Judge to consider whether to call for dairy-quota vote

The next step in a process to determine the fate of California's 51-year-old milk quota program will be taken by an administrative law judge who listened to two days of testimony from farmers, attorneys and economists on both sides of the issue.

The hearing, held via webinar and teleconference last week, was called because Stop QIP, a group of dairy farmers seeking to terminate the state quota implementation plan, or QIP, submitted enough petition signatures to the California Department of Food and Agriculture to compel the hearing.

Specifically, the hearing considered whether the referendum process contained in Chapter 3.5 of the Food and Agricultural Code authorizes CDFA to terminate the QIP. If a referendum is called, a simple majority of 51% would be needed to continue the status quo; an unfavorable vote of 49.1% would suspend CDFA's authority to collect quota assessments, which by default would also suspend the program.

Administrative Law Judge Timothy Aspinwall presided over the hearing, which heard presentations from attorneys representing the organizations Stop QIP, Save QIP and United Dairy Families of California, and economists for Stop QIP and Save QIP. Testimony from about 70 dairy farmers, with the majority in favor of keeping the QIP, dominated most of the proceedings. CDFA also received written testimony.

A central argument is whether the QIP can be amended or terminated by a simple-majority vote under Chapter 3.5, which was added in 1994 by the state Legislature to make changes to quota pricing and payments. Producers in favor of quota say ending quota should require a super-majority vote, the same threshold under which the program was approved.

Stop QIP says holding a producer referendum to suspend the program under Chapter 3.5 is legal, because prior to the state joining the federal milk marketing order in 2018, language for how CDFA would administer the program and collect assessments was entered in Chapter 3.5.

A broader argument has been about maintaining the quota system, unique to California and which Stop QIP supporters describe as a "relic of the past" that has "served its purpose."

Prior to its implementation in 1969, farmers were paid based on where they shipped their milk and what that plant processed. Because milk is priced according to end use, with fluid milk commanding the highest price, contracts with fluid-milk bottlers were highly sought after. This led to competition among farmers and put them at the mercy of processors, according to hearing testimony.

To incentivize farmers with lucrative fluid-milk contracts to move to a market-wide milk-pooling system that allows farmers to share in the fluid-milk premiums, the state offered quota, which entitles farmers who own it additional revenue for milk covered by their quota. All Grade A milk producers are required to contribute to the program, with funds distributed monthly to quota holders.

"Because quota is a tradeable asset, it has changed hands many times since 1969 and is not tied anymore to original Class 1 (fluid milk) contract holders like it was 50 years ago," said Anja Raudabaugh, CEO of Western United Dairies, in written testimony.

Through the years, many dairy farmers have built their businesses around quota. Most quota holders who testified at the hearing said they would face financial hardship, with some saying they would have to close their doors, if quota were eliminated without compensation. Many said they invested in quota rather than retirement or estate plans. While other farmers sold their quota to buy more cows and expand their operations, quota proponents said they chose to invest in quota and that they would not be profitable without it.

Quota is "a way of increasing cash flow without increasing cows," Escalon dairy farmer Richard Wagner testified. Some quota holders said money from quota allowed them to invest in environmental improvements and other efficiencies in their operations.

Farmers such as Lisa Spaletta, who operates in Petaluma and took out a loan to buy quota from a retired dairy farmer, said if quota were to terminate abruptly, she would be on the hook for an asset that no longer has value. Some farmers contend that Stop QIP's efforts—including the petition that led to the current hearing and a separate legal challenge to stop CDFA from collecting quota assessments—contributed to the plunging value of quota, which according to hearing testimony was previously worth about $500 a pound and has now dropped to $150.

Farmers who own little or no quota testified that quota assessments, which many of them called a "tax," impose a financial burden on their businesses because they're required to pay into a program that doesn't benefit them.

"If our dairy was able to stop paying the QIP, we could operate more efficiently," said Tulare dairy farmer Nick Koot, who testified he pays about $7,000 a month into the quota fund. "If the QIP continues into the future, I am not sure my family and I will be able to stay in the dairy business in California."

Some Stop QIP proponents said they never owned quota, which they view as a financial risk because the program could be voted out by farmers at any time. Others, such as James Vieira of Turlock, testified they didn't know how QIP worked and never realized how much they were paying into the system until the state moved to a federal order and the payment was clearly reflected on milk checks.

A.J. Bos, a leader of Stop QIP who operates in Bakersfield, pointed out that not every dairy farmer can buy quota or can afford to, as only 23% of the state's milk is covered by quota.

Attorneys for the groups now have until June 26 to submit briefs to Aspinwall, who acknowledged at the start of the hearing that he had never heard of milk quota until he was assigned the case. Aspinwall said he will make a recommendation to CDFA Secretary Karen Ross regarding the referendum.

Meanwhile, UDFC, whose members say they seek a consensus plan for quota, submitted a petition to CDFA last week that outlines a proposal for a five-year sunset of quota. The petition calls for CDFA to bring the proposal—unveiled in February—to a producer referendum.

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