BILL ANALYSIS �
SENATE COMMITTEE on AGRICULTURE
Senator Cathleen Galgiani, Chair
BILL NO: AB 1038 HEARING: 07/11/13
AUTHOR: Pan FISCAL: Yes
VERSION: 07/10/13 as proposed CONSULTANT: Anne Megaro
to be amended 07/11/13
Milk products: California Dairy Future Task Force
SUMMARY :
This bill makes findings and declarations related to dairy
production, encourages the California Department of Food and
Agriculture (CDFA) to hold hearings addressing milk pricing,
creates the California Dairy Future Task Force (Task Force) in
statute, encourages CDFA to engage the Task Force to assist in
developing recommendations that would achieve long-term success
and sustainability for the dairy industry, and directs the Task
Force to address specified issues and report recommendations by
July 1, 2014. This bill also appropriates funding for
administration and activities of the Task Force from existing
industry assessments.
BACKGROUND AND EXISTING LAW :
California leads the nation in dairy production, supplying over
41 billion pounds of milk (21% of total national supply) and
accounting for $7.68 billion in raw commodity value for 2011
(USDA, National Agricultural Statistics Service). California's
dairy industry is governed by laws and regulations enacted since
the 1930s to stabilize the economy of the industry.
Milk production and value: A herd of dairy cows will provide a
steady, continuous supply of milk that must be harvested daily
and sent to market. Milk is a high-valued commodity in terms of
its nutritional benefits and unique characteristics allowing for
processing into various products such as, but not limited to,
butter, cheese, milk and protein powders, infant formula,
yogurt, and ice cream. Milk is made up of 3 general components:
fat, solids-non-fat (protein), and fluids that contain mostly
water and lactose (milk sugar). Farmers are paid for their milk
roughly based on the content of fat and solids-non-fat (SNF)
rather than total milk volume, since these components are what
determine final processed product volume (butter, cheese, etc.).
1 For more information, please visit:
http://www.cdfa.ca.gov/dairy/pdf/yearsofservice2007.pdf
AB 1038 - Page 2
California Milk Marketing: The Great Depression of the 1930s
affected California dairy producers in that milk sales and milk
prices decreased significantly. Dairy producers were going out
of business when the cost of production greatly exceeded milk
price1. Unlike other agricultural commodities, dairy farmers
cannot store raw product and wait to sell when prices improve.
Therefore, price-cutting to move product to market was prevalent
and the dairy industry began to dissolve. Producers and
processors turned to the governor for assistance, which led CDFA
to develop the first milk pricing system in California.
At that time, Federal Milk Marketing Orders (FMMO) were also
under consideration in the federal government, but it was
determined that California would create their own milk marketing
program separate from the FMMOs. The Young Act of 1935 and the
Desmond Act of 1937 authorized CDFA to set minimum prices for
dairy commodities to eliminate "pricing wars" among producers,
processors, distributors, and retail stores.
Current law and regulations provide for a California milk
marketing program2 (Food and Agriculture Code � 61801 et sec.).
CDFA's Dairy Marketing Branch is responsible for the oversight
of the production and marketing of milk and dairy products,
including setting minimum prices and regulating dairy market
trade practices. According to CDFA, milk pricing is regulated
for the following reasons:
Milk is a perishable product and must be harvested
daily.
No other regulations would be in place to assure an
adequate supply of milk.
Production is highest when demand for fluid milk is at a
seasonal low, largely due to the fact that a significant
amount of fluid milk is consumed by children at school.
Milk production is at its highest when schools adjourn for
summer vacations.
Milk continues to be viewed as a necessary food item,
particularly for children.
Dairy products are divided into the following classes:
Class 1: Fluid milk, cream, and half-and-half
Class 2: Sour cream, heavy cream, cottage cheese,
buttermilk, and yogurt
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 3
Class 3: Ice cream and other frozen dairy products
Class 4a: Butter and dried milk products including
nonfat dry milk
Class 4b: Cheese (other than cottage cheese) and dry
whey
Each class utilizes a specific formula developed by CDFA to
determine the price paid to dairy farmers. Classes were
developed to recognize the unique differences among dairy
products. For instance, fluid milk has a short shelf-life and
requires high-quality raw milk, thus Class 1 usually carries a
higher price than that for other classes of milk. This pricing
structure is called "end-product pricing."
Milk Pooling Act: Prior to 1967, dairy farmers were paid for
their milk depending on how it was used. Farmers could receive
a higher price for their milk if shipped to a fluid milk
processor, as previously described. Thus, a dairy producer
shipping milk to a cheese plant would be at a financial
disadvantage compared to a farmer shipping compositionally
similar milk to a fluid milk processor, thus creating financial
inequities among farmers. The Gonsalves Milk Pooling Act of
1967 was created to stabilize milk pricing and end bidding wars
among producers and processors for the right to ship milk to
fluid processors. This Act spread the revenues of all milk
products to all producers, regardless of how their milk was
used3.
Existing law authorizes the secretary to develop milk pricing
formulas that establish, through regulation, the minimum prices
to be paid by milk processors for specified utilization classes
of market milk. The secretary is restricted by statute and
regulation as to what factors may be included in determining
milk pricing formulas, and is required to take into
consideration relevant economic factors and other specified
factors when establishing minimum milk prices. CDFA monitors
the Chicago Mercantile Exchange (CME) for market prices for
butter, cheddar cheese, powdered milk, and dry whey. Other
considerations for economic pressures on producers and
processors include feed price, manufacturing, and transportation
costs. (Food and Agriculture Code � 61801 et sec.)
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 4
CDFA Hearing Process: The secretary may call a hearing or can
be petitioned by the dairy industry to adjust milk pricing
formulas or other factors related to milk stabilization and
marketing plans. (Food and Agriculture Code � 61801 et sec.)
Within 15 days of receiving a petition from an interested party,
CDFA must accept or deny a hearing to amend the stabilization or
marketing plans. At the hearing, all interested parties may
offer testimony and proposals on topics covered by the hearing
notice. Once the hearing concludes, if CDFA determines that an
amendment to the marketing and stabilization plans shall be
made, the final decision will take effect within 62 days of the
hearing, and the decision will be made public 10 days prior to
implementation (52 days post-hearing).
PROPOSED LAW :
This bill as proposed to be amended July 11, 2013:
Finds and declares challenges facing the dairy industry.
Encourages CDFA, to the extent that economic conditions
warrant, to hold milk pricing hearings addressing:
o Amendments to the current emergency milk price
relief decision to allow for emergency price relief.
o Changes to the whey scale factor that is used
to determine the amount paid into the milk pool in
California.
Declares the intent of the Legislature that the
secretary actively engage the California Dairy Future Task
Force to assist in developing recommendations intended to
best position the California dairy industry to achieve the
goals of long-term success and sustainability in evolving
markets.
Declares the intent of the Legislature that these
recommendations address current statutory and regulatory
impediments to achieve these goals.
Creates the California Dairy Future Task Force in
statute, as previously established by the secretary and
consisting of dairy producers, processors, and
cooperatives. The Task Force shall be in continued
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 5
existence for the specific purpose of developing a stable
economic environment for the California dairy industry.
Directs the California Dairy Future Task Force to do all
of the following:
o Evaluate market-based and other alternative
pricing models
o Evaluate pricing mechanisms that appropriately
share risk and value between producers and processors,
promote competition, and encourage innovation.
o Evaluate whether California's regulated milk
pricing system has kept pace with the rapidly changing
global marketplace.
o Evaluate the adequacy of relevant statutes and
regulations.
o Solicit input from the dairy industry and
related businesses.
o Make recommendations to the secretary and the
Legislature no later than July 1, 2014, regarding the
addition, modification, or repeal of existing statutes
and regulations for all classes of milk.
Appropriates funds from an existing milk assessment to
be used for administration and activities of the California
Dairy Future Task Force. This assessment is paid by both
producers and processors subject to the provisions of any
stabilization and marketing plan and is currently used to
pay for administration of these plans.
COMMENTS :
Stated need for this bill: According to the author's staff, "In
the past 5 years 387 dairies in California have closed. In 2012
alone California lost 105 family dairies due predominantly to
financial stress and losses. California dairy operator's income
is controlled by a complex, yet valuable pooling and
stabilization system, benefiting both the dairy owner as well as
the creamery. The programs are operated by the state for the
ultimate benefit of the consumer. California needs to find a
solution while working through the pooling system to stop the
dairy crisis in the state."
State of the Dairy Industry: California dairy producers have
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 6
endured extreme financial stress over the last several years due
to the economic collapse in 2008/09 and various recent factors
impacting feed costs and milk prices. Feed costs have more than
tripled since 2005. Last year, corn prices further increased
due to widespread drought in the Midwest where most of the corn
used for animal feed is produced. High fuel prices exacerbated
the cost of production, which is compounded by the fact that
40-60% of domestic corn production is used to make ethanol.
Milk production over time has changed from 50 years ago when
fluid milk dominated the market, comprising 60% of the pool.
Today, fluid milk accounts for less than 14%, whereas butter,
dry milk powders and cheese (Classes 4a and 4b) represent
approximately 80% of the market. Recently, export opportunities
have also increased demand for milk products, and the California
dairy industry is aptly situated to meet that demand due to both
potential producing capacity and favorable geographical
location, among other factors. However, it is recognized that
California's system of regulating milk pricing is antiquated and
may be impinging on producer and processor ability to meet the
growing global demand for dairy products.
Dairy Future Task Force: Secretary Ross convened the California
Dairy Future Task Force (Task Force) in July 2012 to address
issues and challenges facing the dairy industry and to create an
action plan for the future. The Task Force is comprised of 32
producer and processor stakeholders and their first session was
held in October 2012. Four self-appointed working groups of
technical experts have since formed, focusing on the following
issues: Reforming Class 4 (21st Century Pricing System), Quota,
Risk Management, and Investment. In addition, CDFA has
commissioned the UC Agricultural Issues Center to assist with
economic modeling and analysis of pricing systems. This project
is anticipated to have a December 31, 2013, completion date.
CDFA Hearings: Producer groups have repeatedly petitioned CDFA
to hold price adjustment hearings over the past few years,
specifically on whey values. The most recent hearing on May 20,
2013, resulted in the Secretary granting a temporary emergency
price relief amounting to an increase of $0.125 per hundred
pounds of pooled milk from July to December 2013. In her letter
to dairy industry stakeholders, Secretary Ross explained that
questions regarding the stability of market recovery deem the
adjustment appropriate. She also stated that:
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 7
"We must work together to create a new system to allow
producers to improve margins by being responsive to
market signals, to provide incentives for the
construction of additional processing capacity, and to
encourage the production and marketing of new
innovative products that add value to milk. The
industry is being compelled to engage these issues in
the California Dairy Future Task Force, the
Legislature, and, potentially, the Federal Milk
Marketing Order. The Department stands ready to
participate in any forum that presents an opportunity
to ensure the long-term stability of the California
dairy industry, but I strongly believe that the Task
Force is the best process for bringing producers and
processors together to achieve this goal."
Cheese, Whey, and Class 4b: To clarify the connection between
cheese and whey and the impact of Class 4b pricing adjustments,
one of the first steps of cheesemaking is turning milk into
curds and whey. The curds may be pressed and further processed
into cheese, whereas the whey may be used for various products
such as low-value animal feed or high value human consumption
products such as whey protein concentrate. However, not all
cheese plants have the equipment to manufacture whey products,
and whey becomes a byproduct of cheesemaking that carries a cost
of disposal. By increasing the price of Class 4b to capture
more whey value, as has been suggested by other proposals and
this bill, only cheesemakers would be faced with an increased
milk price.
Class 4b and Class III: One of the main arguments in support of
raising the value of whey is the comparison of the price that
California producers receive for Class 4b (cheese and whey) and
what other producers in the FMMO receive for milk in Class III
(similar to California's Class 4b). Over the past 2 years,
California dairy producers have received between roughly $1 and
$3.50 per hundredweight of milk less than their FMMO
counterparts. Given the reality of dairies closing due to
economic hardships, it has been argued that California should
more closely follow the FMMO to remain competitive and receive a
fair price for their milk.
Those in favor of raising the price of whey view the difference
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 8
between California and federal whey prices as additional income
to cheese manufacturers at the expense of dairy producers. The
counter-argument recognizes that some cheesemakers have invested
in technology to make new products and expand markets, thus
sales of the resulting whey product is considered a return on
investment.
In 2003, CDFA created a whey value formula that tracked with the
Federal Class III whey value. In 2006, the price of whey
increased dramatically to nearly $3.50 per hundredweight of
milk, causing severe economic stress to cheesemakers not able to
utilize whey. To address this, CDFA fixed the whey value at
$0.25. The federal whey value continued to fluctuate from below
California's $0.25/hundredweight of milk to nearly $3.00 above
in 2009. In 2011, CDFA created a sliding scale, increasing the
whey factor from a base of $0.25 to a cap of $0.65 where the
price within this range would be determined by the market value
for dry whey. The cap was increased to $0.75 in September 2012.
RELATED LEGISLATION :
AB 31 (Pan) 2013-14 Session. Makes findings and declarations
regarding challenges facing the dairy industry. Hearing
postponed in the Assembly Appropriations Committee.
PRIOR ACTIONS :
Not Applicable
SUPPORT :
None received pertaining to the bill as amended July 11, 2013
OPPOSITION :
None received pertaining to the bill as amended July 11, 2013
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf
AB 1038 - Page 9
2 For more information, please visit:
http://www.cdfa.ca.gov/dairy/Milk_Pricing_Works.html
3 For more information, please visit:
www.cdfa.ca.gov/dairy/pdf/InfoPack/SP102-HistoryOfPooling2007.pdf