(July 27, 2012) DairyLine spoke with Rob Vandenheuvel of the Milk Producers Council regarding CDFA’s announcement that they will not be changing the whey factor in the Class 4b milk pricing formula. Listen Here:

In an announcement released July 20, a California Department of Food & Agriculture (CDFA) panel recommended no change in the whey factor in the Class 4b milk pricing formula. However, CDFA secretary Karen Ross gave the state’s dairy producers a small concession, increasing the cap on the whey factor by 10¢/cwt., effective Aug. 1. She also announced formation of a task force to look into California’s milk pricing system.

The action follows a May 31-June 1 hearing on petitions from dairy producer organizations to revise the whey factor in California’s Class 4b milk pricing formula.

Western United Dairymen (WUD) and a coalition of groups representing about 80% of the milk produced in California – including California Dairies, Inc., Dairy Farmers of America, Land O’Lakes, Security Milk Producers Association, California Dairy Campaign, Alliance of Western Milk Producers, and Milk Producers Council – petitioned CDFA in early March. The producers groups asked that the Class 4b whey factor, last modified in September 2011, be adjusted to account for the higher value of dry whey, returning a larger portion of that value to dairy farmers. They said the formula used in California’s state milk marketing order created a large gap between California 4b and federal order Class III milk, both used to make cheese.

In reviewing hearing testimony and post-hearing documents, the hearing panel determined, “The current Class 4b pricing formula maintains a sound economic relationship between the state’s milk production and marketing conditions for manufactured dairy products. The panel recommends that no changes be made to the whey factor in the Class 4b pricing formula at this time.”

However, citing the negative impact of high feeds costs on dairy producer income, Ross increased the cap on the whey factor value in the Class 4b formula from 65¢/cwt. to 75¢/cwt., while maintaining the current floor of 25¢/cwt. For each 5¢ ‘step’ in the dry whey commodity price, the corresponding whey factor will increase in 6.25¢ increments. The effect of the new sliding scale is an increase in the Class 4b price of approximately 10¢/cwt. when the dry whey commodity market is at the upper end of the new scale (see below).

Dry whey sliding scale in the Class 4b pricing formula

Effective Aug. 1, 2012

 

DMN monthly average dry whey price          Whey factor in 4b formula

($/lb)                                                                     ($/cwt.)

< 0.25                                                                  0.25

? 0.25 and < 0.30                     0.3125

? 0.30 and < 0.35                                             0.375

? 0.35 and < 0.40                                             0.4375

? 0.40 and < 0.45                     0.5

? 0.45 and < 0.50                     0.5625

? 0.50 and < 0.55                     0.625

? 0.55 and < 0.60                     0.6875

? 0.60                                     0.75

In adjusting the whey factor, Ross said she recognized that processors have financial challenges of their own and that this action will increase their costs.

 

“But I believe this is an essential step to maintain the crucial balance between processors and producers while ensuring consumers have an affordable supply of milk,” Ross said. “Clearly, this is a smaller adjustment than requested by the petitioners, but to increase it more at this time will likely have a negative impact on other segments of the industry.”

 

Producers disappointed

The Milk Producers Council’s Rob Vandenheuvel expressed extreme disappointment over the recommendation and small whey factor increase in his organization’s weekly newsletter.

“To say the results were ‘disappointing’ doesn’t begin to capture the emotion felt on the producer side of the industry,” Vandenheuvel wrote.

Vandenheuvel said the current value for dry whey is approximately 49¢/lb. With the new sliding scale, effective Aug. 1, the market value of dry whey would add 6.25¢ to the Class 4b formula in August, compared to the current formula. With Class 4b accounting for approximately 40% of the milk in California’s “pool,” that 6.25¢ increase in the Class 4b price would equate to an increase of about 2.5¢/cwt. in the overall price paid to dairy producers.

“To understand why this decision was so frustrating, you have to look at why producers requested the hearing in the first place,” Vandenheuvel continued. “California law places the responsibility of establishing minimum prices for each of the five classes of milk on the Secretary of Agriculture. While California law gives the Secretary broad latitude in how he or she determines or calculates a price, the law is very specific that whatever price is ultimately determined, it shall be in a “reasonable and sound economic relationship” with what comparable milk is worth around the country.

Vandenheuvel said the Class 4b formula resulted in “state-sponsored discounting of milk.” He said the gap between California 4b and federal order Class III prices has been widening. In 2010, the Class 4b price averaged $1.24/cwt. below the Class III price. In 2011, that gap rose to $2/cwt., and in the first six months of 2012, the average difference was $2.08/cwt.

“These differences equate to a discount of hundreds of millions of dollars for California’s cheese manufacturers,” Vandenheuvel wrote.

Task force announced

Ross called the whey factor just a small piece of a much larger issue – the overall pricing structure for California milk and dairy products. To address the bigger issue, she announced creation of the California Dairy Future Task Force, which will be charged with developing recommendations for structural changes to California’s dairy pricing formulas and other milk marketing regulations.

She said the task force must develop solutions “to establish a more stable foundation to provide a bright future for California dairy families and processors. It is imperative that we all work together – processors, producers, cooperatives and the (CDFA) – to evaluate and resolve the critical issues facing the dairy industry. We must work together as one and not in factions.”

For more information, including the panel’s recommendation, visit http://cdfa.ca.gov/dairy/uploader/postings/hearings/.