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California’s FMMO adoption brings growing pains

milk truck
Dairy pricing discrepancies resolved, but quota system receives mixed reviews.

California adopted the U.S. Department of Agriculture’s Federal Milk Marketing Order (FMMO) system of pricing and pooling milk on Nov. 1, 2018, resolving price disparities between California and the rest of the U.S. However, a new report from CoBank’s Knowledge Exchange division suggests that the FMMO did not change the underlying market forces that determine what milk produced in California is worth; it only nudged the regulated price higher and added safety valves to pay milk under class prices if supply exceeds demand, CoBank said.

Processors gained flexibility, while producers gained access to higher regulated prices, the report noted, adding that “the traditionally stable landscape of milk utilization in California has changed as processors make monthly pooling decisions, which has led to some concern among producers.”

CoBank said in the last month under the California system, 94% of all the milk produced in the state was part of a pool. One month later, when the FMMO took effect, processors elected to pool only 69% of the milk, or 2.1 million lb. In previous months, that figure was typically around 3.1 million lb.

“Production in the state did not suddenly disappear; rather, certain processors elected not to pool milk,” CoBank said.

In addition to the uncertainty created by processors’ new flexibility under the FMMO, the report said the regulated system added a regional pricing component that did not exist in the California system. The one-state, one-minimum blend price was replaced by five pricing zones that value milk based on where it is received. The transportation allowance system was eliminated with the FMMO, and along with it went strong incentives to move milk to certain markets, CoBank explained.

California’s quota system under the California Department of Food & Agriculture remains relatively intact, but it faces uncertainty as some non-quota holders would like to see it go away.  

Many organizations have clients on both side of the quota issue, whether they be trade associations, lending institutions or feed suppliers, according to the report. Some organizations stand to lose investment and income, while others stand to gain an additional 38 cents/cwt. each month. As such, CoBank said debate surrounding the quota will be ongoing.

“The transparency of the FMMO gives California producers hope that they are finally on a level playing field with the rest of the country,” CoBank reported. “In the short term, it may appear so for many. In the long run, with additional transportation costs no longer subsidized, processors will have incentives to move milk around differently, make different processing decisions or charge additional hauling costs.”

Until USDA launches a national hearing to change the pricing formulas, both producers and processors now have a new system that gives them something they were looking for, CoBank said.

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