Dick Groves
Editor, Cheese Reporter

 

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California Federal Order Moves A Step Closer To Reality

USDA late last week released a long-awaited and much-anticipated proposal recommending the establishment of a federal milk marketing order for the state of California. If you’ve been around the dairy industry for more than, say, a couple of decades, that recommended decision is certainly a monumental document.

As reported on our front page last week, the proposed California federal order would adopt the same dairy product classification and pricing provisions used throughout the current federal order system, and also provides for the recognition of producer quota as administered by the California Department of Food and Agriculture.

California’s dairy industry, of course, is currently regulated under a state order that dates back almost 50 years. For a good chunk of that period, the idea of California joining the federal order system was unthinkable, maybe even laughable.

That’s at least in part because California’s state milk order served the state’s dairy industry quite well for many years. Or at least it served the growth of the state’s dairy industry quite well.

As explained in a 2006 report prepared by McKinsey & Company for the California Milk Advisory Board, from 1980 to 2004, California doubled its share of the US dairy supply, from 11 to 21 percent, and in the process went from milk neutrality, with production matching demand, to “abundant milk surplus.”

This success rested on two foundations, that report continued. The first was that the cost of production remained relatively low throughout the period compared to costs in other dairying regions.

Second, “pricing made production and processing profitable,” the report noted. Toward the end of the 1980s, with per capita cheese consumption growing, “California dairy producers sought to attract cheese processors to the state and agreed to lowering the California price for milk going into cheese production,” which brought the California price below the federal order price.

Cheese makers “could therefore buy raw milk more cheaply in California” than in key competitor states such as Wisconsin and New York, which had a “rigid, high-cost pricing system” regulated by the federal order system. Around the same time, the California Milk Advisory Board began a campaign to promote California cheese.

“This two-pronged strategy proved highly successful, and California’s share of the nation’s cheese consumption jumped from 5 percent in 1980 to 21 percent in 2004,” the report added. Looked at another way, California’s cheese production increased from 181.5 million pounds in 1980 to 1.993 billion pounds in 2004.

Another perspective on the importance of California’s state milk order was provided back in 1989 by Bill Blakeslee, vice president of Mid-America Dairymen, Inc. (which later became one of the founding cooperatives of Dairy Farmers of America).

Speaking at the 1989 Midwest Milk Marketing Conference in Madison, WI, Blakeslee noted that, in 1988, the Minnesota-Wisconsin price (predecessor of today’s federal order Class III price) averaged $11.03 per hundredweight, compared to a California Class 4b price average of $9.91 per hundred, meaning that, in 1988, “there was over a dollar a hundredweight spread between the cost of milk going into cheese in the Midwest, and the cost of milk going into cheese in California. That translates into a dime a pound advantage Californians have on milk going into cheese production.”

What that meant, Blakeslee added, was that California cheese “can go from the West Coast to the East Coast and have a competitive advantage over the Midwest.” Keep in mind that, in 1988, California ranked second in the US in milk production (behind Wisconsin) and third in the US in cheese production (behind Wisconsin and Minnesota). Today, California ranks first in milk production and second in cheese production.

So California’s cheesemilk (Class 4b) pricing advantage got the state where it is today, but what about the future? It is worth noting that, in 2015, California’s share of US cheese production (20.6 percent) was actually below its share back in 2005 (23.4 percent), the year before the McKinsey report was released.

In that context, it could be argued that California’s cheesemilk pricing advantage got the state where it was a decade ago. Now, that cheesemilk pricing advantage is on the verge of completely disappearing.

USDA, in its economic impact analysis of the recommended California federal order, says adoption of federal order classified prices in California will lead to higher milk prices in California, which in turn leads to increased California milk production. And adoption of the federal order Class III price in California, which is higher than the current California Class 4b price, would reduce California cheese and whey production.

So it’s possible California’s cheese production has reached its peak already. We shall see.

It’s worth remembering that this is just a recommended decision from USDA.
There’s a 90-day comment period (possibly longer), following by USDA’s analysis and consideration of those comments, and then a final decision.
California dairy producers will have the final say; if a California federal order is favored by two-thirds of the producers or producers representing two-thirds of the milk produced participating in the voting process, a final California order will be issued.

A California federal order has been unthinkable for years, but here in 2017, the dairy industry could be just months away from the unthinkable becoming real.


Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to
dgroves @cheesereporter.com.

 

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