BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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                                 THIRD READING


          Bill No:  SB 362
          Author:   Florez (D)
          Amended:  5/28/09
          Vote:     21

           
           SENATE FOOD AND AGRICULTURE COMMITTEE  :  3-2, 4/21/09
          AYES:  Florez, Hancock, Pavley
          NOES:  Maldonado, Hollingsworth

           SENATE APPROPRIATIONS COMMITTEE  :  7-5, 5/28/09
          AYES:  Kehoe, Corbett, DeSaulnier, Hancock, Leno, Oropeza,  
            Yee
          NOES:  Cox, Denham, Runner, Walters, Wyland
          NO VOTE RECORDED:  Wolk


           SUBJECT  :    Milk pooling:  exemptions

           SOURCE  :     Author


           DIGEST  :    This bill permits a producer-handler who elects  
          or has elected to operate outside the pool to make  
          deductions for all its production from its Class 1 sales  
          before being required to account to the pool.  (Current law  
          permits a producer-handler who elects to operate outside  
          the pool to make deductions to its Class 1 sales, excluding  
          sales to a handler, before being required to account to the  
          pool.)  This bill also deletes certain provisions relating  
          to the participation of milk production of exempted  
          producer-handlers.  This bill extends from producers of  
          certified milk or guaranteed raw milk, to dairy farms that  
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          produce and process raw milk, the option to be or continue  
          to be subject to continue to be subject to or excluded from  
          the milk pooling plan.

           ANALYSIS  :    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 established on a monthly basis by the  
          Department of Food and Agriculture (DFA), 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  

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          cream, cottage cheese, and yogurt.

          This bill:

          1.Permits a producer-handler who elects or has elected to  
            operate outside the milk pool to make deductions for all  
            of its production from its Class 1 sales before being  
            required to account to the pool.

          2.Deletes certain provisions relating to the participation  
            of milk production of exempted producer-handlers in  
            either the base pool or overbase pool and to the transfer  
            by a producer-handler of the option to join or operate  
            outside the pool.

          3.Provides that, on or after January 1, 2010, a dairy farm  
            that produces and processes raw milk, shall have the  
            option to be or continue to be subject to the pooling  
            plan or to be prospectively excluded from the pooling  
            plan.

          4.Makes conforming and technical changes.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

                          Fiscal Impact (in thousands)

           Major Provisions             2009-10             2010-11          
              2011-12            Fund

           Revision of milk            Potentially significant loss of  
          fee revenue    Special*
          pooling program to        ongoing without an equal  
          reduction in
          add exemptions              workload; unknown, likely  
          offsetting
                                                 impacts to the state  
          as a consumer of
                                                 milk and milk  
          products

          *Department of Food and Agriculture Fund (Pool  
          Administrative Fee)

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          According to the Senate Appropriations Committee analysis,  
          the Milk Pooling Program has 35 positions and a budget of  
          $4,650,000 for 2009-10.  Of that amount, $1,060,000 is  
          operating expenses, $408,000 is departmental overhead,  
          $260,000 is division overhead, $177,000 is state pro-rata,  
          and $2,741,000 is personnel cost.

           SUPPORT  :   (Verified  5/29/09)

          California Raw Milk Association

           OPPOSITION  :    (Verified  5/29/09)

          Agriculture Council of California
          California Dairy Campaign
          California Farmers Union
          Dairy Institute of California
          Western Alliance of Western Milk Producers
          Western United Dairymen

           ARGUMENTS IN SUPPORT  :    The California Producer Handler  
          Association (PD's), which is comprised of Foster Farms  
          (Crystal), Rockview Farms, Hollandia, and Producers Dairy,  
          states that, "SB 362 will allow the Producer Handler  
          Association to compete with out-of-State Milk Interests who  
          are shipping their milk into California and do not have to  
          pay into the pool.  In fact, last year, 14 out of 32 class  
          one (drinking milk) plants in California bought exempt milk  
          from outside California.  In 2008 the amount of milk being  
          imported from outside of California and processed by  
          California plants was 21% of production, more than 3 times  
          the Producer-Handler exemption.

          "The original Gonsalves Milk Pooling Act exempted the PD's,  
          recognizing the PD's receive NO benefit from the pool.   
          Over the years the Legislature has increased that exemption  
          on 3 separate occasions.

          The proponents contend that supporting the Producer Handler  
          Exemption will help preserve fluid milk production and  
          sales from California dairies.  Proponents contend that  
          this bill will assist the rest of the dairy industry from  
          which the PD's purchase 60% of their milk.  If the PD's are  

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          unable to compete with out-of-state operations they will  
          lose their market share and thereby have to reduce the  
          amount of milk they are purchasing from the dairy industry.

           ARGUMENTS IN OPPOSITION  :    According to the Dairy  
          Institute of California, this bill "?would make the small  
          but significant inequities already present in California's  
          milk pricing and pooling program explode.  This would have  
          negative impact on nearly all milk processors, but for a  
          favored few.  SB 362, as amended, would deregulate a  
          handful of processors but keep the rest captive, forcing  
          the regulated processors, and the farmers from whom they  
          buy their milk, to lose valuable, local markets for their  
          milk.  This enormous inequity would result in lost jobs,  
          lost investment in plant capacity, and lost local and state  
          revenue from businesses unable to compete on such an uneven  
          playing field.

          "The customers for our products, the state's retailers,  
          move their business based upon fractions of a penny.  The  
          impact of SB 362 will provide many dollars of advantage to  
          a few processors, allowing them to capture markets 
          that should be fair and competitive.  Our members can  
          compete on quality and service, but the burden imposed by  
          SB 362 will be insurmountable."  
           

          TSM:cm  6/1/09   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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