pricing formula.

The two-day hearing resulted from petitions by two producer groups, which contend that California dairy farmers are being shortchanged by the undervaluation of the state's Class 4b whey factor, which applies to milk sold to California cheese manufacturers. The farmer organizations say the whey price under the state-regulated milk pricing system is too low compared to what dairy farmers in other states earn under the federal milk marketing order.

The petitioners are Western United Dairymen and a coalition of dairy organizations and cooperatives comprised of the Milk Producers Council, California Dairies Inc., Dairy Farmers of America, Land O'Lakes, Security Milk Producers Association, California Dairy Campaign and Alliance of Western Milk Producers.

The groups submitted identical proposals that they say would result in a California Class 4b price that more accurately tracks the market direction followed by the federal order Class III whey value.

Currently, the whey value in the 4b pricing formula is an adjustable rate between 25 cents and 65 cents per hundredweight. This sliding-scale approach was implemented last September as a result of a similar hearing held last summer. Before that, the whey factor was set at 25 cents per cwt.

"While Western United Dairymen appreciated the modification, we believed it still fell short of a fair method to determine the whey value in the Class 4b formula," testified the organization's CEO Michael Marsh.

The dairy groups proposed a new sliding scale that would range from $0 when the average monthly Western dry whey price is less than 20 cents per pound to $4 per cwt. when the dry whey price is more than 92 cents per pound.

They also proposed using data from the U.S. Department of Agriculture Dairy Market News as the source of the dry whey price rather than the USDA National Agricultural Statistics Service that is currently used, saying the former is more timely.

Marsh said the 65-cent cap in the state's current formula puts farmers at a competitive disadvantage because it prevents them "from getting a comparable share of the whey value like their counterparts in federal orders." The disparity between the federal Class III price and the state's milk price also makes it difficult for dairy farmers to do effective hedging as a risk management tool, he added.

One by one, dairy farmers testified about the financial hardships they have endured since the milk price collapse of 2009 and the soaring feed costs that came simultaneously. And while milk prices improved in 2011, they said, many of the state's dairies have not recovered their losses, with some of them closing their doors. Still faced with high feed costs—as well as increases in fuel and regulatory costs—and now with falling milk prices, they said they urgently need a new milk pricing system that would give them what they consider a fair share of the whey value.

Farmers noted that whey is increasingly finding new uses and more markets, and that demand for the byproduct has driven values above the 65 cent per cwt. cap, widening the disparity between the federal order price and the California price.

Donna Melby, an attorney representing the coalition, said as a result of the pricing inequity, California farmers have collectively lost about $300 million in 2011 while the state's cheese manufacturers are benefiting from the low whey price and enjoying "windfall profits."

But cheese manufacturers, all of whom oppose the producers' proposal, said they are already struggling to adapt to the pricing changes the department implemented in September and that any further adjustments would harm their businesses. They also said that raising the regulated milk price would forestall new plant expansions and jeopardize plant capacity at a time when California milk production and cow numbers are increasing.

Farmdale Creamery of San Bernardino submitted an alternate proposal that would return the whey factor to 25 cents per cwt. in the state milk pricing formula. In its proposal, the creamery said it sees no reason "to invest what is required to convert our whey stream into a higher-value process if that entire added value is taxed and transferred to the producer community by the petitioned-for regulation."

Jose Maldonado, vice president of finance for Marquez Brothers International in Hanford, said he supports the Farmdale proposal, and said his company invested in a whey processing plant to deal with the high cost of whey disposal but has not been able to make money on the byproduct. He said if the department grants the farmers' proposal, his company would not be able to recoup its investment.

But Marsh said cheese plants have been able to adapt and find ways "to recover value or make whey products profitable" the same way dairy farmers have found value in milk that's not suitable for human consumption by selling it to calf raisers rather than disposing of it.

In his testimony, Rob Vandenheuvel, general manager of the Milk Producers Council, said, "Each individual manufacturing plant in California makes a business decision as to whether they can secure a milk supply at a price that allows them to process that milk into a product that can garner a profitable price in the marketplace."

Vandenheuvel said that's no different "than the considerations that must be made by cheese manufacturers around the country—including those that operate in federal order areas that pay prices at or above Class III minimum prices."

CDFA has 52 days following the close of the hearing on June 1 to announce its decision. The department then has 10 days to implement any changes to the milk price formulas.

(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.