Dick Groves
Editor, Cheese Reporter

 

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Letter to the Editor

A Total Myth: ‘The California Discount’
by Rachel Kaldor, Executive Director
Dairy Institute of California

An open letter from the Dairy Institute of California:

California dairy farmers have been sold a bill of goods. They’ve been told that since they aren’t getting the Class III price, they’re being cheated. But it’s a myth, a total myth.

This fiction has gotten in the way of any reasonable discussion about dairy pricing in California. It has become all or nothing. Unless California farmers get the Class III price, they’re completely dissatisfied.

Here are the facts that completely debunk the myth:
• In no existing federal milk marketing order does USDA require all cheese makers to pay the Class III price. So the claim that California dairy farmers should get paid what Wisconsin farmers get paid deserves closer scrutiny.

• Today, Wisconsin spot milk sales are happening at between $4.00 and $8.00 UNDER Class III. That is never part of the “California Discount” story. California processors, however, never pay less than the Class 4b price.

• California’s binding minimum price regulations limit competition across manufacturers and that has led to adequate supply, limiting market pressure for increased premiums.

• Wisconsin has many specialty, value-added cheese plants, which generate more revenue than commodity products. California’s largely commodity cheese plants were built to accommodate our large milk volume; those commodity products generate lower revenue.

• Wisconsin cheese plants are nearly half a continent closer to our domestic market. California is the most distant dairy region from domestic cheese markets. It costs money to move product to market.
These facts add up to the real story.

Let’s look at a federal order that has large commodity cheese plants, with a normally ample supply of milk, but closer to domestic markets than California: New Mexico. What’s the most recent mailbox price paid to farmers in that Federal Order? For October 2015, in New Mexico — a federal order with the same rules as Wisconsin but with a dairy industry structured a lot like California — the price was $15.55. But the price paid to dairy farmers in California was $15.82.

That is the real story. It’s not the California discount. It’s the California difference — one state’s unique industry structure compared to another’s.

“The California Discount” makes an easy target of our state’s industry. It deliberately distracts from the real work needed to make our industry successful in changing markets; domestic and now global. And it’s simply a myth. A total myth.

/s/

Rachel Kaldor
Executive Director
Dairy Institute of California
Sacramento, CA


About The California Discount

Thank you to Rachel Kaldor for contributing the Letter to the Editor on the California Discount.

By way of brief background, the “California Discount” to which Kaldor refers represents the difference between the California Class 4b (cheesemilk) price and the federal order Class III price.

Historically, the gap between these prices has always been significant. What has drawn criticism from dairy producer organizations in recent years is the fact that the dry whey price has a far greater positive impact on the federal order Class III price than it does on the California Class 4b price.

So, according to California’s Milk Producers Council, high dry whey prices over the 2010-2014 period resulted in a “California Discount” of nearly $2 billion.

And the California producer community has been trying to reduce the size of the “California Discount” for several years now. As Karen Ross, secretary of the California Department of Food and Agriculture, noted in October of 2013, since 2011, the CDFA has held six hearings and denied five hearing requests; and in the last 10 years, it has held a total of 18 hearings and denied a total of 12.

This was of course before the CDFA held a hearing in June of 2015, the result of which was a one-year increase in the whey factor in the Class 4b price formula from August 1, 2015, through July 31, 2016.

As Ross noted in that October 22, 2013 letter to dairy industry stakeholders, testimony submitted at a September 2013 hearing supported the CDFA’s position “that the manufactured milk pricing formulas need to be changed to equitably return value to producers and recognize that only a few processors are realizing the full value of whey.

“California’s 1960’s system of regulated milk pricing is outdated and impairs the ability of the dairy industry to meet 21st century challenges and opportunities in national and international markets,” Ross added.

Unfortunately (at least in our opinion), the “solution” now being pursued in California is a throwback to the Depression era; USDA held a lengthy hearing last fall on establishing a federal milk marketing order for the state of California.

Certainly, that’s one way for California producers to receive the Class III price (or close to it). But it doesn’t seem to be a long-term answer to milk pricing issues either in California or nationally. DG

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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