Dick Groves
Editor, Cheese Reporter

 

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Pondering A Federal Order For California

California has had its own state milk marketing order since the late 1960s, and by most measures that state order has served California’s dairy industry quite well. Whether or not California will fare as well if and when it joins the federal milk marketing order program remains to be seen.

As reported on our back page last week, the three largest dairy cooperatives in California — California Dairies, Inc. (CDI), Dairy Farmers of America (DFA) and Land O’Lakes (LOL) — have petitioned the US Department of Agriculture to hold a hearing to consider establishing a federal order for California.

There is still a long road to travel before a California federal order becomes a reality: even before a hearing is held, USDA is providing an opportunity, until April 10, for interested parties to submit alternative proposals to be considered at a hearing; and then USDA intends to hold a series of public outreach meetings in California in May. A hearing would follow.

So it’s probably safe to say it will be sometime in 2016 before a California federal order becomes a reality.
And even that’s far from certain, because the same co-ops that petitioned USDA to hold a hearing to create a California federal order could actually vote down such an order if they don’t like the specific provisions of that order.

With that timetable in front of us, it’s worth taking a look at a bit of history to see how California has fared in the roughly 46 years since its state milk order was established.

Statistically speaking, back in 1969, California ranked fourth nationally in milk production, trailing Wisconsin, New York and Minnesota. Wisconsin that year outproduced California by more than 9 billion pounds of milk (18.1 billion pounds for Wisconsin vs. 8.9 billion pounds for California).

Back then, California was a much more fluid milk-oriented state than it is today. In 1969, Wisconsin was by far the leading cheese-producing state, with output totaling 866.6 million pounds. California’s production of 13.7 million pounds that year didn’t even rank it in the top 20 among cheese-producing states.

And California has led the US in butter production for a couple of decades now, but back in 1969, the state’s butter output of 60.8 million pounds was less than one-fifth the production of Minnesota, the leading butter-producing state at that time.

So how has California’s dairy industry fared since its state milk order was implemented? Well, California has been the leading milk-producing state for over two decades, and the state’s 2014 production of 42.3 billion pounds was more than 14 billion pounds greater than Wisconsin’s. Meanwhile, California’s 2014 cheese production was a record 2.42 billion pounds, second only to Wisconsin’s 2.9 billion pounds (that’s a preliminary estimate).

And California last year accounted for over one-third of total US butter production.

So at least from a production perspective, it’s safe to say that California’s state milk order has had a very positive impact on the state’s dairy industry.

And one reason California was able to build its cheese industry was because of the state’s Class 4b (cheesemilk) price. This California advantage (to cheese makers, anyway, if not dairy producers) was nicely explained at the 1989 Midwest Milk Marketing Conference in Madison, WI, by Bill Blakeslee, vice president of Mid-America Dairymen, Inc. (which later became part of Dairy Farmers of America).

During his presentation, Blakeslee looked at the California delivered cost of cheese to several markets around the US, compared to the delivered cost of cheese from Madison, WI.

Blakeslee’s conclusion was summed up as follows: “California can go from the West Coast to the East Coast and have a competitive advantage over the Midwest.”

That advantage remains true to this day. Back in 1988, the year before Blakeslee made his presentation, the federal order Minnesota-Wisconsin price (predecessor to today’s Class III price) averaged $11.03 per hundredweight, while the Class 4 price in California averaged $9.91 per hundred.

As Blakeslee observed, 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.”

Last year, the federal order Class III price averaged $22.34 per hundred, while the California Class 4b price averaged $19.93 per hundred. Thus, the California advantage that Blakeslee talked about back in 1989 had more than doubled by 2014.

But in 2016, it may disappear completely. Under the California co-ops’ proposal, the California federal order would use the same four-class system of product classification found in all existing federal orders, and class prices for milk would follow the federal order system. That means that California’s Class 4b price (as well as its Class 4a price, for butter and milk powder) would be relegated to the scrap heap of milk pricing history.

If California does end up becoming the 11th federal order, there are a few things that we can safely predict: California’s dairy producers will receive higher prices for their milk (at least in the short run); California’s long-time advantage in making cheese from milk that’s less expensive than milk used by cheese makers operating in federal orders will disappear; and the California order will be the largest order (bumping the Upper Midwest order into second place).

Beyond that, about the only safe prediction is that the milk pricing landscape in the future, with a California federal order, would be far different than the one Bill Blakeslee described back in 1989.


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