BILL ANALYSIS SB 362 Page 1 Date of Hearing: July 1, 2009 ASSEMBLY COMMITTEE ON AGRICULTURE Cathleen Galgiani, Chair SB 362 (Florez) - As Amended: May 28, 2009 SENATE VOTE : 24-12 SUBJECT : Milk pooling: exemptions. SUMMARY : Permits producer-handlers (PH) of fluid milk to operate outside of the Gonsalves Milk Pooling Act (Act), for that portion of fluid milk they produce, and permits those producers and processors of raw milk, after January 1, 2010, to have the option of operating inside or outside of the Act. Specifically, this bill : 1)Updates existing language to reflect and authorize past actions; deletes outdated language and eliminates the prohibition for a PH to buy or sell pool quota. 2)Authorizes, on or after January 1, 2010, a producer and processor of raw milk to have the option to participate in the milk pool or not, and defines a "dairy farm that produces and processes raw milk" to mean a vertically integrated operation, including the dairy farm and processing plant owned and operated by the same entity, that sells to the consumer. 3)Adds raw milk dairy farms that produce and process their milk to those that may elect to be excluded from the pool and later elect to join the pool under the requirement that only their production base and pool quota, as they had originally been entitled, or their existing 12 month average daily production of Class 1 usage, whichever is less. EXISTING LAW authorizes the formation and adoption of milk stabilization and marketing plans; created the Act, stating legislative declarations; established production basis and pool quota for those delivering to Class 1 plants; proposed a pooling plan and establishment quota, options for producers and PHs to participate with an exemption for PH's existing production; created payment structure to the pool for processors based upon usage and disbursement structure to producers; provides administrative duties and fees; approval or disapproval procedures for a pooling plan; and, for amendments and SB 362 Page 2 termination of the plan. Defines various classes of milk products as follows: Class 1: Any market (fluid) milk product. Class 2: Any manufactured market milk for sour cream, cottage cheese, soft fresh cheese, buttermilk or market cream used for manufactured products. Class 3: All market milk or cream used to manufacture frozen dairy products. Class 4a: All market milk used to manufacture butter, various powder milks, certain products sold outside of the 48 contiguous states, and other products sold outside of the United States. Class 4b: All market milk used to manufacture cheese other than cottage cheese. FISCAL EFFECT : According to the Senate Appropriations Committee, there is the potential for significant loss of fee revenue to operate the Act, without an equal reduction in work-load. Further, there it is unknown, but likely offsetting, impacts to the state for consumer of milk and milk products. COMMENTS : The Legislature created the Gonsalves Milking Pooling Act in 1967 and declares, among other issues, that "unfair, unjust, destructive and demoralizing trade practices have appeared with the industry, and these practices constitute a menace to the health and welfare of the people of the state." Further, the declarations state that it is the "policy of this state to promote, foster and encourage the intelligent production and orderly marketing of commodities necessary to our citizens, including fluid milk and fluid creams, and to eliminate speculation, waste, improper marketing, unfair and destructive trade practices, and improper accounting for milk purchased from producers." The creation of the Act was intended to address many of the concerns articulated in the declarations mentioned above. The Act provided much negotiation and trust of the author by dairymen, processors, and members. That author was the late Assembly Member Joe Gonsalves, for whom the Act was named. This Act provided significant change to the manner in which milk was paid for in California, providing greater autonomy for producers from processors. These changes also created a payment structure for processors based upon their usage of the milk, such as fluid SB 362 Page 3 milk being a different price than ice cream or butter, and the payment to producers became a blended value based upon a formula, and are not tied to how a producer's milk is used. Although there have been many changes to the pricing structure over the years, they have primarily occurred through the petitioned hearing process of the California Department of Food and Agriculture (CDFA) rather than legislatively. To simply state today's pricing formula, it uses prices from specific commodities on the Chicago Mercantile Market, and other component pricing factors such as fats and solids not fat. Based upon the formula, processors are required to pay into the pool the value of the Class of milk products they produced and then the pool is paid to the producer based upon the milk delivered, this is referred. For those producers that have "Quota", an additional $1.70 per pound is received in their milk check. Quota was created through the Act and given to those producers that had Class 1 contracts at the creation of the Act to appease them for agreeing to the pool concept. PHs received quota based upon their Class 1 milk sales. Quota has been established as a tradable commodity that is bought and sold among producers and PHs. Class 1 milk is the highest value milk product and its usage pays the highest price into the pool. Estimated prices by industry for the June 2009 reflect Class 1 price to be $11.85 per pound, for 4a to be $10.08 per pound, and for 4b to be 9.56 per pound. Any removal of Class 1 usage from the pool will decrease the amount that will be distributed to producers. In 1978, legislation was enacted that permitted PHs to increase that granted additional quota to all producers, and at the same time, any quota which had been purchased by the PHs prior to January 1, 1978, was added to their exemption from the pool. This allowed PHs to establish a new level of exemption from the pool. An additional quota purchased by a PH after this date would be required to be part of the pool. In 1993, SB 688 (McCorquodale) Chapter 1113, Statutes of 1993, created the $1.70 differential for quota holders and non-holders. It additionally, according to a previous analysis by this committee, made "minor technical amendments to the special provisions in current law relating to producer-handlers SB 362 Page 4 ......by allowing them to keep more of their milk outside the milk pooling system." In essence, those technical amendments lifted the cap for PHs Class 1 sales to be completely exempt from the pool without regard to their growth. In 1995, according to a Senate Floor analysis, SB 105 (Kelly) purposed to "correct an unintended problem created by a specified provision enacted in Chapter 1112 of the statutes of 1993 (SB 688) which substantially liberalized the "Exemption" rules concerning quota by six producer-handlers." The proponents of this bill believed that those provisions had "proven to be severely detrimental to the state's dairy producers, processors, cooperatives, retailers and grocers." Significant market changes have occurred in the dairy industry over the past decade. Many consolidations have occurred by producers, processors, cooperatives and retailers. Examples are the expansion of the large retailers such as Costco who has created issues over minimum milk pricing and urban encroachment on producers causing many to relocate either in-state or out-of-state. Currently, the diary industry is under one if it's most severe economic downturns due to prices being significantly below costs of production. Supporters state that this bill will allow PHs to compete with out of state milk interests that are shipping milk into California and not having to participate in the pool. They state that in the original Act, the PHs received no benefit from the pool. Independent retail stores are faced with significant competition from large chains and wholesalers, while attempting to "buy from local, family owned suppliers." SB 362 will help them stay competitive with the large scale operators, which have found lower cost milk from surrounding states. According to CDFA and the supporters, the five PHs producers produce an estimated 600 million pounds of milk annually and of that, roughly 255.2 million pounds of that production is exempt from the milk pool. SB 362 would more than double their current milk pool exemption. Opposition claims that at the creation of the Act, it was negotiated to allow the PHs to be exempt from the pool for their class one sales production and allowed them to purchase unlimited fluid milk from the pool. The exemption provided to PHs in SB 362 would allow them to grow their operations and SB 362 Page 5 bottling plants significantly, completely outside the pool and its regulations. PHs currently have roughly 25% of the Class 1 market today, allowing this additional growth outside to the milk pool regulation would give them an overwhelming advantage over all other pool processors. There are currently five PHs in California and two raw milk producers that process and bottle their milk. The state has 32 Class 1 milk bottling plants. California's fluid milk per capita consumption has decreased significantly since 1967 to 2007 and continues a steady decline. The number of class 1 bottling plants in the United States also has had a steady decline while those remaining plants are processing more than twice the volume they were in 1987. CDFA released the results of a 2008 survey on fluid milk processed in and out of state and sold in state. That survey is reflected below: California Packaged Fluid Milk: ------------------------------------------------------------- |Sources and |Processed |Processed |Total sold in | |Destinations in | In |Out-of-State |California | |gallons for the |California | | | |year 2008 | | | | |-------------------+------------+-------------+--------------| |Sold in California |770,158,618 |31,877,869 |802,036,487 | |-------------------+------------+-------------+--------------| |Sold Out-of-State |24,180,490 |Not | | | | |applicable | | |-------------------+------------+-------------+--------------| |Total Processed in | | | | |California |794,339,108 | | | ------------------------------------------------------------- Of the 31.9 million gallons packaged fluid milk processed out-of-state and sold in California: Approximately 30% was organic milk Types of milk included half-and-half, ultra high temperature (UHT) milk, UHT 1/3 creamers, and various container sizes of conventional and flavored milks. Sources: CDFA, California Fluid Milk Processing Plants, SB 362 Page 6 Distributors, Grocery Chains, Convenience Stores, Restaurants/Food Service, Out-of-State Fluid Milk Processing Plants. The Act was created in order to bring more stability to milk production in California by pooling the proceeds of milk products produced from milk produced within the state. The industry has grown substantially since the creation of the Act and many market factors have led to changes in the pricing formula. The market for Class 1 sales is highly competitive and are won or lost based upon cents per gallon. The proponents claim that they should benefit from servicing markets they have developed with milk they produce, giving them the ability to be more competitive. Besides competing somewhat with each other, they also compete with other bottlers in the state, although the number has diminished significantly over the last 20 years. The producers, cooperatives, and other processors, claim that such an exemption from the pool would provide the PHs with a significant market advantage as well as harm the producers of the state by removing more of the highest valued product from contributing to the milk pool. This issue is before the Legislature during a time the industry and processors are facing major economic challenges and likely more consolidation of the industry. The Committee may wish to consider if the pool structure remains appropriate for current economic conditions and if all milk produced and processed in California should be part of the milk pool. REGISTERED SUPPORT / OPPOSITION : Support California Producer Handler Association North State Grocery, Inc. (dba Holiday and SAV MOR Foods) PAQ, INC. (dba Food4Less and Rancho San Miguel) Opposition Alliance of Western Milk Producers California Dairy Campaign California Farm Bureau Federation SB 362 Page 7 California Farmers Union County of Madera, Board of Supervisors Dairy Institute of California Milk Producers Council Western United Dairymen Analysis Prepared by : Jim Collin / AGRI. / (916) 319-2084