BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 1038 (Pan) - Milk Products: California Dairy Future Task
Force
Amended: August 13, 2013 Policy Vote: Ag 3-0
Urgency: No Mandate: No
Hearing Date: August 30, 2013
Consultant: Robert Ingenito
SUSPENSE FILE.
Bill Summary: AB 1038 would (1) codify the existence of the
California Dairy Future Task Force (CDFTF), (2) make specified
changes to how CDFTF is funded, and (3) require CDFTF to address
specified issues and report recommendations to the Legislature
by mid-2014.
Fiscal Impact:
This bill would change CDFTF's funding from a continuous
appropriation to a capped amount of $500,000 appropriated
annually by the Legislature. To the extent that current
CDFTF activities and new requirements contained in the bill
exceed the cap, this bill would result in a cost-pressure
(special fund). The magnitude of the cost pressure is
unknown.
Background: California's dairy industry is governed by laws and
regulations enacted since the 1930s to provide stabilization.
Specifically, reduced consumer demand for milk during the Great
Depression caused its price to decline sharply (to as low as
one-cent per quart), leading milk producers to close operations.
Ultimately, the state established a minimum milk price. The
Young Act of 1935 and the Desmond Act of 1937 authorized the
California Department of Food and Agriculture (CDFA) to set
minimum prices for dairy commodities to eliminate "pricing wars"
among producers, processors, distributors, and retail stores.
Under current law and regulations, 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. Dairy products are
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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
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."
Prior to 1967, dairy farmers were paid for their milk varying
amounts depending on end use. Farmers could receive a higher
price for their milk if shipped to a fluid milk processor.
Consequently, 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 (GMPA) was created to stabilize milk
pricing and end bidding wars among producers and processors for
the right to ship milk to fluid processors. The GMPA spread the
revenues of all milk products to all producers, regardless of
how their milk was used.
Current law authorizes CDFA 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. CDFA 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.
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CDFA 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. 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 would do all of the following:
Encourage 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.
Declare the intent of the Legislature that the Secretary
actively engage CDFTF 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.
Create CDFTF in statute, as previously established by
the Secretary and consisting of dairy producers,
processors, and cooperatives. CDFTF shall be in continued
existence for the specific purpose of developing a stable
economic environment for the California dairy industry.
Direct the CDFTF 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
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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.
Appropriate funds from an existing milk assessment to be
used for administration and activities of the CTFTF. 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.
Related Legislation: AB 31 (Pan, 2011) as originally drafted
would have replaced the dry whey factor, a component of the
Class 4b milk pricing formula, found in the current
stabilization and marketing plans, with a dry whey factor that
would be more similar to the dry whey factor found in the
analogous federal milk marketing order pricing formula. The
proposed dry whey factor would increase the California Class 4b
price, which is the price California manufacturers pay for milk
used to make cheese. The bill would have also added a pool
credit that would allow some cheese manufacturers to be exempt
from the Class 4b price increase associated with the proposed
dry whey factor on a specific portion of the milk purchased to
make cheese. The amended version of the bill made findings and
declarations regarding challenges facing the dairy industry.
This measure was held in the Assembly Appropriations Committee.
Staff Comments: This bill pertains to the price paid for only
one of the five classes of milk described above (Class 4b). One
of the first steps of cheesemaking is turning milk into curds
and whey. The curds may be pressed and further processed into
cheese. Dry whey is a byproduct of the cheese production
process. Previously, it was a waste product that was of little
use. Recently, however, cheese manufacturers have developed
technology that transforms it into various products such as
low-value animal feed or high value human consumption products
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such as whey protein concentrate. This technological advance has
impacted milk's pricing structure, as discussed below.
Complicating the matter further, not all cheese producers have
invested in the technology necessary to manufacture these whey
products.
Under current practice with respect to milk pricing, the State
accounts for the price of whey differently than federal pricing.
The latter takes into account a nationwide survey of whey
prices. In contrast, under the State's methodology, there is
currently a hard cap on the value of the price of whey.
Specifically, in 2003, CDFA created a whey value formula that
tracked with the federal 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.
Thus, the price currently can never rise above 75 cents per
hundred pounds of milk. The technological advances that have
changed whey from being a waste product to having useful
applications have caused its value to increase sharply.
Consequently, there is a substantial differential between the
national and California price. Currently, the federal whey value
is above two dollars ($2.00) per hundred pounds of milk. Over
the past two years, California dairy producers have received
between roughly $1 and $3.50 per hundredweight of milk less than
their national counterparts.
California dairy farmers have been petitioning CDFA to make up
for this difference for several years. CDFA has granted several
temporary measures that increased the price of whey slightly.
But from the perspective of the dairy industry, a more
comprehensive and permanent solution is still elusive.
Over the past several years, California's dairy industry has
seen its costs of production rise sharply, largely due to
increases in the cost of livestock feed. However, by increasing
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the price of Class 4b to capture more whey value (and thus
alleviate economic pressure on the dairy industry), only
cheesemakers would be faced with an increased milk price, not
all of whom have the equipment to transform whey from by product
to useful purposes.
CDFA Secretary Karen Ross convened the CDFTF in July 2012 to
address these and related issues. CTFTF is comprised of 32
producer and processor stakeholders and their first session was
held in October 2012. In addition, as noted below, CDFA has
commissioned the UC Davis 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. Under AB 1038, the determination of Class 4b milk prices
would remain with CDFA, which will rely on market price research
conducted by CDFTF.
Regarding the specific fiscal impacts of AB 1038, as noted
above, CDFA has entered into a $209,000 contract with the
University of California, Davis, to provide analytical services
for CDFTF activities. This contract may require modifications
based on the bill's changes to the scope of work, and costs
would likely be greater than the initial contracted amount. If
the combined future costs of CDFTF were to exceed the bill's
funding limitation (which is not defined in the bill), then the
completion of its current work could be placed in jeopardy.
Author's amendments would set the annual funding of the
California Dairy Future Task Force at $500,000.