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actions; deletes outdated language and eliminates the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