BILL ANALYSIS
SENATE FOOD and AGRICULTURE COMMITTEE
Senator Dean Florez, Chairman
BILL NO: SB 362 HEARING: 4/21/09
AUTHOR: Florez FISCAL: Yes
VERSION: 2/25/09 CONSULTANT: John Chandler
Milk pooling: equalization pools.
BACKGROUND AND EXISTING LAW
The California Milk Pooling Program was established in 1967 as
the Gonsalves Milk Pooling Act (Act) to address concerns within
the milk industry of equitable prices among dairymen for similar
milk. The Act was put into place to end destructive trade
practices within the industry. The practices of primary concern
were those of handlers who demanded kickbacks from dairymen in
order to obtain a contract to ship milk to their processing
plant. Essentially, the Act established a system in which
dairymen in California received a similar price for their milk
regardless of what the milk end product would be. Prior to the
Act, there was a wide variation in dairyman compensation for
Class 1 milk, fluid milk you drink, and non Class 1 milk used
for making other milk products. While the milk from the cow was
the same, the price to the dairyman would vary based on the
product into which the processor processed their milk into. As
a result there was much competition between dairymen to sell
their milk to Class 1 processors for higher value. The Act
eliminated much of the inequity in dairyman prices by pooling
dairyman revenue across all dairymen taking all milk sold
regardless of Class and issuing a minimum price to the dairyman
for all milk in California. The minimum price or overbase price
for milk is establish on a monthly basis by the California
Department of Food and Agriculture (CDFA), who is responsible
for administering the California Milk Pooling Program.
In addition to the overbase price, there is also the pool quota
price. The pool quota was established to account for those
dairymen, prior to the Act's implementation, who produced Class
1, fluid milk. As a result, the quota price is higher than the
overbase price for the same milk. As part of the milk pooling
system dairymen are able to buy and sell their quota to other
dairymen since quota was only established during the formation
of the pool. This has established a value and a market for pool
quota within the dairy industry. Quota was issued to dairymen
again in 1978 by the Legislature and has also been issued when
there has been growth in Class 1, fluid milk, and Class 2, heavy
cream, cottage cheese, and yogurt.
SB 362 - Page 2
PROPOSED LAW
SB 362 eliminates the California Milk Pooling Program.
COMMENTS
1.According to the author, the California Milk Pooling Program
represents an antiquated system that does not fully represent
the current economic climate or the current nature of
California's dairy industry. There have been a number of
recent challenges to the 30-year-old milk pooling system that
highlight the age of the system. Most recently, the milk
industry has an oversupply of milk helping to drive down the
price, putting a strain on the entire milk market and driving
many dairymen out of the business.
Some milk processors are feeling disadvantaged by the milk
pool when dealing with out-of-state competition that is not
required to pay California milk pool minimum prices.
Competing with an out of state operations not in the
California pool, the out of state the state processors can use
the milk pool regulations to achieve a price advantage
operating outside of the California milk pool.
The milk pool does not allow a vertically integrated dairy
company to take advantage of the vertical integration through
cost saving production and processing. A company that owns
its own dairy and plant would be required to pay into the milk
pool for milk they purchased from their own plant rather than
just paying themselves. Since the start of the milk pool in
1967 a significant portion of the milk industry has shifted
with the growth of producer owned cooperatives. Similar to
vertically integrated dairy companies are not able to directly
pay their owner members due to the milk pool.
California is one of the larger markets of niche milk
products, such the raw milk industry and organic milk
industry, that may compete differently than most conventional
milk producers. Specifically, raw milk products are not in a
condition to be mixed with the majority of California milk due
to specific regulatory constraints on raw milk handling.
2.Opponents of SB 362 argue that the elimination of the
California Milk Pooling Program would plunge the milk industry
into chaos similar to the state of the industry prior to the
implementation of the pool in 1967. Without the milk pool,
SB 362 - Page 3
the power over the milk industry would be back in the hands of
the milk processors. Under the current dire milk economy, the
potential for the return of the same destructive business
practices from before the milk pool could lead to greater
economic uncertainty for California milk producers.
The implementation of the milk pool in California played a
critical role in ensuring that dairy producers are able to
effectively market their milk. If the milk pool is eliminated
and the industry is allowed to return to the milk market
system used prior to the pool, with milk processors wielding
greater control of the milk markets, it would put smaller
dairies at a disadvantage when competing against larger
dairies that would be able to negotiate favorable contracts
with processors.
Further, opponents feel that without the stability provided by
the milk pool California milk producers would be at a
disadvantage when competing against milk producers under
federal milk marketing order. While the California Milk
Pooling Program provides market stability for dairymen, it
does not have a direct impact on consumer prices seen in
stores as the dairy pricing regulations remain untouched.
SUPPORT
None received
OPPOSITION
Agriculture Council of California
California Dairy Campaign
California Farmers Union
Dairy Institute
Western United Dairymen