BILL ANALYSIS �
AB 31
Page 1
Date of Hearing: May 1, 2013
ASSEMBLY COMMITTEE ON AGRICULTURE
Susan Talamantes Eggman, Chair
AB 31 (Pan) - As Introduced: December 3, 2012
SUBJECT : Stabilization and marketing plan for market milk.
SUMMARY : Requires the Secretary (Secretary) of the California
Department of Food and Agriculture (CDFA), when establishing the
price for class 4b market milk, to use a dry whey value factor
that is no less than 80% of the federal milk marketing order dry
whey factor, as specified. Specifically, this bill :
1)Requires CDFA, in establishing 4b market milk price formula
paid by handlers to producers, to set a dry whey value factor
component of that formula as follows:
a) Dry whey value is to be at a minimum of 80% of the dry
whey value used in the federal milk marketing orders; and,
b) Less a manufacturing cost allowance of $0.1991
multiplied by a factor of 4.69.
2)Permits handler plants that buy milk for class 4b utilization,
to deduct a dry whey credit for up to 264,480 pounds of
solids-not-fat produced each month. Requires the dry whey
credit to equal the established dry whey factor established
under the milk stabilization and marketing (pooling) plan,
divided by 8.7.
EXISTING LAW authorizes the Secretary to formulate milk polling
plans that establish, through regulation, the minimum prices to
be paid by milk handlers for specified utilization (classes) of
market milk. The Secretary is required to take relevant
economic factors and other described considerations in
establishing the price to be paid for each class of market milk.
Permits the Secretary to call for a hearing or be petitioned by
producers or processors, to adjust a pricing formula(s) or other
factors involved in a pricing formula(s).
California Milk Pooling rules establish price formulas for each
of the five classes of market milk; require handlers to pay a
minimum price based upon usage by class; permit producers to
exit the pool one time per year on December 31; and, established
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"quota" that the pool pays $1.70 per pound more to holders of
quota than non-holders. Quota holders must ship to pooled
plants. Processors can be pooled or non-pooled but must still
pay minimum price for milk utilization. The five classes are as
follows:
Class 1: Fluid milk products
Class 2: Yogurt, cottage cheese, sour cream
Class 3: Frozen Products
Class 4a: Butter, nonfat dry milk
Class 4b: Cheese, whey products
Federal Milk Pooling rules establish prices by surveying prices
paid by processors for the various classes of milk; permit
processors to exit a pool on a month by month basis; and, does
not require handlers to pay producers a minimum class price if
depooled. Federal milk classes are as follows:
Class 1: Fluid milk products
Class 2: Yogurt, cottage cheese, sour cream, frozen
products
Class 3: Cheese, whey products
Class 4: Dry milk powder, butter
FISCAL EFFECT : Unknown. Legislative Counsel has keyed this
bill fiscal.
COMMENTS : Milk pricing has been regulated in some form since
1935. The California Milk Pooling Act (Act) was created in 1967
in an effort to stabilize milk pricing and end fluid milk
processor's practice of bidding wars between producers that set
producers against each other in the market place, and leaving
some without homes for their milk. California is the only state
milk pool. Federal milk pools were authorized in 1937; some
have been terminated over the years, others have had boundary
changes, and some areas, such as Idaho, do not have a pooling
system. It takes from 18 to 48 months to create a federal milk
pool, and their rules have some major differences to our state's
rules.
The Act was created to spread the revenues of all milk products
to all producers, regardless of how their milk was used. The
state policy has been that revenues from all milk products are
shared with producers, and "Make Allowances" were created for
processors as incentives for doing business in California. The
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system structure was made to allow the Secretary to address
usage price changes through regulation, not statute, in a more
timely fashion than under federal milk pooling. California can
change price formulas within a 90 day period; whereas, the
federal price changes can take 18 months to three years.
California producer price formulas are based upon usage and the
Chicago Mercantile Exchange block cheddar cheese value; the
various formulas for each of the five classes of milk include
F.O.B. Adjusters, Make Allowances, and yield factors; they are
detailed and complicated. When the Pooling Act was created,
fluid milk, which is the highest value milk product, was
estimated to be 60% of the pool. Today fluid milk is makes up
less than 14% of the pool. In 1996, when Chicago Mercantile
Exchange block cheddar was made the price point for the pool
formulas, cheddar was about 60% of the cheese produced in
California. Today, cheddar makes up about 14% of total cheese
made here, but fluctuates depending on demand. This
demonstrates the significant changes in the marketplace for milk
products over the years since the Act was created. Further,
milk product exports are on the rise due to droughts in the
southern hemisphere reducing their production levels, and it is
cheaper to ship California milk products to the Asian market
than to the East Coast.
While California is a major market for milk products, our
production far exceeds the market demand; therefore, many
products manufactured here are in competition with products
produced closer to the market demand, in densely populated areas
of the nation such as the eastern United States. Producers
closer to these areas are receiving higher prices than
California producers for a variety of reasons, e.g., larger
percentage of fluid milk being consumed, less transportation
cost, more processors with less available raw product, and other
factors.
Our state's processors are always pushing their limits of
capacity. In fact, in June 2012, some processors set delivery
quotas causing some milk to be dumped. Some of this product may
be sold at deeply discounted prices to other states where
manufacturers may make products that compete against California
products. In some states, such as Wisconsin, they have a
shortage of milk and a surplus of cheese processors making the
demand for milk high and milk prices higher. Further, they make
higher value specialty cheeses, contrary to California's lower
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value commodity cheeses. California exports approximately 50%
of the cheese produced here.
The number of cheese plants in California is roughly 57 to 60,
with some operating only part of the year. Out of these plants,
only 11 have some type of whey processing rather than it being a
cost for disposal. Whey can be made into various types of
products, such as a low value animal feed, to high value
products for human consumption in the form of whey protein
concentrate and whey protein isolates, and it can be used in
food products and pharmaceuticals. The equipment for the
manufacturing of whey products is more costly than cheese
equipment and can be product specific, making processors needing
to know what whey market they are going to attempt to enter
before purchasing the equipment. Of these 11 whey producers,
only one or two make dry whey. AB 31 will capture roughly half
of the cheese manufacturers that receive more than the credit
provided.
California dairy producers have been under severe financial
pressure over the recent years due to loss of export markets in
2008, and more recently, due to feed costs doubling and tripling
over the last 18 to 24 months caused by drought in corn
producing states. The reduced available feed corn, high fuel
costs and increases to other inputs that track corn prices has
changed the economic dynamics of producing milk in California.
This is compounded by an estimated 40% to 60% of domestic corn
being turned into ethanol. Most California producers produce
50% or less of their annual feed needs, but many buy all of
their input products. This significant shift in costs has
depleted producers' balance sheets and assets.
Further, California dairies have had to come into compliance
with the state and federal environmental laws, causing increases
in capital costs without increases to production value. In the
last five years the number of dairies in California has
decreased by 387, with an estimated 105 going out of business in
2012 due to financial stress. There is the possibility that
another 200 may be gone by years end.
Producer groups have petitioned the Secretary several times over
the past few years for milk price increases, and specifically,
whey values. CDFA cited in the recent hearings a lack of
authority to address the petition's request for the creation of
a whey credit for specified sized cheese makers, and citing a
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conflict in the Act's requirement of having all processors pay
the same raw product price.
In 2003, CDFA did create a whey value formula to the Class 4b
pricing; it tracked the federal Class 3 whey value. 2006 saw
the whey value have a meteoric rose to nearly $3.50 per
hundredweight (cwt), causing severe economic stress to the
non-whey using cheese makers. In 2007 CDFA fixed the whey value
at a set rate of $0.25 rather than using the historic end
product pricing formula. In 2008 the federal whey value fell
below the California fixed rate for almost a year. In mid-2009,
the federal whey factor did another significant increase
reaching a value of nearly $3.00. In late 2011, CDFA created a
sliding scale whey factor having a base of $0.25 and a cap of
$0.65; in September 2012 the cap was increased to $0.75. The
current federal whey price remains over $2.00.
The producers see this differential as lost income and gained
income to cheese processors, during a period when they are under
extreme financial stress. AB 31 would shift revenues from
cheese processors to producers. According to the author, the
80% of federal whey price factor recognizes the increased
transportation cost for California processors and provides
additional revenues to the current transportation allowance
given in the pricing formula. Additionally, while all
processors receive the whey credit, it attempts to reduce the
financial impacts on smaller cheese producers in the state.
Processors invested in new technology, developed new products
and markets, and this is viewed as their return. In their
opposition they state that while there are fewer dairy farms in
California, we are still the largest producer of milk in the
nation, and there is a need to focus on new product development,
as it was recommended by in an industry commissioned report
several years ago.
The committee may wish to consider if it is appropriate policy
to create a statutory pricing requirement in the Act,
recognizing that any changes will require additional legislation
rather than by a regulatory change.
The committee may wish to consider if the establishment of a
processors' whey credit will be in conflict with the Act's
requirements for the same raw product pricing for all
processors.
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The committee may wish to consider if it is appropriate state
policy that producers should share in revenues from all milk
products.
REGISTERED SUPPORT / OPPOSITION :
Support
Western United Dairymen (Sponsor)
A.F. Mendes, Inc.
Agricultural Council of California
Bear Mountain Dairy
California Dairy Campaign
California Dairies, Inc.
California Farm Bureau Federation
California Grain & Feed Association
Crystal Creamery
Dairy Farmers of America
De Groot Dairies
Dennis Boertje & Son Dairy
DeWit Dairy
Double Diamond Dairy
Fern Oak Farms
Foster Farms Dairy
Hilltop Holsteins
J C J Dairy
Land O'Lakes, Inc.
Mark & Brenda Alderson Dairy
Milk Made Dairy
Michael Marsh, CPA
Milk Producers Council
Moonshine Dairy
Pinherio and Deniz Dairy
Producers Dairy
Red Rose Dairy
Rockview Farms
Schager Dairy
Tierra Buena Ranch
Tiersma Dairy
Tommen Dairy
Tony Martin Dairy
Tulare County Farm Bureau
Vander Schaaf Dairy
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Veenendaal Dairy Farm, Inc.
Opposition
Banos Royal Farms
California League of Food Processors
Clauss Dairy Farms
CMA Livestock
Dairy Institute of California
Hilmar Cheese Company
James Ahlem Dairy
Kraft Foods Group
Leprino Foods
Los Altos Food Products, Inc.
Marquez Brothers International, Inc.
Nyman Bros Dairy
Rumiano Cheese Company
Sam Kooistra Dairy
Seifert Dairies, LP
Seward Farms
Sunwest Jersey Dairy
Westside Jerseys
Analysis Prepared by : Jim Collin / AGRI. / (916) 319-2084