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            actions; deletes outdated language and eliminates the  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  








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          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  








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          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  








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          ......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  








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          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,  








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               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








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          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