Milk in California; Proposal To Establish a Federal Milk Marketing Order
Federal RegisterApr 2, 2018
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1051
[Doc. No. AO-15-0071; AMS-DA-14-0095]
Milk in California; Proposal To Establish a Federal Milk Marketing Order
AGENCY:
Agricultural Marketing Service, USDA.
ACTION:
Proposed rule; order for referendum; notice of public meeting.
SUMMARY:
The Agricultural Marketing Service (AMS) proposes the issuance of a Federal Milk Marketing Order (FMMO) regulating the handling of milk in California. This proposed rule proposes adoption of a California FMMO incorporating the entire state of California and would adopt the same dairy product classification and pricing provisions used throughout the current FMMO system. The proposed California FMMO provides for the recognition of producer quota as administered by the California Department of Food and Agriculture. This proposed FMMO is subject to producer approval by referendum.
DATES:
The Agricultural Marketing Service (AMS) will conduct a public meeting at 9:00 a.m. on April 10, 2018, to explain and answer questions relating to how the proposed California FMMO contained in this proposed rule, if adopted, would operate and review the producer referendum process that will be followed to obtain producer approval of the proposed rule.
ADDRESSES:
The public meeting will be held at the Clovis Veterans Memorial District Building, 808 Fourth Street, Clovis, California 93612. Meeting information can be found at
www.ams.usda.gov/caorder.
FOR FURTHER INFORMATION CONTACT:
Erin Taylor, Acting Director, Order Formulation and Enforcement Division, USDA/AMS/Dairy Program, STOP 0231, Room 2969-S, 1400 Independence Ave. SW, Washington, DC 20250-0231, (202) 720-7311, email address:
erin.taylor@ams.usda.gov.
SUPPLEMENTARY INFORMATION:
This proposed rule, in accordance to 7 CFR part 900.13a, is the Secretary's final decision in this proceeding and proposes the issuance of a marketing order as defined in 7 CFR part 900.2(j). AMS finds that a FMMO for California would provide more orderly marketing conditions in the marketing area, warranting promulgation of a California FMMO. The record is replete with discussion from most parties on whether disorderly marketing conditions exist, or are even needed, to warrant promulgation of a California FMMO. FMMOs are authorized by the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674 and 7253) (AMAA). The declared policy of the AMAA makes no mention of “disorder,” and AMS finds that disorderly marketing conditions are not a requirement for an order to be promulgated. The standard for FMMO promulgation is to “. . . establish and maintain such orderly marketing conditions . . . ,” (7 U.S.C. 602(4)) and AMS finds that the proposed California FMMO meets that standard.
AMS has considered all record evidence presented at the hearing. Pursuant to a February 14, 2018 Memorandum from Secretary of Agriculture Sonny Perdue, Judicial Officer William Jensen conducted an independent
de novo
review of the hearing record. The Judicial Officer issued an Order on March 9, 2018 whereby he ratified all decisions and rulings made by Administrative Law Judge (ALJ) Jill Clifton during the hearing. The Judicial Officer ratified ALJ Clifton's Certification of the Transcript, except that he revised the list of exhibits that ALJ Clifton identified as not having been admitted into evidence by adding “Exhibit 108-Exhibit D” to that list. AMS has also considered the arguments and proposed findings submitted in post-hearing briefs, officially noticed documents, and comments and exceptions filed in response to the recommended decision to formulate this proposed FMMO. The regulatory provisions proposed herein reflect California marketing conditions, while adhering to fundamental FMMO principles that have historically helped to maintain orderly marketing conditions, ensured a sufficient supply of pure and wholesome milk, and been in the public interest.
A FMMO is a regulation issued by the Secretary of Agriculture that places certain requirements on the handling of milk in the area it covers. Each FMMO is established under the authority of the AMAA. A FMMO requires handlers of milk for a marketing area to pay minimum class prices according to how the milk is used. These prices are established under each FMMO after a public hearing where evidence is received on the supply and demand conditions for milk in the market. A FMMO requires that payments for milk be pooled and paid to individual farmers or cooperative associations of farmers on the basis of a uniform or average price. Thus, all eligible dairy farmers (producers) share in the marketwide use-values of milk by regulated handlers.
AMS proposes the establishment of a FMMO in 7 CFR part 1051 to regulate the handling of milk in California. Where appropriate, AMS proposes the adoption of uniform provisions found in 7 CFR part 1000 that are have been adopted into the 10 current FMMOS established in chapter X. These uniform provisions include, but are not limited to, product classification, end-product price formulas, Class I differential structure, and the producer-handler definition.
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This decision recognizes the unique market structure of the California dairy industry through tailored performance-based standards to determine eligibility for pool participation.
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References to Class I, Class II, Class III and Class IV refer to products classified in those classes based on uniform FMMO provisions.
As in all current FMMOs, California handlers regulated by a California FMMO would be responsible for accurate reporting of all milk movements and uses, and would be required to make timely payments to producers. The California FMMO would be administered by the United States Department of Agriculture (USDA) through a Market Administrator, who would provide essential marketing services, such as laboratory testing, reporting verification, information collection and publication, and producer payment enforcement.
A unique feature of the proposed order is a provision for the recognition of the quota value specified in the California quota program currently administered by the California Department of Food and Agriculture (CDFA). AMS finds that the California quota program should remain a function of CDFA in whatever manner CDFA deems appropriate. Should CDFA continue to use producer monies to fund the quota program, AMS finds that the proper recognition of quota values within a California FMMO, as provided for in the Agriculture Act of 2014 (2014 Farm Bill) (Pub. L. 113-79, sec. 1410(d)), is to permit an authorized deduction from payment to producers, in an amount determined and announced by CDFA.
In conjunction with this proposed FMMO, AMS conducted a Regulatory Economic Impact Analysis to determine the potential impact of regulating California milk handlers under a FMMO on the milk supply, product demand and prices, milk allocation in California and throughout the United States, and impacts to consumers. As part of the
analysis, a regional econometric model was used to project deviations from the USDA Agricultural Baseline Projections to 2026
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under the provisions of the proposed California FMMO. The full text of the Regulatory Economic Impact Analysis Report and accompanying documentation may be accessed at
www.regulations.gov
or
www.ams.usda.gov/caorder.
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Official Notice is taken of: U.S. Department of Agriculture, Office of the Chief Economist, World Agricultural Outlook Board, Interagency Agricultural Projections Committee, 2016,
Long-term Projections Report OCE-2016-1.
Prior documents in this proceeding:
Notice of Hearing:
Issued July 27, 2015; published August 6, 2015 (80 FR 47210);
Notice To Reconvene Hearing:
Issued September 25, 2015; published September 30, 2015 (80 FR 58636);
Recommended Decision and Opportunity To File Written Exceptions:
Issued February 6, 2017; published February 14, 2017 (82 FR 10634);
Documents for Official Notice:
Issued August 8, 2017; published August 14, 2017 (82 FR 37827); and
Submission for OMB Review: Information Collection—Producer Ballots:
Issued September 27, 2017; published October 2, 2017 (82 FR 45795);
Delay of Rulemaking:
Issued February 1, 2018; published February 6, 2018 (83 FR 5215);
Ratification of Record:
Issued March 14, 2018; published March 19, 2018 (83 FR 11903).
This proposed rule is governed by the provisions of Sections 556 and 557 of Title 5 of the United States Code and is therefore excluded from the requirements of Executive Order 12866.
This proposed rule is not expected to be an Executive Order 13771 regulatory action because this proposed rule is not a significant regulatory action under Executive Order 12866.
The provisions of this proposed rule have been reviewed under Executive Order 12988, Civil Justice Reform. They are not intended to have a retroactive effect. If adopted, the proposed FMMO would not preempt any state or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.
AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.
The AMAA provides that administrative proceedings must be exhausted before parties may file suit in court. Under 7 U.S.C. 608c(15)(A) of the AMAA, any handler subject to an order may request modification or exemption from such order by filing with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with the law. A handler is afforded the opportunity for a hearing on the petition. After a hearing, USDA would rule on the petition. The AMAA provides that the district court of the United States in any district in which the handler is an inhabitant, or has its principal place of business, has jurisdiction in equity to review USDA's ruling on the petition, provided a bill in equity is filed not later than 20 days after the date of the entry of the ruling.
Civil Rights Impact Analysis
AMS has reviewed this proposed rule in accordance with Departmental Regulation 4300-4—Civil Rights Impact Analysis (CRIA), to identify and address potential impacts the proposal might have on any protected groups of people. After a careful review of the proposed rule's intent and provisions, AMS has determined that this proposed rule, if adopted, would not limit or reduce the ability of individuals in any protected classes to participate in the proposed FMMO, or to enjoy the anticipated benefits of the proposed program. Any impacts on dairy farmers and processors arising from implementation of this proposed rule are not expected to be disproportionate for members of any protected group on a prohibited basis.
An anonymous commenter took exception to AMS's determination with respect to civil rights impact of the proposed rule. The commenter took exception with AMS's conclusion that because the proposed California FMMO would provide for orderly marketing conditions, its implementation would not result in disparate impacts on protected classes, especially consumers. The civil rights analysis did not consider consumers because consumers are not a protected class. Other observations suggested by the commenter regarding consumerism and homelessness are outside the scope of the CRIA.
Regulatory Flexibility Analysis
Pursuant to the requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions so that small businesses will not be unduly or disproportionately burdened. Small dairy farm businesses have been defined by the Small Business Administration (SBA) (13 CFR 121.601) as those businesses having annual gross receipts of less than $750,000. SBA's definition of small agricultural service firms, which includes handlers that would be regulated under this proposed FMO, varies depending on the product manufactured. Small fluid milk and ice cream manufacturers are defined as having 1,000 or fewer employees. Small butter and dry or condensed dairy product manufacturers are defined as having 750 or fewer employees. Small cheese manufacturers are defined as having 1,250 or fewer employees.
For the purpose of determining which California dairy farms are “small businesses,” the $750,000 per year criterion was used to establish a production guideline that equates to approximately 315,000 pounds of milk per month. Although this guideline does not factor in additional monies that may be received by dairy farmers, it is a standard encompassing most small dairy farms. For the purpose of determining a handler's size, if the plant is part of a larger company operating multiple plants that collectively exceed the employee limit for that type of manufacturing, the plant is considered a large business even if the local plant has fewer than the defined number of employees.
Interested persons were invited to present evidence at the hearing on the probable regulatory and informational impact of the proposed California FMMO on small businesses. Specific evidence on the number of large and small dairy farms in California (above and below the threshold of $750,000 in annual sales) was not presented at the hearing. However, data compiled by CDFA
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suggests that between 5 and 15 percent of California dairy farms would be considered small business entities. No comparable data for dairy product manufacturers was available.
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Official Notice is taken of: CDFA,
California Dairy Review,
Volume 19, Issue 9, September 2015.
https://www.cdfa.ca.gov/dairy/pdf/CDR/2015/CDR_SEPT_15.pdf.
Record evidence indicates that implementing the proposed California FMMO would not impose a disproportionate burden on small businesses. Currently, the California dairy industry is regulated by a California State Order (CSO) that is administered and enforced by CDFA. While the CSO and FMMOs have differences that are discussed elsewhere
in this document, they both maintain similar classified pricing and marketwide pooling functions. Therefore, it is not expected that the proposed regulatory change will have a significant impact on California small businesses.
The record evidence indicates that while the program is likely to impose some costs on the regulated parties, those costs would be outweighed by the benefits expected to accrue to the California dairy industry. In conjunction with the publication of the recommended decision (82 FR 10634), AMS released a Regulatory Economic Impact Analysis (REIA) to study the possible impacts of the proposed California FMMO. AMS received five comments related to the REIA. The substance of those comments and AMS's response are provided in the documentation that accompanies an updated REIA, which was prepared to reflect the provisions proposed in this FMMO. The updated analysis may be viewed in conjunction with this proposed FMMO (Docket No. AMS-DA-14-0095) at
www.regulations.gov.
California Dairy Market Background
The record shows that the California dairy industry accounts for approximately 20 percent of the nation's milk supply. While its 39 million residents are concentrated in the state's coastal areas, the majority of California's dairy farms are located in the interior valleys, frequently at some distance from milk processing plants and consumer population centers.
CDFA has defined and established distinct regulations for Northern and Southern California dairy regions.
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According to data published by CDFA,
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over 94 percent of the state's approximately 40.4 billion pounds of milk for 2016 was produced in the Northern California region. The five leading milk production counties in 2016 were Tulare, Merced, Kings, Stanislaus, and Kern, together accounting for approximately 72.4 percent of the state's milk.
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Official Notice is taken of: CDFA,
Stabilization and Marketing Plan for Market Milk, as Amended, for the Northern California Marketing Area,
August 2015.
https://www.cdfa.ca.gov/dairy/pdf/hearings/2015/NOCAL_STAB_PLAN61.pdf.
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Official Notice is taken of: CDFA,
California Dairy Statistics Annual,
2016.
https://www.cdfa.ca.gov/dairy/pdf/Annual/2016/2016_Statistics_Annual.pdf.
According to CDFA, there were 1,392 dairy farms in California in 2016. Of those, 1,297 were located in Northern California, and 95 were in Southern California. The statewide average number of cows per dairy was 1,249; in Northern California, the average herd size was 1,265 cows, and in Southern California, 1,026 cows. Average milk production for the state's 1.74 million cows was 23,265 pounds in 2016.
According to record evidence, 132 handlers reported milk receipts to CDFA for at least one month during 2015. A CDFA February 2015 list of California dairy product processing plants by type of product produced
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shows that 35 California plants processed Class 1 products; 75 plants processed Class 2 and 3 products; 18 plants processed Class 4a products; and 64 plants processed Class 4b products.
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Some plants processed products in more than one class.
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Official Notice is taken of: CDFA, Milk and Dairy Food Safety Branch,
Milk Plant Listings. https://www.cdfa.ca.gov/ahfss/Milk_and_Dairy_Food_Safety/index.html#Plants.
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References to Class 1, Class 2, Class 3, Class 4a and Class 4b refer to products classified in those categories based on the CSO.
CDFA reported
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that approximately 98 percent of California's 2016 milk production was market grade (Grade A), and the rest was manufacturing grade (Grade B). Thirteen percent of the milk pooled under the CSO was utilized by California processors as Class 1 (fluid milk). Eight and three-tenths percent was utilized for Classes 2 and 3 (soft and frozen dairy products), 32.3 percent was utilized for Class 4a (butter and dried milk powders), and 46.4 percent was utilized for Class 4b (cheese).
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CDFA,
California Dairy Statistics Annual,
2016.
According to CDFA, total Class 1 sales in California were approximately 642 million gallons in 2016. Record evidence shows that annual California Class 1 sales outside the state averaged 22 million gallons for the five years preceding 2015.
The record shows that for the five-year period from 2010 through 2014, an average of 230 million pounds of California bulk milk products were transferred to out-of-state plants for processing each year. During the same period, an average of 633 million pounds of milk from outside the state was received and reported by California pool plants each year.
Impact on Small Businesses
AMS proposes to establish a FMMO in California similar to the 10 existing FMMOs in the national system. The California dairy industry is currently regulated under the CSO, which is similar to the proposed FMMO in most respects. California handlers currently report milk receipts and utilization to CDFA, which calculates handler prices based on component values derived from finished product sales surveys. Likewise, FMMO handlers report milk receipts and utilization to the Market Administrators, who calculate handlers' pool obligations according to price formulas that incorporate component prices based on end product sales values. Under both programs, the value of handlers' milk is pooled, and pool revenues are shared by all the pooled producers. Thus, transitioning to the FMMO is expected to have only a minimal impact on the reporting and regulatory responsibilities for large or small handlers, who are already complying with similar CSO regulations.
Pricing
Under the proposed California FMMO, uniform FMMO end-product price formulas would replace the CDFA price formulas currently used to calculate handler milk prices. FMMO end-product price formulas incorporate component prices derived from national end-product sales surveys conducted by AMS. Use of price formulas based on national product sales would permit California producers to receive prices for pooled milk reflective of the national market for commodity products for which their milk is utilized. Consistent with the current FMMOs, California FMMO Class I prices would be computed using the higher of the Class III or IV advance prices announced the previous month, and would be adjusted by the Class I differential for the county where the plant is located.
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FMMOs have four classifications of milk: Class I—fluid milk products; Class II—fluid cream products, soft “spoonable” cheeses, ice cream, and yogurt; Class III—hard cheeses and spreadable cheese such as cream cheese; Class IV—butter and dried milk products.
Regulated minimum prices, especially for milk used in cheese manufacturing, are likely to be higher than what handlers would pay under the CSO. However, pooling regulations under the proposed FMMO would allow handlers to elect not to pool milk used in manufacturing. This option would be available to both large and small manufacturing handlers.
Dairy farmers whose milk is pooled on the proposed California FMMO would receive a pro rata share of the pool revenues through the California FMMO uniform blend price. The California FMMO would not provide for the quota and non-quota milk pricing tiers found under the CSO. Under the proposed California FMMO, regulated handlers would be allowed to deduct monies, in an amount determined and announced by CDFA, from blend prices paid to California dairy farmers for
pooled milk and send those monies to CDFA to administer the quota program.
These changes are expected to affect producers and handlers of all sizes, but are not expected to be disproportionate for small entities.
Producer-Handlers
The record shows that there are four producer-handlers
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in California whose Class 1 milk production is all or partially exempt from CSO pricing and pooling by virtue of their “exempt quota” holdings, representing approximately 21 million pounds of milk each month. It is likely that these four entities would become fully regulated by the proposed California FMMO and accountable to the marketwide pool for all of their Class I sales in the marketing area. By accounting to the pool for all their Class I sales in the marketing area, the value of the marketwide pool is expected to increase, benefiting most other large and small producers. The proposed California FMMO makes no provision for exempting large producer-handlers from pricing and pooling regulations under the order.
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Producer-handlers are dairy farmers who process and distribute their own farm milk into dairy products.
The evidentiary record shows that several smaller California producer-handlers, whose production volume exceeds the threshold to receive an exemption from the CSO's pricing and pooling regulations, would likely qualify as producer-handlers under the proposed California FMMO.
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The CSO exempts producer-handlers with sales averaging less than 500 gallons of milk per day on an annual basis and who distribute 95 percent of their production to retail or wholesale outlets.
Interstate Commerce
The evidentiary record indicates that milk in interstate commerce, which the CSO does not have authority to regulate, would be regulated under the proposed California FMMO. Currently, California handlers who purchase milk produced outside the state do not account to the CSO marketwide pool for that milk. Record evidence shows approximately 425 million pounds of milk from outside the state was processed into Class 1 products at California processing plants during 2014.
Under the proposed FMMO, all Class I milk processed and distributed in the marketing area would be subject to FMMO pricing and pooling regulations, regardless of its origin. Thus, revenues from Class 1 sales that are not currently regulated would accrue to the California FMMO pool and would be shared with all producers who are pooled on the California FMMO, including out-of-state producers. If California handlers elect to continue processing out-of-state milk into Class I products, under the provisions of the proposed California FMMO they would be required to pay the order's classified minimum price for that milk. Those additional revenues would be pooled and would benefit large and small producers who participate in the pool. Both large and small out-of-state producers who ship milk to pool plants in California would receive the California FMMO uniform blend price for their milk.
Classification and Fortification
Dairy product classification under the CSO and the proposed FMMO is similar, but not identical. The table below compares CSO and FMMO product classes.
CSO Class
Equivalent FMMO Class
Class 1
Class I.
Class 2 and 3
Class II.
Class 4b
Class III.
Class 4a
Class IV.
Under the proposed California FMMO, the classification of certain California products would change to align with standard FMMO classifications:
• Reassigning buttermilk from CSO Class 2 to FMMO Class I
• Reassigning half and half from CSO Class 1 to FMMO Class II
• Reassigning eggnog from CSO Class 2 to FMMO Class I
• There are numerous instances where the CSO classifies a product based on product type and where the product is sold.
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The proposed California FMMO would classify all products based solely on product type.
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Official Notice is taken of: CDFA,
Classification of Dairy Products. https://www.cdfa.ca.gov/dairy/pdf/PRDCLASS.pdf
.
Under the proposed FMMO, California handlers would no longer receive credits for fluid milk fortification. Instead, accounting for fortification would be uniform with other FMMOs, as the fluid milk equivalent of the milk solids used to fortify fluid milk products would be classified as Class IV, and the increased volume of Class I product due to fortification would be classified as Class I. The FMMO system accounts for fortification differently than does the CSO. The record does not indicate the net impact of this change. However, the impact is not expected to disproportionately affect small entities.
Transportation Credits
The proposed California FMMO does not contain a transportation credit program to encourage milk shipments to Class 1, 2, and 3 plants, as is currently provided for in the CSO. AMS proposes that producer payments be adjusted to reflect the applicable producer location adjustment for the handler location where the milk is received, thus providing the incentive to producers to supply Class I plants. Producers are responsible for finding a market for their milk and consequently bear the cost of transporting their milk to a plant. The record of this proceeding does not support reducing the producers' value of the marketwide pool by authorizing transportation credits to handlers. This change is not expected to disproportionately impact small business entities.
Summary
AMS continues to find that adoption of the proposed California FMMO would promote more orderly marketing of milk in interstate commerce. Classified milk prices under the order would reflect national prices for manufactured products and local prices for fluid milk products, fostering greater equality for California producers and handlers in the markets where they compete. Under the proposed FMMO, handlers would be assured a uniform cost for raw milk, and producers would receive uniform payments for raw milk, regardless of its use. Small dairy farmers and handlers are not expected to be disproportionately impacted by the transition from CSO to FMMO regulations.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the ballot materials that will be used in conducting the referendum have been submitted to and approved by OMB (0581-0300). The forms to be used to administer the proposed California FMMO have also been reviewed by OMB (0581-0032) and would be approved should the California FMMO producer referendum pass.
Any additional information collection and recordkeeping requirements that may be imposed under the proposed order would be submitted to OMB for public comment and approval.
Secretary's Decision
Notice is hereby given of the filing with the Hearing Clerk of this final decision with respect to the proposed marketing agreement and order
regulating the handling of milk in California.
This final decision is issued pursuant to the provisions of the AMAA and the applicable rules of practice and procedure governing the formulation of marketing agreements and orders (7 CFR part 900). The proposed marketing agreement and order are authorized under 7 U.S.C. 608c.
The proposed marketing agreement and order are based on the record of a public hearing held September 22 through November 18, 2015, in Clovis, California. The hearing was held to receive evidence on four proposals submitted by dairy farmers, handlers, and other interested parties. Notice of this hearing was published in the
Federal Register
on August 6, 2015 (80 FR 47210).
Ninety-eight witnesses testified over the course of the 40-day hearing. Witnesses provided a broad overview of the history and complexity of the California dairy industry, and submitted 194 exhibits containing supporting data, analyses, and historical information.
Upon the basis of evidence introduced at the hearing and the record thereof, the Administrator of AMS on February 6, 2017, filed with the Hearing Clerk, USDA, a recommended decision and Opportunity to File Written Exceptions thereto by May 15, 2017. Twenty-nine comments or exceptions were filed. That document also announced AMS's intent to request approval of new information collection requirements to implement the program. Written comments on the proposed information collection requirements were due April 17, 2017. Two comments were filed. AMS issued a notice regarding Documents for Official Notice, inviting comments on whether the Department should take official notice of numerous listed documents submitted for consideration by proponents. The notice was issued on August 8, 2017, and published on August 14, 2017. Comments on the official notice request were due August 29, 2017. Three supportive comments were received and are discussed later in this decision. Lastly, AMS announced its intent to request approval of a new information collection for ballot material to be used in a producer referendum in a document issued on April 17, 2017, and published on April 21, 2017. Comments on the ballot material information collection were due June 20, 2017. One supportive comment was received. A Submission for OMB Review seeking OMB approval of the ballot material was issued on September 27, 2017, and published on October 2, 2017 (82 FR 45795).
The material issues presented on the record of hearing are as follows:
1. Whether the handling of milk in the proposed marketing area is in the current of interstate commerce, or directly burdens, obstructs, or affects interstate commerce in milk or its products;
2. Whether economic and marketing conditions in California show a need for a Federal marketing order that would tend to effectuate the declared policy of the Act;
3. If an order is issued, what its provisions should be with respect to:
a. Handlers to be regulated and milk to be priced and pooled under the order;
b. Classification of milk, and assignment of receipts to classes of utilization;
c. Pricing of milk;
d. Distribution of proceeds to producers; and
e. Administrative provisions.
Findings and Conclusions
The findings and conclusions on the material issues are based on the record of the hearing and the comments and exceptions filed with regard to the recommended decision. Discussions are organized by topic, recognizing inevitable overlap in some areas. Topics are addressed in the following order:
1. Regulatory Comparison
2. Overview of Proposals
3. Justification for a California FMMO
4. California Quota Program Recognition
5. Definitions and Uniform Provisions
6. Classification
7. Pricing
8. Pooling
9. Transportation Credits
10. Miscellaneous and Administrative Provisions
11. Ruling on Office Notice Documents
12. Rulings on Proposed Findings, Conclusions, and Exceptions
1. Regulatory Comparison
The purpose of the following section is to provide a general description and comparison of the major features of the California state dairy regulatory framework and the FMMO system as provided in the evidentiary record. A more detailed discussion of each issue is provided in the appropriate section of this decision.
California State Order:
Currently, milk marketing in California is regulated by the CDFA. The CSO is codified in the
Pooling Plan for Market Milk,
as amended, and in two
Stabilization and Marketing Plan(s) for Market Milk,
as amended, for the Northern and Southern California marketing areas.
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Official Notice is taken of: Chapter 2, Part 3, Division 21 and Chapter 3, Part 3, Division 21 of the California Food and Agriculture Code.
Quota
The California quota program is a state-administered producer program that entitles the quota holder to $0.195 per pound of solids-not-fat above the CSO base and overbase price of milk.
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The quota premium is funded by a deduction from the CSO marketwide pool before the CSO overbase price is calculated. The quota program requires quota holders to deliver milk to a pool plant at least once every 60 days. Quota can be bought and sold, and according to record evidence, approximately 58 percent of California dairy farms owned some volume of quota in 2015.
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The hearing record reveals that the $0.195 per pound solids-non-fat equates to a $1.70 per cwt of milk quota premium. Additionally, under current CSO provisions, base and overbase prices are equal.
Classification
The CSO provides for the pricing of five classified use values of milk. In general, Class 1 is milk used in fluid milk products; Class 2 is milk used in heavy cream, cottage cheese, yogurt, and sterilized products; Class 3 is milk used in ice cream and frozen products; Class 4a is milk used in butter and dry milk products, such as nonfat dry milk; and Class 4b is milk used in cheese—other than cottage cheese—and whey products.
Pricing
The CSO utilizes an end-product pricing system to determine classified prices for raw milk produced and manufactured in the State of California. Class 1, 4a, and 4b prices are announced monthly. Class 2 and 3 prices are announced bi-monthly. Prices for all five milk classes are component-based. Three components of milk are used to determine prices: butterfat (fat); solids-not-fat (SNF), which includes protein and lactose; and a fluid carrier (used in only the Class 1 price).
The CSO determines milk component prices based on commodity market prices obtained from the Chicago Mercantile Exchange (CME), the AMS Dairy Market News Western Dry Whey—Mostly (WDW-Mostly) price series, and the announced nonfat dry milk (NFDM) California Weighted Average Price (CWAP), which is determined by CDFA through weekly surveys of California manufacturing plants.
The price for milk used in cheese manufacturing (CSO Class 4b) is a
central issue in this proceeding. The Class 4b price is announced monthly and utilizes average commodity market prices for block Cheddar cheese, butter, and dry skim whey to determine the Class 4b component values. The average CME prices for butter and 40-pound Cheddar blocks are adjusted by f.o.b. price adjusters, which are designed to represent the difference between the CME price and the price California manufacturers actually receive. The CME butter price is also reduced by $0.10 per pound to derive the value of whey butter as it relates to cheese processing. The value of dry skim whey is determined through a sliding scale that provides a per hundredweight (cwt) value based on a series of announced WDW-Mostly per pound value ranges. The sliding scale determines dry whey's contribution to the Class 4b price, with a floor of $0.25 per cwt and a ceiling of $0.75 per cwt when the WDW-Mostly price equals or exceeds $0.60 per pound.
The CSO pricing system has a number of features worth highlighting. First, under the CSO, handlers must pay at least minimum classified prices for all Grade A milk purchased from California dairy farmers, regardless of whether the milk is pooled on the CSO. Additionally, Class 1 processors may claim credits against their pool obligations to offset the cost of fortifying fluid milk to meet the State-mandated nonfat solids content standards.
The classified use values of all the milk pooled on the CSO are aggregated, and producers are paid on the fat and SNF component levels in their raw milk. Producers are paid on the basis of their allocated quota (if applicable), base, and overbase production for the month. While the CSO pricing formulas have changed over time, in their current form the base and overbase prices are the same. Generally, the quota price is the overbase price plus the $1.70 per cwt quota premium.
Pooling
Almost all California-produced milk received by California pool plants is pooled on the CSO, with some exceptions. Grade B milk is neither pooled nor subject to minimum prices. Manufacturing plants that do not make any Class 1 or 2 products can opt out of the pool; however, they are still required to pay announced CSO classified minimum prices for Grade A milk received. The requirement that quota holders must deliver milk to a pool plant at least once every 60 days tends to limit the amount of Grade A milk not pooled on the CSO. The decision not to pool milk in California carries with it a stipulation that the plant may not repool for 12 months after opting not to pool, and after repooling, a plant cannot opt out of pooling for 12 months.
Entities recognized as producer-handlers under the CSO may be exempt from pooling some or all of their milk. Producer-handlers are dairy farmers who also process and distribute their dairy products. Fully exempt (“Option 66”) producer-handlers have minimal production volumes and are exempt from the pricing and pooling provisions of the CSO. Producer-handlers who own exempt quota (“Option 70”) do not account to the CSO marketwide pool for the volume of Class 1 milk covered by their exempt quota.
The State of California cannot regulate interstate commerce; therefore, milk from out-of-state producers cannot be regulated by the CSO. While the record reflects that California handlers typically pay for out-of-state milk at a price reflective of the receiving plant's utilization, those prices are not regulated or enforced by the CSO.
Transportation Credits
The CSO provides transportation credits to producers for farm-to-plant Class 1, 2, and 3 milk movements between designated supply zones and plants with more than 50 percent Class 1, 2, and/or 3 utilization in designated demand zones. The CSO also provides for transportation allowances to handlers for plant-to-plant milk movements.
Federal Milk Marketing Orders
A FMMO is a regulation issued by the Secretary of Agriculture (Secretary) that places certain requirements on the handling of milk in a defined geographic marketing area. FMMOs are authorized by the AMAA. The declared policy of the AMAA is to “. . . establish and maintain such orderly marketing conditions for agricultural commodities in interstate commerce . . .” (7 U.S.C. 602(1)). The principal means of meeting the objectives of the FMMO program are through the use of classified milk pricing and the marketwide pooling of returns.
Classification
Whereas the CSO designates five classes of milk utilization, FMMOs provide for four classes of milk utilization. FMMO Class I is milk used in fluid milk products. Class II is milk used to produce fluid cream products, soft “spoonable” products like cottage cheese, ice cream, sour cream, and yogurt, and other products such as kefir, baking mixes, infant formula and meal replacements, certain prepared foods, and ingredients in other prepared food products. Class III is milk used to produce spreadable cheeses like cream cheese, and hard cheeses, like Cheddar, that can be crumbled, grated, or shredded. Class IV is milk used to produce butter, evaporated, or sweetened condensed milk in consumer-style packages, and dry milk products.
Pricing
Like the CSO, the FMMO program currently uses end-product price formulas based on the wholesale prices of finished products to determine the minimum classified prices handlers pay for raw milk in the four classes of utilization. However, the FMMO pricing system has some notable differences. While the CSO announces some classified prices on a bi-monthly basis, FMMOs announce prices for all four milk classes monthly. FMMOs use four components of milk to determine prices: Butterfat, protein, nonfat solids, and other solids.
Like the CSO, the FMMO determines component prices based on commodity prices. However, AMS administers the Dairy Product Mandatory Reporting Program (DPMRP) to survey weekly wholesale prices of four manufactured dairy products (cheese, butter, NFDM and dry whey), and releases weekly average survey prices in the National Dairy Product Sales Report (NDPSR).
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The FMMO product-price formulas use these surveyed prices to determine the component values in raw milk.
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Official Notice is taken of: The Notice of Equivalent Price Series: 77 FR 22282. The National Dairy Product Sales Report was deemed as equivalent to the price series previously released by the National Agricultural Statistics Service.
As referenced previously, a central issue of this proceeding is the pricing of milk used for cheese manufacturing (FMMO Class III). The FMMO pricing system determines the Class III value from DPMRP surveyed butter, cheese, and dry whey prices. The FMMO does not utilize a sliding scale to determine the value of whey that contributes to the Class III price.
Unlike the CSO, FMMOs do not provide for a tiered system of producer payments. A uniform blend price is computed for each FMMO reflecting the use of all milk in each marketwide pool. A blend price is paid for all milk that is pooled on the FMMO, adjusted for location. In six of the FMMOs, producers are paid for the pounds of butterfat, pounds of protein, pounds of other solids, and cwt of milk pooled. The cwt price is known as the producer price differential (PPD) and reflects the
producer's pro rata share of the value of Class I, Class II, and Class IV uses in the pool relative to Class III value. In the other four FMMOs, producers are paid on a butterfat and skim basis.
Pooling
Inclusion in the FMMO marketwide pool carries with it an obligation to be available to serve the fluid market with necessary milk supplies throughout the year. In the FMMO system, participation in the pool is mandatory for distributing plants that process Grade A milk into Class I products sold in a FMMO marketing area. Handlers of manufacturing milk (Class II, III, or IV) have the option of pooling, and pool eligibility is based on performance standards specific to each FMMO.
FMMOs recognize the unique business structures of producer-handlers and exempt them from the pricing and pooling regulations of the orders based on size. Producer-handler exemptions under FMMOs are limited to those vertically-integrated entities that produce and distribute no more than three million pounds of packaged fluid milk products each month.
Unlike the CSO, FMMOs are authorized to regulate the interstate commerce connected with milk marketing. Thus, there is no differentiated regulatory treatment for milk produced outside of a FMMO marketing area boundary. All eligible milk is pooled and priced in the same manner, regardless of its source.
Transportation Credits
The Appalachian and Southeast FMMOs provide for transportation credits to offset a handler's cost of hauling supplemental milk to Class I markets. During deficit months, handlers can apply for transportation credits to offset the cost of supplemental milk deliveries from outside the marketing area to meet the Class I demand of FMMO handlers. The most significant difference from the CSO here is that the FMMO transportation credits described are not paid from the marketwide pool. Instead, they are paid from separate funds obtained through monthly assessments on handlers' Class I producer milk. The exception is the Upper Midwest FMMO, which provides transportation credits on plant-to-plant milk movements paid from the marketwide pool.
2. Overview of Proposals
Four proposals were published in the Hearing Notice of this proceeding. Dairy Farmers of America, Inc., Land O'Lakes, Inc., and California Dairies, Inc. jointly submitted Proposal 1. Dairy Farmers of America, Inc. (DFA), is a national dairy-farmer owned cooperative with approximately 14,000 members and several processing facilities located throughout the United States, with products marketed both nationally and internationally. Within California, DFA represents 260 members and operates three processing facilities. Land O'Lakes (LOL) is a national farmer-owned cooperative with over 2,200 dairy-farmer members. LOL has processing facilities in the Upper Midwest, the eastern United States, and the State of California, with products marketed nationally and internationally. Within California, LOL represents 200 dairy-farmer members and operates three processing facilities. California Dairies, Inc. (CDI), is a California based dairy-farmer owned cooperative with 390 dairy-farmer members, six processing facilities in California, and national and international product sales. Combined, DFA, LOL, and CDI (Cooperatives) market approximately 75 percent of the milk produced in California.
Proposal 1 seeks to establish a California FMMO that incorporates the same dairy product classification and pricing provisions as those used throughout the FMMO system. Proposal 1 also includes unique pooling provisions, described as “inclusive” throughout the proceeding, that would pool the majority of the milk produced in California each month while also allowing for the pooling of milk produced outside of the marketing area if it meets specific pooling provisions. The proposal includes fortification and transportation credits similar to those currently provided by the CSO. Lastly, Proposal 1 provides for payment of the California quota program quota values from the marketwide pool before the FMMO blend price is computed each month.
Proposal 2 was submitted on behalf of the Dairy Institute of California (Institute). The Institute is a California trade association representing proprietary fluid milk processors, cheese manufacturers, and cultured and frozen dairy products manufacturers in 38 plants throughout California. Institute plants process 70 percent of the fluid milk products, 85 percent of the cultured and frozen dairy products, and 90 percent of the cheese manufactured in the state. The Institute's first position is that a California FMMO should not be promulgated. However, should USDA find justification for promulgation, the Institute supports Proposal 2. Proposal 2 incorporates the same dairy product classification provisions used throughout the FMMO system, as well as pooling provisions that are consistent with those found in other FMMOs. The Proposal 2 pooling provisions require the pooling of Class I milk, but the pooling of milk used in manufactured products is optional. Proposal 2 includes fortification and transportation credits similar to those currently provided by the CSO. It also includes an additional shrinkage allowance for extended shelf life (ESL) products above that provided in the FMMO system. Lastly, Proposal 2 recognizes quota value by allowing producers to opt out of the quota program, thus receiving a FMMO blend price reflective of the market's utilization. Under Proposal 2, producers who remain in the quota program would have their blend price monies transferred to CDFA and redistributed according to their quota and non-quota holdings.
Proposal 3 was submitted on behalf of the California Producer Handlers Association (CPHA). CPHA is an association of four producer-handlers: Foster Farms Dairy, Inc. (Foster); Hollandia Dairy, Inc.; Producers Dairy Foods, Inc. (Producers);and Rockview Dairies, Inc. (Rockview). CPHA members own their respective dairy farms and process that farm milk, as well as the milk of other dairy farms, for delivery to consumers. CPHA members own exempt quota, which entitles them to exemption from CSO pricing and pooling provisions for the volume of Class 1 milk covered by their exempt quota. Proposal 3 seeks recognition and continuation of CPHA members' exempt quota status under a California FMMO.
Proposal 4 was submitted on behalf of Ponderosa Dairy (Ponderosa). Ponderosa is a Nevada dairy farm that supplies raw milk to California fluid milk processing plants. Ponderosa contends that disorderly marketing conditions do not exist in California that would warrant promulgation of a FMMO. However, if USDA finds justification for a California FMMO, Proposal 4 seeks to allow California handlers to elect partially-regulated plant status with regard to milk they receive from out-of-state producers. Such allowance would enable handlers to not pool out-of-state milk, as long as they could demonstrate that they paid out-of-state producers an amount equal to or higher than the market blend price.
3. Justification for a California FMMO
This section reviews and summarizes the testimony, hearing evidence, and comments and exceptions filed regarding the recommended decision addressing whether or not promulgation of a California FMMO is justified. After careful consideration and review, this final decision affirms the finding that
the proposed California FMMO would provide for more orderly marketing conditions for the handling of milk in the State of California, as provided for and authorized by the AMAA. The Secretary has found upon the record that the proposed order and all of its terms and provisions will tend to effectuate the declared policy of the AMAA 608 c(4).
Summary of Testimony
A Cooperative witness testified regarding current California marketing conditions and the need for establishing a California FMMO. According to the witness, California is the largest milk-producing state, producing more than 20 percent of the nation's milk. The witness stated that the pooled volume of a California FMMO would be the largest of all FMMOs, averaging slightly below 3.4 billion pounds per month; the Class I volume would represent the third largest, following the Northeast and Mideast FMMOs.
The Cooperative witness testified that the primary reason California farmers are seeking the establishment of a FMMO is to receive prices reflective of the national commodity values for all milk uses. The witness opined that orderly marketing is no longer attainable through the CSO because the prices California dairy farmers receive do not reflect the full value of their raw milk. The witness estimated that this pricing difference has reduced California dairy farm income by $1.5 billion since 2010. The witness maintained that Proposal 1 allows California dairy farms to receive an equitable price for their milk, while also tailoring FMMO provisions to the California dairy industry. The Cooperatives' post-hearing brief reflected this position.
The Cooperative witness testified that there are significant price differences, depending on whether a producer's milk is regulated by the CSO or a FMMO. To illustrate this difference, the witness compared California farm milk prices to those received by producers in the states that comprise the Upper Midwest and Pacific Northwest marketing areas.
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The witness selected these areas for comparison due to the similar milk utilization in the Upper Midwest FMMO and the geographic proximity of the Pacific Northwest FMMO. The witness estimated that between August 2012 and May 2015, California dairy farmers received on average $1.85 per cwt less (ranging from $0.43-$4.27 per cwt lower) than producers pooled on the Upper Midwest and Pacific Northwest FMMOs. The witness used the data to emphasize a wide difference in prices for farmers in similarly situated areas. The witness opined that a California FMMO, as advanced in Proposal 1, would ensure California dairy farmers receive equitable prices, more in line with those received by their FMMO counterparts.
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Wisconsin, Minnesota, and Illinois; Oregon, Washington and Northern Idaho, respectively.
The Cooperative witness emphasized that while both the CSO and the FMMOs use end-product pricing formulas to determine class prices, the two regulatory systems use different commodity series, effective dates, yield factors, and make allowances, which result in substantially different prices, as highlighted above. The witness explained that while the two regulatory systems have always had price differences, historically CSO and FMMO prices were relatively close. According to the witness, prices began to diverge significantly in 2007 when the CSO established a fixed whey factor in its formula for milk used to produce cheese. From that point forward, the witness said, price differences have become significant and have led to market disruptions both in the fluid and manufacturing markets.
The Cooperative witness summarized USDA's justification from the FMMO Order Reform decision for adopting a national Class I price surface that assigns a Class I differential for every county in the country, including counties in California. The witness said that the separate CSO Class 1 price surface undermines the integrity of the nationally coordinated Class I price surface and has become a source of disorder in California. To demonstrate the disorder, the witness compared FMMO Class I and CSO Class 1 prices for both in-state and out-of-state purchases. The witness said that because of the CSO and FMMO differences in both classified price formulas and Class I/1 price surfaces, the Class 1 price paid by California handlers is almost always lower than what it otherwise would be if FMMO Class I prices were applicable for those same purchases.
The Cooperative witness presented a similar comparison between CSO Class 1 prices and Class I prices in FMMO areas that were likely competitors. The witness said that under FMMO regulations, the difference in Class I prices between two FMMO areas is attributed to the difference in the Class I differential at the two locations. For example, the witness explained, the Class I price difference between two plants, one located in a $2.10 zone and another in the $2.00 zone, would be $0.10 per cwt. However, when the witness compared Class 1 prices in California and a competing FMMO area, the price difference was always greater than the difference in differentials. For example, the FMMO differential in the Los Angeles/San Diego market is $2.10, while the differential in neighboring Phoenix is $2.35, a difference of $0.25. However, said the witness, when comparing the actual CSO Class 1 price in Los Angeles/San Diego with the FMMO Class I price in Phoenix from August 2012 to July 2015, the difference averaged $0.62. The witness concluded that these observed price differences undermine a nationally-coordinated pricing structure and contribute to disorderly marketing, where fluid milk handlers pay different minimum prices depending on where they are regulated.
The Cooperative witness also provided testimony on the CSO and FMMO price disparities for manufacturing milk. The witness testified that FMMO Class II, III, and IV prices reflect national prices for products manufactured in these classes. If Proposal 1 is adopted, the witness said, California handlers would pay the same uniform prices as their FMMO competitors in the national marketplace. The witness noted past FMMO decisions that discussed the national supply and demand for manufactured dairy products and the need for national uniform manufacturing prices. The witness stressed that California producers should also receive these national prices like their FMMO counterparts.
The Cooperative witness elaborated on the differences between CSO and FMMO manufacturing class prices. When comparing FMMO Class II to CSO Class 2 and Class 3 prices, the witness cited differences in the commodity series used as price references, the time periods of data used, and the length of time prices are applicable to explain the sometimes large differences in prices under the two regulatory systems. As a result, the witness said, Class 2 products are sometimes sold on a spot basis to exploit short-term price differences.
The Cooperative witness presented a comparison of CSO Class 4a and FMMO Class IV prices from January 2000 to July 2015, revealing that over the entire time period the Class 4a price averaged $0.29 per cwt less than the Class IV price. The witness added that over this 15-year period, the CSO Class 4a price on an annual average basis was never above the FMMO Class IV price.
The Cooperative witness also provided testimony on the price disparity between CSO Class 4b and FMMO Class III price formulas. Data from January 2000 to July 2015 revealed
that the CSO Class 4b price was lower than the Class III price in 161 of the 187 months examined. The witness computed the average difference over that 15-year time period to be $0.91 per cwt, with the largest difference of $3.24 per cwt occurring in November 2014. The witness attributed the observed price differences to differences in the valuation of dry whey between the CSO 4b and the FMMO Class III formulas. The witness said that in 2007, the whey factor in the CSO Class 4b formula became a tiered, bracketed system with a floor of $0.25 and a ceiling of $0.75, which is reached when the WDW-Mostly price is greater than or equal to $0.60 per pound. The witness added that the whey value contained in the FMMO Class III price comes from the AMS NDPSR, and reflects the mandatory reporting of dry whey sales throughout the country. The witness estimated that from August 2012 through July 2015, the Dairy Market News (DMN) whey value contributed $0.68 per cwt to the CSO 4b price, while the NDPSR whey value contributed $2.39 per cwt to the FMMO Class III price. The witness concluded that the whey cap contained in the CSO 4b price results in lower contributions to the marketwide pool than what is observed in the national marketplace and reflected in FMMO prices.
The Cooperative witness reiterated the consequences of having two different regulatory pricing schemes which has led to severe differences between the regulated markets. The witness opined that the regulatory differences allow California handlers who purchase raw milk and manufacture products for sale in the national marketplace to pay substantially different regulated minimum prices than handlers regulated by the FMMO system. The witness estimated that because of the regulatory price differences, from August 2012 to July 2015, California farms received, on average, $1.89 per cwt less than similarly-situated FMMO farms. The witness concluded that this results in California farms being in a worse competitive position than similarly situated FMMO farms. The witness labeled this as disorderly and said that this condition should be remedied through the adoption of Proposal 1.
The Cooperative witness also entered data estimating the value of regulating interstate commerce through the establishment of a California FMMO. The witness cited January 2009 through July 2015 CDFA data that indicated a monthly average of 54.5 million pounds of milk originating outside the state was processed by California processing plants, and another monthly average 36 million pounds of milk was produced inside California and sold to plants located outside of the state. The witness explained that this milk is able to evade CSO minimum-price regulations because of the state's inability to regulate interstate commerce. Consequently, the witness said, out-of-state farms delivering milk to California plants can receive plant blend prices, which can be higher than the market's overbase price received by in-state producers delivering to the same plant. The witness elaborated that the problem is compounded because processors receiving these unregulated supplies are not required to pay minimum classified prices and can instead pay a lower price than their competitors pay for regulated milk. By regulating these interstate transactions through the establishment of a California FMMO, the witness stressed, the California market would be more orderly.
The Cooperatives' post-hearing brief also highlighted the CSO's inability to regulate out-of-area milk as a market dysfunction. The Cooperatives wrote that out-of-area sales financially harm California dairy farms because the Class 1 revenues from those sales do not contribute to the CSO marketwide pool that is shared with all the farms in the market.
A consultant witness, appearing on behalf of the Cooperatives, testified in support of Proposal 1. The witness was of the opinion that the primary purpose of FMMOs is to enhance producer prices, which is provided in the AMAA through its flexibility to regulate milk and/or milk products, not just fluid milk. As evidence of this flexibility, the witness discussed the Evaporated Milk Marketing Agreement, in existence until 1947, under which manufacturing milk was regulated. The witness said it was reasonable to conclude from this example that the regulation of all California plants that purchase milk from California farms, as contained in Proposal 1, would fall within the scope of the AMAA.
The consultant witness elaborated that extending minimum price regulation to all classes of milk in California is necessary to avoid the market-disrupting practice of handlers opting to not pool eligible milk because of price, often referred to as depooling. The witness said that many FMMOs have adopted provisions to reduce instances of depooling. Currently under the CSO, the witness said, while plants can choose to not participate in the marketwide pool, they gain no price advantage because they are still required to pay minimum classified prices. The witness was of the opinion that the impact of depooling would be greater in a California FMMO because of how California quota premiums are paid. The witness testified that uniform prices calculated after deducting quota premiums would be less than they otherwise would be if large volumes of milk were not pooled. Additionally, the witness addressed the requirement of uniform producer payments. The witness was of the opinion that under Proposal 1, once quota premiums were paid, as required by California law, remaining pool revenues would be distributed uniformly to producers for non-quota milk, as required by the AMAA.
The consultant witness addressed the issue of whether Proposal 1 would implement classified prices that were too high. The witness opined that the classified price formulas contained in Proposal 1 would not establish manufacturing milk prices that are too high because FMMO regulated handlers in other areas are already paying those prices. The witness entered data showing that cheese production has increased in the western states (not including California and Idaho) by 92 percent from 2000 to 2014, while California cheese production has increased only 64 percent. The witness concluded that minimum FMMO prices have not been detrimental to FMMO-regulated plants, and offered the fact that over-order premiums are currently paid to FMMO producers to support that claim. The witness stated that regulations providing for orderly marketing conditions should also provide stability (regulations should not alter market transactions) and efficiency (regulations should stimulate a competitive economic environment), and concluded that both are embodied in Proposal 1.
Twenty-seven California dairy farmers testified in support of Proposal 1. Sixteen belong to one of the three proponent Cooperatives: Nine LOL members, three DFA members, and four CDI members. An additional 11 dairy farmers not associated with the Cooperatives provided testimony supporting the adoption of Proposal 1.
Although each dairy farmer provided unique testimony, several difficulties challenging the California dairy industry were addressed repeatedly. Producer testimony described financial hardships due to the CSO producer prices they receive consistently being below the amount needed to cover the cost of production. One farmer witness cited CDFA cost of production data from the first quarter of 2015 for the North
Valley of California, and estimated that 90 percent of surveyed farms had negative net incomes. Farmer witnesses stated that a FMMO would provide an opportunity for dairy farms to cover their cost of production and work toward reducing debts incurred from historically low mailbox prices.
A number of producers testified that historically they had many competitive advantages (low cost of land, grain, hay and water) enabling them to produce milk at a significantly lower cost than farms located in the rest of the county. All of the witnesses testified that the hardships of high land, feed, and/or water costs, as compared to those in other dairy states, have eroded their competitive advantage. Citing no competitive advantage, coupled with the difference between the FMMO and CSO pricing formulas, dairy farmers testified they are receiving a lower mailbox price than their FMMO counterparts. Testimony stressed that these realities are forcing many California dairy farms out of business.
Many producers expressed that their inability to cover the cost of production is tied to how whey is valued in the CSO Class 4b formula. Thirteen of the 27 producers testified regarding the impact of the whey valuation on mailbox prices. The witnesses stressed that the CSO historically responded to producers' needs by encouraging manufacturing plant investment that would provide an outlet for milk to be processed at a regulated price considered fair. According to the witnesses, this regulatory balance shifted in 2007 because of a CDFA rulemaking that adopted a sliding scale capping the value of the dry whey factor in the Class 4b formula. Witnesses stated that the 2007 hearing marked the start of the widening discrepancy between mailbox prices for California dairy farmers and those received by other dairy farmers across the nation. Witnesses also said that the reduced mailbox prices continue to undervalue milk throughout the State. The producers were of the opinion that a California FMMO would bring California's valuation of dry whey in line with the rest of the country. With comparable whey values, producers testified their mailbox price would become more representative of the true market value of their milk.
Three testifying producers owned farms in both California and in FMMO regulated areas. These producers testified to the difference in production costs and mailbox prices received by their farms over the last decade or more. Their testimonies specifically highlighted the industry differences between California and Wisconsin. The producers said the production advantages California dairy farmers once enjoyed (inexpensive land, feed, and a different regulatory environment) no longer exist, and as a result, California dairy farms are closing or moving out of state at an increasing rate.
Seven producers testified that the use of futures contracting and hedging as risk management tools are hindered by the differences in the CSO and FMMO price formulas. They explained that current risk management tools are based on FMMO prices, and the fact that CSO prices are different make those tools less effective for California producers.
Eight producers provided evidence about reductions in the California dairy industry since 2007. According to the witnesses, many farms have elected to reduce their herd size or cease dairy farming. A witness provided September 2014 to September 2015 data showing that the Cooperatives have experienced a 6.6 percent reduction in milk production volume. The witness stated that the reduction seen by the Cooperatives is supported by CDFA data showing a 3.5 percent reduction in California milk production. The witness noted that while milk production in California is decreasing, it is increasing in the rest of the country. The witnesses believed the discrepancy between California and national milk production trends is due to the inability of California farms to compete on a level playing field with farms in the FMMO system. Many also expressed concern with the impact on related businesses due to the closing of many California dairy farms.
According to six producer witnesses, many farms have opted to weather the milk price volatility by diversifying their operations and investing in tree-crop production. Several witnesses testified that lenders encourage tree-crop production over dairy farming, due to the reduction of risk and the large margins attainable in tree-crop farming. Producers expressed a belief that the adoption of a California FMMO would lead to a more stable dairy industry supported by lenders.
Overall, California producer witnesses stated they are currently subject to a regulatory system that does not provide producer milk prices representative of the full value of their raw milk in the market. The producers believe adoption of a California FMMO represents an opportunity to remedy this regulatory disadvantage and to compete on a level playing field with the rest of the country.
A Western United Dairymen (WUD) representative testified in support of Proposal 1. WUD is a trade organization representing approximately 50 percent of California dairy farmers, whose farm sizes range from 17 to 10,000 cows. According to the WUD witness, the difference between CSO Class 4b and FMMO Class III prices demonstrates that the CSO is not providing California dairy farms with a milk price reflective of the national marketplace for manufactured dairy products. The witness attributed the pricing differences to how dry whey is accounted for in the two price formulas. The witness said the value difference has become increasingly larger since the CSO adopted a fixed whey factor in 2007, and then subsequently replaced it with a sliding scale whey factor in 2011. The witness said that from August 2014 to July 2015 the CSO Class 4b whey value averaged $1.50 per cwt less than the FMMO Class III whey value. As a result, the witness said, there are different regulated minimum milk prices for the milk products that compete in a national market. This regulated milk price difference, the witness stressed, results in market decisions based on government regulations instead of market fundamentals. Furthermore, the witness said, the resulting lower CSO class prices put California dairy farmers at a competitive disadvantage compared to their FMMO counterparts. The witness concluded that this situation is disorderly and reiterated WUD's support for Proposal 1 as a more appropriate method to determine the value of whey.
A witness representing the California Dairy Campaign (CDC) testified in support of Proposal 1. CDC is a dairy producer organization with members located throughout California. The CDC witness said that over the last 10 years, more than 600 California dairy farms have permanently closed or moved to other states. The witness attributed this to milk prices that have been consistently lower than the cost of producing milk in California, and noted that water and feed availability due to the ongoing drought is the primary reason for increased production costs. The witness highlighted the consolidation and concentration of the California dairy manufacturing sector that causes dairy producers to be price takers in the market, thus making equitable regulated minimum prices vital to the long-term viability of California dairy farms.
The CDC witness testified that the failure of the CSO to align with FMMO prices, particularly between CSO Class 4b and FMMO Class III, has resulted in a more than $1.5 billion loss to
California producers since 2010. The witness also said that risk-management tools, particularly the USDA Margin Production Program (MPP), are not as effective for California dairy farms because the national all-milk price used to determine MPP payments is significantly higher than California producer mailbox prices under CSO regulation.
The witness highlighted CDC's support of specific provisions contained in Proposal 1, including the adoption of FMMO end-product pricing formulas, unique pooling provisions that address the needs of the California market, regulation of out-of-state milk, uniform producer-handler provisions, fluid milk fortification allowances, and the continuation of the California quota program. The witness opined that Proposal 1 addresses California's unique market conditions and is the only path to restoring California producer price equity and the health of the California dairy industry.
CDC's post-hearing brief stated that CDC has supported adoption of a California FMMO for over 20 years. The brief highlighted 2015 CDFA data showing California cost of production at $19.30 per cwt, while the average farm income was $15.94 per cwt. The brief stated the belief that minimum prices are put in place to ensure dairy farmers are able to share in some minimal level of profitability. CDC estimated that in 2015, a 1,000-cow California dairy farm was paid approximately $1.4 million less than equal-sized farms whose milk was pooled on a FMMO. A witness representing Milk Producers Council (MPC) testified in support of Proposal 1. MPC is a nonprofit trade association with 120 California dairy-farmer members, accounting for approximately 10 percent of the California milking herd. The witness agreed with testimony given by the Cooperatives outlining California's disorderly marketing conditions. The witness said that California dairy farmers have repeatedly, though unsuccessfully, sought relief through CDFA to bring CSO classified prices more in line with FMMO classified prices. This is why California dairy farmers are now seeking to join the FMMO system, the witness added.
The MPC witness testified that Proposal 1 would establish orderly marketing conditions in California, resulting in a level playing field for producers and processors. The witness stressed that not only would Proposal 1 provide price alignment between California and FMMOs, but a California FMMO would regulate interstate commerce—something the CSO cannot do. Proposal 1 would also maintain the current California quota program, a vital financial tool for many California dairy farmers, the witness stated. The witness said that while the quota program has no impact on the minimum prices handlers pay, it does aid in providing a local milk supply for some plants that would otherwise have to source milk from farther distances. The witness explained that in some instances, quota is an investment farms located in higher cost areas of the state make to remain financially viable and be able to provide a local milk supply to plants that would otherwise have to seek a supply from farther distances.
A witness representing the National Farmers Union (NFU) testified in support of Proposal 1. NFU is a national grassroots farmer organization with over 200,000 members across the nation, including dairy farmers located in California. The witness testified that NFU supports the inclusion of California in the FMMO system so California dairy farms can receive prices similar to those received by dairy farms located throughout the country. The witness testified that California's low-milk prices and high-feed costs have resulted in strained margins and ultimately the closure of over 400 dairy farms in the last five years.
The NFU witness testified that the pay price differences between dairy farms whose milk is pooled under the CSO and FMMOs are primarily due to the difference in the Class 4b and Class III prices and have resulted in disorderly marketing conditions and a revenue loss to California dairy farms of more than $1.5 billion since 2010. The witness added that pay-price differences have reduced the ability of California dairy farms to utilize risk management tools, and put them at a disadvantage when competing for resources such as feed, land, cattle and labor.
A witness appearing on behalf of the Institute testified that while the Institute offered Proposal 2 as an alternative to the Cooperatives' proposal, their first position is that disorderly marketing conditions do not exist in California to warrant the promulgation of a FMMO. The witness stated that the California dairy industry is currently regulated by the CSO, whose purpose, much like a FMMO, is to provide for orderly marketing conditions. The witness emphasized their opinion that orderly marketing conditions are currently achieved through CSO classified pricing and marketwide pooling.
The Institute witness reviewed CSO history and regulatory evolution, and highlighted regulatory changes demonstrating how the CSO has consistently adapted to changing market conditions. Some, but not all, of these regulatory changes are highlighted below.
The Institute witness explained that California sought state solutions to disorderly marketing conditions through the Young Act of 1935. When FMMOs were authorized in 1937, California opted to remain under the purview of the CSO.
The Institute witness explained that the CSO adopted marketwide pooling through the Gonsalves Milk Pooling Act. Before that time, handlers operated individual handler pools, giving Class 1 handlers strong bargaining power as producers sought Class 1 contracts.
According to the witness, this led to handler practices that eroded producer revenues. The witness testified that the California quota program, also authorized by the Gonsalves Milk Pooling Act, was a way for Southern California dairy farmers, who at the time had a higher percentage of Class 1 contracts, to preserve some of the Class 1 earnings they would otherwise be required to share with all producers through marketwide pooling. At the time, the witness said, producers were assigned a production base, and producer quota was allocated based on historical Class 1 sales. Milk marketed in excess of a producer's base and quota allocations was termed overbase milk. The witness explained that during this time the state's population was growing, and quota was deemed necessary to ensure the market's Class 1 needs would always be met.
The Institute witness said that when the quota program was established, there was a growing number of dairy farmers who also owned fluid milk bottling operations. They typically processed all the milk they produced, and were referred to as producer-handlers. These operations feared that the income benefits they gained from processing their own milk would disappear with the establishment of mandatory pooling. To relieve this concern, the witness said smaller producer-handlers were exempted from pooling in return for not receiving a quota allocation. The witness explained larger producer-handlers had the option of not receiving a quota premium, and deducting those quota pounds from their Class 1 obligations to the pool, an amount referred to as exempt quota.
The Institute witness testified that the CSO was modified numerous times in the late 1970's and early 1980's to ensure that Class 1 needs of the market would always be met. First, call provisions were established requiring manufacturing plants participating in
the pool to maintain a percentage of quota milk available to Class 1 plants. Second, a system of transportation credits and allowances was established to cover part of the cost of moving milk from surplus areas to deficit areas for Class 1 use. According to the witness, CDFA regularly updates these milk movement incentives to reflect current costs.
In the early 1990's, CDFA amended how the quota premium was derived. At the time, quota funds were derived from Class 1, 2, and 3 prices, while overbase prices were derived from Class 4a and 4b prices. Consequently, the witness noted, the difference between quota and overbase prices varied greatly by month. The witness said the historic value of quota, in comparison to the overbase value, was evaluated to derive a fixed quota price of $0.195 per pound of quota solids nonfat.
The Institute witness also reviewed several instances since 2000 where CSO provisions were amended to reflect changing market conditions and changing FMMO regulations. These instances included adopting the “higher of” concept for pricing Class 1 milk, incorporating a dry whey factor in the price formulas, and changing the make allowances contained in the product price formulas—all changes the witness said were necessary to maintain orderly marketing conditions in California.
The Institute witness maintained that current California marketing conditions are orderly, and therefore the establishment of a FMMO is not justified. The witness stated the CSO program focuses on orderly marketing conditions to ensure Class 1 needs are met, while providing reasonable returns to those dairy farms who supply the Class 1 market. The witness stressed the regulated price differences between CSO Class 4a/4b prices and FMMO Class III/IV prices do not amount to disorder, and in fact, those differences are needed to maintain orderly marketing in the state.
The Institute witness testified that in the CSO-regulated environment, where all milk is subject to minimum price regulation, it is important that manufacturing prices are not set above market-clearing levels. The witness elaborated that the largest market, and therefore the highest value, for finished dairy products is in the eastern United States where most of the population resides. Therefore, the witness said, in order for California dairy products to be transported and compete in the eastern markets, they must have a lower value in the West. The witness was of the opinion that FMMO Class III and Class IV prices are not appropriate local, market-clearing prices for California.
The Institute witness also opined that current differences between CSO Class 2 and 3 prices and FMMO Class II prices are not disorderly. The witness explained that Class 2 and 3 prices are set relative to the Class 4a price, and it is important that these prices are not set so high as to encourage dairy ingredient substitution with Class 4a products. The witness argued the Cooperatives provided no evidence that the class price differences between the CSO and FMMO systems are disorderly.
The Institute witness also testified regarding the difference between CSO Class 1 and FMMO Class I prices. While CSO Class 1 prices are somewhat lower than those in neighboring FMMO areas, the witness said, they are not causing disorderly marketing conditions. The witness explained that if lower priced California milk is sold into FMMO areas, there are provisions for FMMO partial regulation to ensure the California Class 1 plants do not have a regulatory price advantage over the FMMO plants.
The Institute witness testified that recent declines in California milk production and increases in dairy farm consolidation are not evidence of disorderly marketing conditions. The witness elaborated that dairy-farm consolidation is a natural market evolution resulting from differences in producers' cost structure, risk tolerance, and access to capital. This is no different than consolidation trends seen in other regions of the country, added the witness. The witness also testified that, while dairy farmer margins have been volatile in recent years, California milk production costs have remained below the United States average. According to USDA Economic Research Service data, the witness said 2010-2014 California milk production costs were well below the national average, by a yearly average of $4.19 per cwt. Regardless of milk production and consolidation trends, the witness stated that California has adequate milk supplies to meet fluid demand, and milk movements to meet processing and manufacturing demands are largely efficient.
The Institute witness explained that its members represent approximately 65 percent of the fluid milk processing in California, and none have expressed difficulty obtaining milk supplies or any type of disorderly marketing condition. The witness expressed concern that any changes in the regulatory environment would likely increase the cost of fluid milk. This cost would be passed onto consumers, thereby creating a barrier for fluid milk sales, said the witness.
The Institute witness opined the CSO has an effective pricing and pooling system that has evolved over time to address changing market conditions, and disorderly marketing conditions do not exist to warrant a California FMMO. However, should the Department recommend a California FMMO, the witness said the provisions outlined in Proposal 2 should be adopted.
The post-hearing brief submitted on behalf of the Institute reiterated its opinion that the Department must find disorderly marketing conditions to justify intervention. Disorderly marketing conditions under the AMAA, the Institute wrote, refers to the fluid milk supply and not the market for manufactured milk. The brief stated that California has, on average, an 11 to 12 percent Class 1 utilization and more than enough reserve milk to meet fluid demand.
The Institute's brief outlined a six-point test that it argued needs to be met in order to justify a California FMMO. The Institute stated the current CSO already meets all six of the requirements and thus Federal intervention is not justified.
The Institute's brief also addressed the 1996 and 2014 Farm Bills as they pertain to the consideration of a California FMMO. The Institute stressed that in neither case did Congress amend the AMAA, and therefore the Department is authorized, but not required, to incorporate the California quota program. According to the Institute, whatever decision the Department makes, it must uphold the AMAA's uniform payments and trade barrier provisions. The Institute stated that Proposal 1's incorporation of the California quota program does not uphold either of these provisions.
The Institute's post-hearing brief argued that the differences in Class III and Class 4b prices, highlighted by the Cooperatives, do not provide justification for a California FMMO. According to the brief, the AMAA requires marketing orders to have regional application that recognizes differences in production and market conditions.
A witness appearing on behalf of Hilmar Cheese Company (Hilmar) testified that the Department has consistently found that evidence of disorderly marketing conditions must exist in order to justify Federal intervention through the promulgation or amendment of a FMMO. Hilmar is a dairy manufacturer with facilities in California and Texas selling dairy products both domestically and internationally. According to the witness, Hilmar's California cheese and
whey manufacturing facility is the largest cheese manufacturing facility in the State, processing 12 percent of the total California milk supply, which is purchased from 200 dairy farms, most of whom are not affiliated with any cooperative.
The Hilmar witness cited previous Department decisions, including the 1981 Southwestern Idaho/Eastern Oregon and the 1990 Carolina promulgations, as examples of what market conditions should be present in order for the Department to act. The witness was of the opinion that the Cooperatives did not provide evidence of actual disorderly marketing conditions in California warranting Federal intervention.
In its post-hearing brief, Hilmar stated that FMMOs are designed to be a marketing tool to address problems associated with the inherent instability in milk marketing. Hilmar reiterated its opposition to a California FMMO, stating that the Department has consistently denied proposals seeking price enhancement, as they believe is the case in this proceeding. Hilmar stated that the record does not support the notion that there is an inadequate supply of milk for fluid use in California, and therefore a California FMMO is not justified.
A witness appearing on behalf of HP Hood, LLC, a milk processor with facilities in California and other states, testified that disorderly marketing conditions are not present in California and therefore a FMMO is not warranted. The witness said the CSO is an efficient program that has been routinely updated to reflect changing market conditions. The witness stated that HP Hood has not had any difficulty securing an adequate supply of raw milk for its California processing plants, nor is HP Hood aware of instances where raw milk had to be transported long distances in order to meet California demand.
The HP Hood witness suggested the Department consider the potential adverse impacts of recommending a California FMMO on other FMMOs, as well as potential increases in milk costs to consumers that may stem from adoption of the higher uniform minimum milk prices included in Proposal 1. The witness specifically opposed the inclusive pooling portion of Proposal 1 and explained how the ability for milk handlers to pool or not pool is how orderly marketing has been maintained in the existing FMMOs. The witness urged the adoption of Proposal 2, should the Department find that a California FMMO is warranted.
A witness appeared on behalf of Saputo Cheese USA, Inc. (Saputo), a proprietary international dairy and grocery products manufacturer and marketer with seven dairy product-manufacturing facilities in California. Saputo opposes the promulgation of a California FMMO, but should the Department find a FMMO warranted, it supports adoption of Proposal 2. The witness testified that disorderly marketing conditions are not present in California to warrant FMMO promulgation. The witness explained how CDFA has been responsive to dairy industry concerns, has held many hearings in the past, and administers the CSO in a manner that facilitates orderly marketing as well as, or better than, the FMMO system.
The Saputo witness summarized many of the similarities and differences between the CSO and FMMO systems. The witness was of the opinion that the CSO mandatory pooling rules increased milk production to surplus levels and encouraged the construction of bulk, storable dairy product manufacturing facilities. In conjunction with these rules, the witness explained, CSO regulated minimum prices are set at levels that are not too high to encourage significant additional increases in supply.
The Saputo witness described the California cheese production landscape. The witness, relying on CDFA data, said that from January through March of 2015, 57 cheese plants processed 45 percent of California's milk. The witness noted that out of the 57 cheese plants, 3 of the plants processed more than 25 percent of the state's entire milk supply. The witness stated that if the increase in the hypothetical California FMMO Class III price included in the USDA Preliminary Economic Analysis of $1.84 per cwt occurred, under a system of mandatory pooling, the aforementioned 3 cheese plants would face combined increased annual raw milk costs of nearly $196.5 million. The witness testified that such raw milk cost increases would be disorderly and threaten the viability of California manufacturing facilities.
A witness appearing on behalf of Farmdale Creamery (Farmdale) testified in support of Proposal 2. Farmdale is a proprietary dairy processing company located in San Bernardino, CA, that manufactures cheese, sour cream, dried whey protein concentrate, and buttermilk. The witness was of the opinion that disorderly marketing conditions are not present in California, since there is no shortage of milk to meet fluid milk needs. The Farmdale witness opined that the CSO maintains an orderly market by responding to changing market conditions when warranted.
Should the Department find a California FMMO justified, the witness supported adoption of Proposal 2 and opposed the mandatory pooling provisions contained in Proposal 1.
The witness also testified about financial losses incurred by Farmdale since 2005, when the CSO whey value was sometimes higher than what they could obtain from the market. The witness added that their on-again, off-again financial losses demonstrate the inability of current regulatory pricing systems to track and value the whey markets.
A witness appeared on behalf of Pacific Gold Creamery (Pacific Gold) in opposition to the adoption of a California FMMO, although the witness supported the provisions contained in Proposal 2 should a FMMO be recommended. Pacific Gold operates a dairy farmer-owned specialty cheese plant in California. The witness testified that across existing FMMOs and unregulated areas, dairy product manufacturers regularly pay below FMMO minimum prices. The witness presented and explained USDA-prepared FMMO data regarding volumes of milk pooled and not pooled across existing FMMOs.
The Pacific Gold witness explained how their business produces ricotta from the whey stream of their cheese manufacturing, and how ricotta sales supplement the income of the cheese operation. The witness was of the opinion that the FMMO Class III price, and the accompanying higher whey value contained in Proposal 1, would be devastating to small and mid-size facilities. The witness also testified how an increase in California minimum-regulated prices would jeopardize exports, saying that U.S. domestic cheese prices are already relatively higher than global prices.
A post-hearing brief was submitted on behalf of Trihope Dairy Farms (Trihope). Trihope is a dairy farm located in, and pooled on, the Southeast FMMO. Trihope stated that disorderly marketing conditions do not exist in California to warrant promulgation of a FMMO. Trihope was of the opinion that California dairy farmers are seeking higher prices through a new regulatory body, which is not a justification for USDA to proceed. According to Trihope, the AMAA was designed to solve marketing problems in unregulated areas, not to address price disparities between Federal and State regulation.
Trihope expressed concern about the potential impact a California FMMO would have on the entire system. Trihope specifically noted the impacts to the southeastern marketing areas contained in the USDA Preliminary Economic Impact Analysis. According to their brief, Trihope estimates losses from 2017 to 2024 of approximately $313,091. Trihope wrote that California's marketing issues of high California milk production and limited plant capacity would not be solved by a FMMO.
A post-hearing brief submitted by Select Milk Producers, Inc. (Select) expressed support for the adoption of a California FMMO. Select is a national dairy-farmer cooperative that markets over 6.5 billion pounds of milk annually, and whose members' milk is regularly pooled on the Appalachian, Mideast, Southeast and Southwest FMMOs. Select also supplies plants located in many other FMMOs, but it does not supply any California plants. Select opined that having California's milk supply priced similarly to the rest of the FMMOs would remedy the competitive disadvantages faced by companies competing in the national marketplace, and would allow for more efficient milk movements. Select expressed support for maintaining a uniform national pricing system and opposed the Institute's alternative whey-pricing proposal. Select expressed support for the Cooperatives' inclusive pooling provisions on the basis that the provisions would apply only to California, due to its unique marketing conditions. Select stated the California quota program should be addressed outside of this rulemaking proceeding. Select was of the opinion that adoption of a California FMMO would lead to more orderly milk marketing throughout the entire FMMO system, and thus uphold the intent of the AMAA.
A post-hearing brief submitted on behalf of the Northwest Dairy Association (NDA) expressed support for Proposal 1. NDA is a dairy farmer-owned cooperative that markets the milk of its 460 members and operates numerous fluid milk and manufacturing plants located in Washington, Oregon, Idaho, and Montana. NDA was of the opinion that adoption of Proposal 1 would create more orderly marketing conditions and strengthen the entire FMMO system. As California represents the largest milk supply in the United States, NDA wrote, it is important for the integrity of the FMMO program to include the additional 20 percent of United States milk represented by California. NDA stated that California producers should not be disadvantaged with lower Class III and IV prices than what their western FMMO producer counterparts receive.
Findings
The record contains a voluminous amount of testimony, evidence, and opinions as to whether or not a California FMMO is justified. The Cooperatives and their supporters argue that a California FMMO was authorized by Congress in the 2014 Farm Bill. They contend that this proceeding is not about whether or not a FMMO should be established, but rather to determine what the California FMMO provisions should be. The Cooperatives are of the opinion that the existence of disorderly marketing conditions is not required by the AMAA to justify order promulgation. They stressed in their post-hearing briefs that a FMMO needs to establish and maintain orderly marketing conditions, and that would be accomplished through the adoption of their proposal. However, should the Department find that disorderly marketing conditions must be present, the Cooperatives provided evidence of what they believe are ongoing disorderly marketing conditions in California.
In general, the record reflects that the California producer community supports joining the FMMO system. Producers are of the opinion that the prices they currently receive under the CSO do not reflect the appropriate value for their milk and its components. Particularly, producers believe that the price they receive for milk used for cheese manufacturing does not value the dry whey component at a level commensurate with what manufacturers receive for whey in the marketplace.
In contrast, the Institute and its members consistently argued throughout the hearing, in their post-hearing briefs, and in comments to the recommended decision that the existence of disorderly marketing conditions is required by the AMAA, and that such conditions do not exist in California. They provided testimony explaining how the CSO is a flexible system that is routinely evaluated through the CDFA hearing process and changes are made as market conditions warrant. The Institute and its members were united in the opinion that the Cooperatives are solely seeking to receive higher prices for their milk, and that such higher prices are not justified for California.
As discussed earlier, the declared policy of the AMAA is to “. . . establish and maintain such orderly marketing conditions for agricultural commodities in interstate commerce . . .” FMMOs accomplish this through the classified pricing of milk products and marketwide pooling of those classified use values. Through these mechanisms, orderly marketing conditions are provided so that handlers are assured uniform minimum raw milk costs and producers receive minimum uniform payments for their raw milk, regardless of its use.
While in recent history FMMOs have been consolidated, amended and expanded, it has been decades since a new order has been promulgated. The records of those promulgation proceedings include descriptions of the market conditions at the time, and how a FMMO would provide order in the market. However, those decisions did not, nor does this final decision find, that disorderly marketing conditions must exist or are a condition of order promulgation. Order promulgation and amendatory proceedings have reiterated that a FMMO must adhere to the declared policy of the AMAA, where there is no express or implicit declaration of a requirement for a finding of disorderly marketing conditions.
This final decision continues to find, based on the evidentiary record, a FMMO for California would provide more orderly marketing conditions in the marketing area, and therefore promulgation of a California FMMO is warranted. The record is replete with discussion from most parties on whether disorderly marketing conditions exist, or are even needed, to warrant promulgation of a California FMMO. The declared policy of the AMAA makes no mention of “disorder,” and this final decision continues to find that disorderly marketing conditions are not a requirement for an order to be promulgated. The standard for FMMO promulgation is to “. . . establish and maintain such orderly marketing conditions . . . ,” and this decision continues to find that the proposed California FMMO meets that standard by providing uniform minimum raw milk costs to handlers and minimum uniform payments to producers for their raw milk, regardless of its use.
Comments filed on behalf of the Cooperatives supported the Department's finding that a California FMMO would effectuate the declared policy of the AMAA and was therefore warranted. The Cooperatives supported the determination that disorderly market conditions were not a requirement for FMMO promulgation. Furthermore, the Cooperatives wrote, the recommended decision properly found that the intent of the AMAA was not to preclude a group of state-
regulated producers from petitioning for a FMMO. The Cooperatives expressed that the recommended California FMMO, with some modifications they offered, would provide for more orderly marketing conditions by assuring producers that the prices they receive more appropriately represent the full value of all the classified use values of raw milk in the market. Additionally, wrote the Cooperatives, the proposed California FMMO would provide more orderly marketing conditions by ensuring that prices paid by handlers would be reflective of the national market for manufactured dairy products in which California products compete.
Comments filed on behalf of Select supported the finding that disorderly marketing conditions are not a requirement for order promulgation and that a California FMMO would provide more orderly marketing conditions.
Additionally WUD, CDC, MPC, and National All-Jersey (NAJ), whose comments focused primarily on the specific provisions recommended, offered general support for establishing a California FMMO.
The Institute took exception to the Department's finding that disorderly marketing conditions are not a requirement for order promulgation. They argued that a FMMO can only be promulgated if the regulations “establish” order, and they contend that the Department's finding that an order can be established if it creates “more” order unjustly broadens the authority of the AMAA. The Institute wrote that to establish orderly marketing conditions, market disorder must first exist. Therefore, because the Department did not find disorder in the California marketplace, the promulgation of a California FMMO is not justified.
The Institute further argued that the California FMMO promulgation standard articulated in the recommended decision was in contrast to prior agency decisions that cited disorder as a reason for promulgation or amendment. Lastly, the Institute argued that FMMO Supplemental Rules of Practice refer to disorder as a condition for submitting an amendatory proposal, so such standard should not be ignored in the California FMMO proceeding. The Institute concluded that the Department does not have the legal authority to change its interpretation of the declared policy of the AMAA, and therefore California lacks the market disorder needed to justify promulgation of a FMMO.
Separate comments filed by Leprino Foods (Leprino) and Dean Foods supported the arguments by the Institute regarding order promulgation.
Comments filed by the International Dairy Foods Association (IDFA) did not offer an opinion on whether a California FMMO should be promulgated, but did take exception with the Department's finding that disorderly marketing is not a requirement for FMMO promulgation. IDFA opined that if orderly marketing conditions already exist, the Department has no basis to promulgate an order. Like the Institute, IDFA argued that there should be no differentiation in the threshold for Federal government intervention between amendatory and promulgation proceedings. IDFA contended that the FMMO Supplemental Rules of Practice were adopted through notice and comment rulemaking by which the Department adopted the disorderly marketing conditions requirement, and the different threshold for promulgation described in the recommended decision is not appropriate. Additionally, IDFA reviewed multiple amendatory FMMO decisions that cited disorderly marketing conditions as a justification for regulatory change. IDFA concluded that imposing Federal regulations in a market that exhibits no signs of market disorder carries the risk of disrupting the currently existing orderly marketing conditions. Comments filed by Hilmar also took exception with the Department's finding that disorderly marketing conditions are not a requirement for FMMO promulgation. Hilmar wrote that the objective of the AMAA is to establish and maintain orderly marketing conditions and that the Department ignored past FMMO proceedings that cited disorderly marketing conditions as a justification for regulatory change. Hilmar contended that the Department did not explain why the California FMMO proceeding was held to a different standard.
Another commenter also argued that disorderly marketing conditions should be a requirement for FMMO promulgation. The commenter elaborated that in order for a FMMO to align with the public interest, the public should have access to milk at a reasonable cost, and further study is needed to determine the impact to all stakeholders. The commenter wrote that it was not in the public interest to establish a FMMO in a market where disorderly market conditions have not been found.
Additional opposition to the Department's finding that disorderly marketing conditions are not a requirement for FMMO promulgation was also expressed in comments filed by Pacific Gold and HP Hood.
Comments filed by CPHA were specific to exempt quota; however CPHA stressed that it would be unable to offer support or opposition to a California FMMO until CDFA has released its plan for operating the California quota program.
The Department recognizes that many commenters took exception to the finding that disorderly marketing is not a requirement for FMMO promulgation. Similar to arguments made at the hearing and in post-hearing briefs, the commenters provided numerous rulemaking examples where market disorder was found. However, none demonstrated that market disorder was a requirement for FMMO promulgation. This final decision continues to find that the declared policy of the AMAA to “establish and maintain orderly marketing conditions” does not require market disorder to be the justification for promulgation of an order.
Numerous commenters noted that the Supplemental Rules of Practice in 7 CFR 900.20-900.33 stipulate that petitioners provide examples of market disorder to justify requesting an amendatory proceeding. Commenters took exception to the fact that the Department was not now requiring evidence of market disorder to justify this promulgation proceeding. The 2008 Farm Bill required the Department to establish these Supplemental Rules specifically to address only amendatory proceedings. The rules outline submission requirements for FMMO amendatory proposals and specify timeframes the Department must adhere to during the amendatory rulemaking process. Congress could have extended the reach of the Supplemental Rules to include both amendatory and promulgation FMMO proceedings, but did not.
The record indicates that there are both handler and producer price differences between the CSO and the FMMO systems. The record contains data regarding the difference in classified use values paid by handlers regulated by the CSO and FMMOs. As will be discussed later, this decision proposes the adoption of the classified price formulas that currently exist in the FMMO system. A California FMMO, under the provisions contained in this final decision, would ensure that the prices handlers pay to purchase pooled California milk would be similar to prices paid for milk pooled on other FMMOs. As commodity dairy products compete in the national market, current FMMOs uniformly price the raw milk used in those products. This pricing system ensures that competing handlers have uniform minimum raw milk costs, and consequently none has a regulatory price advantage. The record demonstrates that California
manufactured dairy products compete in the national market. However, the CSO-regulated prices for raw milk paid by California manufacturers are different than those paid by manufacturers under FMMOs. This final decision continues to find the proposed California FMMO would provide classified milk prices that would be more uniform with those paid by competing handlers, and more reflective of the national market for manufactured milk products and the local market for fluid milk products, as is the policy for the 10 current FMMOs. This final decision finds these prices would provide more orderly market conditions for California.
This final decision continues to find that the classified prices proposed for a California FMMO will provide producers with a minimum producer blend price more reflective of the national market for manufactured products and the utilization of the local California market. Taken together, handler and producer prices reflective of the national market in which manufactured dairy products are sold will ensure orderly marketing conditions in California.
While the current CSO provides classified pricing and marketwide pooling similar to a FMMO, the hearing record reflects that California dairy producers have been unsuccessful in obtaining a minimum regulated price they believe is reflective of the full value of their raw milk. Some parties argued on the record, and in their comments on the recommended decision, that because the CSO already provides for classified pricing and marketwide pooling, disorderly marketing conditions do not exist in California, and therefore there is no justification for promulgating a California FMMO. As discussed earlier, disorderly marketing conditions are not a precedent or requirement for order promulgation. Furthermore, this final decision continues to find that it is not the intent of the AMAA to preclude a group of producers from petitioning for a FMMO simply because they are otherwise regulated by a state order that provides for classified pricing and marketwide pooling. Such a restriction would place an undue barrier on those producers as they would not have the opportunity to petition for FMMO regulation simply because they are currently regulated by a state.
Additionally, unlike the CSO, a California FMMO would have the authority to regulate interstate commerce. The record reveals that there is milk, both raw and packaged, being sold into and out of California over which the CSO has no regulatory jurisdiction. The revenues from those unregulated Class I sales are not shared with all the producers supplying the California market. A FMMO would ensure that those classified use values would be shared with all producers who supply the California market. The ability of a California FMMO to capture interstate sales, through either full or partial regulation, would protect the integrity of the entire regulatory framework. Furthermore, out-of-state producers supplying that milk would be paid the order's blend price, which is reflective of the market's total classified use value.
In their post-hearing brief, the Institute made reference to a “six-point test” that must be met in order for a FMMO to be promulgated. While the Institute correctly lists various factors that have been used in some order promulgations, the articulated AMAA standard that must be met for order promulgation is that the order will “. . . establish and maintain such orderly marketing conditions. . . .”
Other parties in post-hearing briefs contended that the 2014 Farm Bill mandated that a California FMMO be promulgated. The Farm Bill merely authorized a California FMMO that recognizes quota value as determined appropriate through a rulemaking proceeding. It is important to note that California producers could have petitioned for a FMMO at any time. However, Congress did not provide for the recognition of quota before the 1996 Farm Bill, and later, the 2014 Farm Bill. This decision finds that a California FMMO is justified, as it would meet the objective of the AMAA to “. . . maintain such orderly marketing conditions. . . .” The provisions proposed herein are tailored to the California market, adhere to the uniform handler and producer pricing provisions of the AMAA, and recognize quota as authorized by the 2014 Farm Bill and as deemed appropriate by an objective analysis of this hearing record.
Some hearing participants indicated that a goal of FMMOs, and therefore of a California FMMO, is to enhance producer prices. Other participants from outside of California, in testimony and post-hearing briefs, expressed the opinion that a California FMMO could not be promulgated if it would have adverse impacts on other FMMOs, and that the Department must act to mitigate those adverse impacts before such promulgation.
FMMOs are a marketing tool that, among other things, establish a marketing framework and enforce market-based minimum prices to handlers and uniform payments to producers reflective of all classified use values in the market. The record reflects that at the time of the hearing, California represented over 20 percent of the United States milk supply. If a California FMMO is established, over 80 percent of the United States milk supply would fall under the same regulatory framework. This decision finds that a California FMMO would provide more orderly marketing conditions in California. Through inclusion of California in the FMMO regulatory framework, the prices received by all producers participating in the FMMO system would be more reflective of the national marketplace for dairy products. This would send uniform market signals to producers that would allow them to make their individual business decisions.
Comments filed by the Maine Dairy Industry Association (MDIA) supported the establishment of the proposed California FMMO, but reiterated their opinion that the Department must mitigate potential adverse producer impacts in other FMMOs. Specifically, MDIA commented that the Department should address four specific adverse impacts: Impact on producer welfare and orderly marketing; impact on Class I utilization; impact from projected regional changes in milk production; and impact from projected depooling in various FMMOs.
It is to be expected that incorporating an additional 20 percent of the U.S. milk supply into a FMMO—milk that is currently state regulated—would have an impact in other regions of the country. The REIA released in conjunction with this final decision estimates the potential impact of regulating California milk handlers under a FMMO and its results show impacts in all regions throughout the United States. This final decision continues to find that promulgation of a California FMMO would enable 80 percent of the United States milk supply to fall under the same regulatory framework. Consolidation under this Federal milk marketing framework would ensure that prices received by all producers participating in the FMMO system would be more reflective of the national marketplace for dairy products. This final decision finds that changes to other FMMOs to counter projected impacts are not warranted and would only serve to send incorrect market signals to those producers who need to make individual business decisions based on accurate information.
4. California Quota Program Recognition
This section reviews and highlights the hearing evidence, post hearing briefs, and comments or exceptions submitted in response to the recommended decision regarding the appropriate recognition of the California quota program, including exempt quota, in a California FMMO. The California quota program is a state-administered program that entitles the quota holder to an additional $0.195 per pound of SNF over the CSO overbase price. Currently, the money to pay the quota premium is deducted from the CSO marketwide pool before the CSO overbase price is calculated. This decision continues to find that the quota program should remain entirely within the jurisdiction of CDFA, and that its proper recognition under the proposed California FMMO would be through an authorized deduction from payments due to producers.
Summary of Testimony
A Cooperative witness testified regarding the development of the California quota program and its continued significance to California dairy farmers. The witness explained the California quota system is a tiered pricing system, developed in the late 1960s, that pays producers on three price calculations referred to as quota, base, and overbase. In its current form, ownership of quota entitles producer-owners to a higher price for milk covered by quota, and a lower base/overbase price on their nonquota milk production. Approximately 58 percent of all California farmers own quota at varying levels, which in aggregate represents approximately 2.2 million pounds of SNF on a daily basis. The witness testified that, currently, quota premium payments are approximately $12.5 to $13 million per month, and this money is taken out of the CSO marketwide pool before the base/overbase price is calculated. The witness stressed that the quota program is an important revenue source for California dairy farms and that the value of quota should not be diminished with the adoption of a California FMMO.
The Cooperative witness reviewed the authorization of the California milk pooling and quota programs by the 1967 Gonsalves Milk Pooling Act (Gonsalves Act). Originally, the witness explained, producers were assigned quota holdings as they related to the producers' historical milk production and individual deliveries to the Class 1 market. The witness said that in the beginning, quota premiums were not a set value, but instead were determined by allocating quota holdings to the highest value milk (Class 1). Then base and overbase production were allocated to the remaining classes in descending order of classified value. In essence, the witness explained, quota holders were paid the Class 1 price for their quota holdings, and then a separate lower value for their non-quota holdings. According to the witness, when CDFA sought to enhance producer prices, additional revenue was typically assigned to Class 1 and subsequently quota holders, and overbase prices were not impacted. The witness said that as milk production grew without corresponding increases in quota holdings, producers were faced with lower milk prices on their non-quota production. Therefore, the Gonsalves Act was amended, effective January 1, 1994, setting the quota premium at $0.195 per pound of SNF (equivalent to $1.70 per cwt). The result, said the witness, was that overbase production did not subsidize quota milk, and quota holders could receive a reasonable return on their quota holdings.
The witness also discussed adjustments made to the total CSO marketwide pool value in conjunction with the quota program. According to the witness, when pooling was originally established, the provisions contained producer location differentials designed to encourage quota milk to be delivered to Class 1 plants. However, as overbase milk production began to grow, location differentials applicable only to quota milk did not ensure that the market's Class 1 needs would always be met, the witness stated. Consequently, in 1983 transportation allowances (on milk movements from ranches to plants) were established in lieu of location differentials. At the same time, the witness said, regional quota adjusters (RQAs), while providing no direct incentive to move Class 1 milk, were established to address producer equity issues that arose with the elimination of location differentials. The witness described RQAs as reductions (ranging from $0.00 to $0.27 per cwt) to the producer's quota premium, depending on their farm location and plant of receipt. In essence, the witness said, quota premiums have a location value: The further the dairy farm is located from the receiving plant, the lower the quota premium.
The Cooperative witness stated that quota can only be held on Grade A milk produced in California, and a quota holder must deliver milk to a pool handler at least every 60 days. The witness also noted the fact that quota is bought and sold on a monthly basis, which underscores its continued importance to California dairy farms. The witness estimated that at a price of $525 per pound of SNF, the California quota program has a value of $1.2 billion to California dairy farms.
The witness was of the opinion, which was reiterated in the Cooperatives' post-hearing briefs, that under current California and Federal statutory authorities, a California FMMO can be established and the California quota program maintained. The witness said that the main objective of Proposal 1 is to preserve the quota program to the maximum extent possible, and that proponents believe this is consistent with the Congressional intent of the Agricultural Act of 2014 (2014 Farm Bill), which authorized a California FMMO that recognizes the quota program.
The witness concluded by outlining what the proponents believe is the necessary framework of a proposed working relationship between CDFA and the Department, and said that the provisions contained in Proposal 1 are needed to effectively maintain the quota program. The witness explained that Proposal 1 allows the quota premium to be removed from the marketwide pool before a FMMO blend price is computed. Producers would then receive the blend price for their nonquota holdings and the FMMO blend price plus the quota premium (adjusted for RQAs) for their quota holdings. According to the witness, USDA would enforce all producer payments, including quota payments, and jurisdiction over quota administration, calculations, record keeping, and regulatory changes would remain with CDFA.
In their post-hearing brief, the Cooperatives asserted that their proposal is the only one that properly recognizes the quota program as intended by Congress. The Cooperatives rebutted the Institute's claim that adoption of Proposal 1 would create a trade barrier to milk produced outside the state because that milk would be ineligible for the quota program. The Cooperatives offered a modification that would create an out-of-state adjustor to ensure out-of-state producers do not receive a lower price than their in-state counterparts who can earn California quota premium payments.
The Cooperatives further argued that Proposal 1 upholds the AMAA's uniform pricing provisions, as all quota milk would be paid uniformly, all non-quota milk would be paid uniformly, and all milk located outside of the proposed marketing area would be
unaffected by the quota program. The Cooperatives' brief stated that the ability of a FMMO to regulate interstate commerce would provide a more level playing field among all handlers with sales in California.
A consultant witness, appearing on behalf of the proponents of Proposal 1, testified regarding the economic importance of the California quota program, and provided a brief history of its evolution. At current market prices, the witness estimated the value of the California quota program at $1.164 billion—a significant economic asset for dairy farms and the communities they support, especially in counties where a high percentage of milk production is covered by quota. The witness noted that not only is quota a solid financial investment for dairy farms, but it is a tangible asset used by dairy farms to obtain additional financing from banks and lenders.
The witness utilized an economic impact analysis model to estimate the total economic impact of the California quota program. The witness estimated that total annual economic value of quota is associated with a $27.9 million increase in California GDP, creation of 1,269 jobs, an $11 million increase in local tax revenue, and a $16.7 million increase in Federal tax revenue. The witness clarified that the analysis did not consider the economic impact of the quota program on non-quota holders, but stressed that any change to the quota program would create regulatory uncertainty and diminish the economic value of quota. The witness opined that Proposal 2 does not recognize the economic value of quota and would result in the devaluation of the asset, which would financially harm California quota holders. The witness concluded that Proposal 1 was the only proposal that would preserve and maintain the California quota program.
Twelve dairy farmers testified that a California FMMO must provide for the continuation of the California quota program. The farmers stressed the importance of the program as an asset for dairy farms throughout the state. The witnesses explained that farms utilize quota not only for the monthly quota premium they receive, but also as an asset on farm balance sheets for lending purposes. The witnesses expressed concern that any devaluation of their quota asset would be financially harmful to their businesses. Of the 27 dairy farmers who testified, eight said they owned quota, and both quota and non-quota holders expressed support for the quota program.
A witness testifying on behalf of WUD also elaborated on the importance of maintaining the quota program and the need for strict pooling provisions to ensure the quota premium could continue to be paid. The witness said quota is considered an asset and if its value is diminished, it could create cash flow and lending difficulties for dairy farms. The witness was of the opinion that if a California order was adopted with pooling provisions similar to those found in other FMMOs, the quota value would likely be diminished, which would violate the California statute. A witness appearing on behalf of the Institute testified regarding Proposal 2's recognition of the California quota program. Like the Cooperative witness, the Institute witness provided a historical overview of the quota program's authorization and evolution. The witness stated that the quota program served as a way to compensate producers who shipped most of their milk to Class 1 plants through the contract system in place prior to marketwide pooling. At the time, the witness said, the industry believed prices to producers would become more uniform and quota allocation would be equalized among producers as Class 1 utilization grew.
The Institute witness outlined the problems the Institute believes arise from Proposal 1's method for quota recognition. The witness was of the opinion, which also was stressed in the Institute's post-hearing brief, that the Cooperatives have rendered an overly broad interpretation of the 2014 Farm Bill, and in doing so, proposed provisions that violate the AMAA. The witness said that before quota can be recognized, a California FMMO must first determine and pay a traditional FMMO blend price to out-of-state dairy farms who cannot own quota. The witness said that subtracting the quota value from the marketwide pool first, before computing a non-quota blend price, as suggested in Proposal 1, would result in non-uniform payments to producers and violate the AMAA.
The Institute witness explained the mechanics of quota recognition in Proposal 2, which were modeled after the former Oregon-Washington FMMO. The witness said that out-of-state producers would receive a traditional FMMO blend price for their milk pooled on the California FMMO. In-state producers would have the option to receive the CDFA calculated quota and non-quota prices, or they could irrevocably opt out of the quota program and receive the traditional FMMO blend price. The witness explained that producers opting to be paid on a quota/non quota basis would have their aggregate FMMO blend price monies transferred to CDFA for reblending and distribution to that producer subset. The witness opined that by giving in-state producers the payment choice, the uniform payment provision of the AMAA would be satisfied. The Institute witness said that Proposal 2 sought to recognize quota value as authorized by the 2014 Farm Bill while simultaneously upholding the purpose and provisions of the AMAA. These opinions were reiterated in the Institute's post-hearing brief.
The Institute witness highlighted California producer support for the quota program, and was of the opinion that USDA's Preliminary Economic Impact Analysis prediction that the program would quickly erode under Proposal 2 was overstated.
Proposal 3, submitted by the CPHA, seeks to have exempt quota—as part of the California quota program—be recognized and preserved, should a California FMMO be recommended. CPHA also proposed that the terms of consanguinity, as currently applied to producer-handlers under CDFA regulations, be removed to allow indefinite perpetuation of exempt quota. CPHA withdrew the second part of their proposal at the hearing.
A consultant witness for CPHA provided testimony regarding the history of the Gonsalves Act and detailed how exempt quota was included as part of the State's milk marketing program from its inception. According to the witness, the CSO marketwide pooling system and quota program were developed as an alternative to a FMMO. The witness said the quota program was originally designed so that farmers who historically served fluid milk processors would continue to receive a higher price for the portion of their milk that had previously been under Class 1 contract; under the CSO marketwide pooling system, all of the Class 1 revenue would be shared with the market's producers. Over time, the witness said, it was thought that quota holdings would be equalized among dairy farmers. Those who had not previously held contracts with fluid milk processors were expected to be assigned rights to new quota created as the fluid milk market expanded.
The consultant witness explained that dairy farmers who processed their own milk into fluid milk products were issued exempt quota, rather than regular quota, under the new CSO system. The exempt quota was allotted to these vertically integrated entities, known as producer-handlers, in recognition of how their milk was marketed. The witness said that there were originally
49 exempt quota holders, but only 4 remain. The witness said that the amount of exempt quota was legislatively capped in 1995.
The consultant witness clarified that exempt quota was issued as certificates of ownership to the producer entity. The witness explained that the handler side of the business is still required to report all of its milk receipts to the CSO, and in turn, the handler entity receives a credit against its financial obligation to the pool for the volume of exempt quota owned by the producer entity. The handler entity then accounts to the CSO marketwide pool for Class 1 sales in excess of the exempt quota volume, said the witness. The producer entity side receives the Class 1 price from the handler side for the exempt quota volume of milk they produce, and then they receive a combination of the quota and overbase prices from the marketwide pool, depending on their regular quota holdings.
A witness from Producers, testifying on behalf of CPHA, said that all four members of CPHA own exempt quota, are referred to as “Option 70” producer-handlers, are fully regulated, and report to the CSO marketwide pool for all their Class 1 sales. The witness contrasted this to “Option 66” producer-handlers, who are fully exempt from the CSO and do not participate in the quota program. Of the original 49 “Option 70” producer-handlers, the witness said only the four CPHA members remain, and all have maintained essentially the same business structures since the quota program was established.
According to the Producers witness, CPHA members hold both exempt quota and regular quota, but most of the milk produced by CPHA members is accounted for as overbase production. Using 2015 CDFA data, the Producers witness calculated that “Option 70” producer-handler milk represents approximately 0.6 percent of all California production. The witness estimated that exempt quota represents 17.4 percent of “Option 70” producer-handler production and 4.6 percent of all California Class 1 sales. The witness said that all of the milk produced and sold by CPHA members, including volumes covered by exempt quota, is reported to the CSO marketwide pool.
The Producers witness said that the Gonsalves Act primarily addressed industry problems that did not impact producer-handlers because all the milk from their dairy operations flowed to their own Class 1 plants and the markets they had developed. The witness was of the opinion that the exempt quota feature was included as part of the quota program to recognize the vertically integrated producer-handler's unique business structure.
Additional CPHA witnesses representing Foster and Rockview joined the Producers witness in describing their acquisition and maintenance of exempt quota over the years. Each mentioned they had to make strategic business decisions or sacrifices in order to preserve their exempt quota status.
The CPHA witnesses attempted to quantify the value of exempt quota, explaining that exempt quota is carried as an asset on their farms' books and can be sold as or converted to regular quota. The CPHA witnesses measured the value of exempt quota as the difference between the CSO Class 1 and the quota prices. Using historical CDFA data, the Producers and Rockview witnesses calculated the average exempt quota value over the previous 20 years to be approximately $1.14 and $1.20 per cwt, respectively.
Using CDFA data for the preceding five years, a second Foster witness calculated the value of exempt quota in terms of regular quota for both northern and southern California. The witness estimated that every pound of exempt quota in northern California and southern California is worth 1.96 pounds and 2.12 pounds of regular quota, respectively. Valuing regular quota at $525 per pound of SNF, but not adjusting for RQAs, the witness estimated the value of exempt quota as $1,029 per pound of SNF in northern California, and $1,113 per pound of SNF in southern California. Citing CDFA production data, the witness calculated the value of the collective 40,244.51 pounds of SNF exempt quota in northern California as $41,411,600 and the 17,669.59 pounds of SNF exempt quota in southern California as $19,666,253.
The Rockview witness added that converting exempt quota to regular quota would make those volumes eligible for CSO transportation credits that are not currently available for exempt quota milk.
A Cooperative witness also testified with regard to the evolution of exempt quota for “Option 70” producer-handlers. The witness estimated that the four CPHA members market approximately five percent of all California Class 1 sales. The witness explained that exempt quota entitles the producer-handler to waive any pool obligation on those holdings. The witness described the value of exempt quota as the difference between the Class 1 and quota prices. The witness estimated that from 1970 through 2014, the additional value of exempt quota was approximately $0.58 per cwt in southern California. The witness estimated the monthly impact to the marketwide pool of recognizing exempt quota in this manner at less than one-half of one cent per cwt. The witness testified that the Cooperatives did not oppose adoption of Proposal 3.
A witness representing the Institute was of the opinion that exempt quota was offered to large producer-handlers for political expediency. According to the witness, as the Gonsalves Act and the particulars of marketwide pooling were being developed in the 1960s, larger producer-handlers worried they would lose advantages enjoyed under the then-prevailing system. The witness explained that to head off producer-handler opposition to marketwide pooling, concessions were made to smaller producer-handlers who were exempted entirely from pooling and received no quota allocation. Larger entities were given the option to forgo the quota premium and instead exempt those pounds from their Class 1 pool obligations.
The Institute witness testified that exempt quota holds no real market value, as it cannot be bought and sold. The witness acknowledged that determining an equivalency between exempt quota and regular quota might be one method to assign a value to exempt quota. The Institute witness opined that exempt quota holders have already recovered the cost of their exempt quota, which they were last able to purchase 20 years previous.
A witness from Dean Foods testified that the competitive advantage producer-handlers gain from their exempt quota can be spread out over their total volume of Class 1 sales. Dean Foods is a national fluid milk manufacturer that operates three Class I plants and one Class II plant in California. The witness argued that CPHA witnesses diluted the impact of exempt quota on Class 1 sales by comparing exempt quota volumes to total California milk production. The witness contended that it was more accurate to compare total “Option 70” producer-handler Class 1 production to total California Class 1 sales. The witness calculated that the total volume of the four producer-handlers, including their exempt quota volumes, accounted for 24 percent of total California Class 1 volume, including milk from out of state. The witness testified that 31 handlers process the other 76 percent of California Class 1 milk.
Additional fluid milk processor witnesses representing Clover Stornetta Farms and Farmdale Creamery, along with another Dean Foods witness, all
testified that their companies face significant disadvantages compared to producer-handlers with exempt quota because, unlike exempt quota holders, their companies must account to the CSO pool at classified prices every month for all the milk they utilize. Some witnesses claimed they have lost sales to “Option 70” producer-handlers due to these regulatory disadvantages.
The Producers witness countered opposition testimony that exempt quota provides a competitive advantage enabling producer-handlers to bid customers away from fully-regulated handlers. The witness said that Producers pays the Class 1 price to the farm side of the business for the exempt quota milk they use, and pays the quota or overbase price for the rest of the farm's milk it processes.
In its post-hearing brief, the Institute argued against recognition of exempt quota under a California FMMO. According to the Institute's brief, the recognition of exempt quota in a California FMMO would violate the AMAA's uniform pricing provisions. The Institute explained that by recognizing exempt quota, exempt-quota-holding producer entities would not share the value of all their Class 1 sales with their fellow dairy farmers, and handler entities would not be required to pay uniform minimum prices for their raw milk supplies.
The Institute brief further argued that the 2014 Farm Bill language authorizing a California FMMO that recognizes quota value does not mean California's entire quota system should be preserved and maintained, nor that certain Class 1 handlers should be permitted to have a regulatory competitive advantage over other Class 1 handlers. The Institute brief also argued that permitting a differentiated status for only those few entities who currently own exempt quota would be inequitable to new market entrants.
In response, CPHA's reply brief asserted that CPHA handler entities currently pay Class 1 prices for all their raw milk, exempt quota provides no financial advantage over other fully-regulated handlers, and there are no market disruptions attributable to exempt quota. The reply brief stressed that CPHA producer entities, not their handler counterparts, hold exempt quota. The reply brief also asserted that the record contains no evidence that exempt quota holders enjoy raw milk price advantages. CPHA contended that all handlers pay the same classified price for raw milk in California, despite misperceptions to the contrary. CPHA pointed out that competitors have won and lost accounts for milk sales for a variety of reasons not necessarily attributed to exempt quota ownership.
According to CPHA's reply brief, Congress's use of the term “quota system,” and its omission of specific reference to exempt quota in the 2014 Farm Bill language, is consistent with its directive that the Secretary should hold a hearing to consider, and is authorized to recognize, all aspects of California's quota program under a California FMMO.
CPHA's reply brief clarified the intent of Proposal 3 to allow for the preservation of exempt quota status for those few producer-handlers who own it. CPHA argued its members are not seeking exemption from all pricing and pooling obligations under a California FMMO, but merely recognition of their ownership of exempt quota and the related volumes of production it represents.
A post hearing brief submitted by Trihope expressed concerns regarding the recognition of the California quota program within the FMMO framework. Trihope was of the opinion that any recognition of quota would violate the AMAA's uniform payments provision. Trihope also wrote that authorizing quota payments would give a revenue advantage to California dairy farms and create a trade barrier for out-of-state farms seeking to be pooled on the California FMMO.
Findings
The record contains detailed information about the establishment and evolution of the quota program administered by the State of California. The record reflects that the Gonsalves Act legislatively authorized both the California quota program and marketwide pooling within the structure of the CSO. Until that point, dairy farms were paid through individual handler pools that reflected a plant's use values for their milk—there was no marketwide pooling function that allowed all producers to share in the benefits from Class 1 sales and the burden of balancing the market to ensure an adequate supply of milk to meet Class 1 demand. Many witnesses alluded to the political compromise reached to compensate dairy farmers who held Class 1 supply contracts from the financial loss they would incur by pooling and sharing their Class 1 revenue with all dairy farmers in California. While the original quota allotment was based on existing Class 1 contracts, it was thought at the time that quota would equalize among producers as Class 1 utilization increased and future quota allotments were issued; however, this did not occur.
Many witnesses spoke of the importance they believe the California quota program has for the state's dairy industry. Producers spoke of the investments they made in purchasing quota allotments, and of the continued financial benefit quota provides through the monthly quota premium they receive. Even producers who own little or no quota spoke of the importance of continuing the program for their fellow dairy farmers.
The 2014 Farm Bill authorized the promulgation of a California FMMO, and specified that the order “shall have the right to reblend and distribute order receipts to recognize quota value.” The hearing record is replete with testimony on the proper interpretation of those final three words, “recognize quota value.” The Cooperatives conveyed, and stressed in their post-hearing brief submissions, that the 2014 Farm Bill mandates the quota program must be recognized, and only the method of recognition is to be decided through this rulemaking proceeding. The Cooperatives were of the opinion that the proper recognition of quota value is through the deduction of quota monies from the marketwide pool before a California blend price is calculated, as is current practice for the CSO.
17
The Cooperatives stressed repeatedly that should any conflict be found between the provisions of the 2014 Farm Bill and the AMAA, the 2014 Farm Bill language should be given more credence, as it is the most recent Congressional action.
17
This position was slightly modified in their post-hearing brief to also adjust prices for out-of-state producers so that their price was not impacted by quota payments.
Institute witnesses and post-hearing briefs stressed that quota recognition must be harmonized with the AMAA, in particular its uniform payments and trade-barrier provisions. Should any conflict arise, the Institute contends that because the Farm Bill did not amend the AMAA, the AMAA as the authorizing legislation should take precedent. The Institute's approach to recognizing quota value is to first allow producers the one-time decision to opt out of the quota program. Those producers who opt out of the quota program would be paid a FMMO blend price calculated without a deduction for quota. Those producers who remain in the quota program would have their FMMO blend price monies sent, in aggregate, to CDFA for reblending and redistribution according to their quota and nonquota milk marketings. The Institute is of the opinion that because dairy producers opting out of the quota program would not have their payments affected by
quota, recognizing quota under a California FMMO would not violate the uniform pricing and trade-barrier provisions of the AMAA.
As discussed earlier, when promulgating or amending any FMMO, the Department must always evaluate whether the proposed action is authorized by the AMAA. The AMAA not only clearly defines its policy goal, which this decision has already discussed, but it also defines specific provisions that must be contained in the FMMO framework. The two most relevant to the discussion on quota recognition are the provision for uniform payments handlers make to producers, and the provision to prevent trade barriers. The uniform payment provisions require all handlers regulated by a FMMO to pay the same classified use value for their raw milk, and all producers whose milk is pooled on a FMMO to receive the same price for their milk regardless of how it is utilized. In this respect, similarly situated handlers are assured that they are paying the same raw milk costs as their competitors, and producers are indifferent as to where or how their milk is utilized, as they receive the same price regardless.
The trade barrier provision specifies that no FMMO may in any manner limit the marketing of milk or milk products within the marketing area. In this regard, FMMOs cannot adopt provisions that would create any economic barrier limiting the marketing of milk within marketing area boundaries.
To determine how to properly recognize quota value, Congress provided additional guidance to the 2014 Farm Bill language through the 2014 Conference Report.
18
In the report, Congress specified that the Department has discretion to determine how best to recognize quota value in whatever manner is appropriate on the basis of a rulemaking proceeding. Consistent with the Conference Report, this decision evaluated record evidence pertaining to how the current California quota program operates, how it can best be recognized within FMMO provisions tailored to the California market, and how all the FMMO provisions work in conjunction with each other to adhere to all AMAA provisions.
18
Official Notice is taken of: the Agricultural Agreement of 2014 Conference Report.
https://www.congress.gov/congressional-report/113th-congress/house-report/333/1
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The California quota program, like the CSO, is administered by CDFA. The record reflects that 58 percent of California dairy farmers own quota. In its current form, the quota program entitles a quota holder to an additional $0.195 per pound SNF (equivalent to $1.70 per cwt) over the market's overbase price on the quota milk they market each month. Similar to their FMMO counterparts, California handlers pay classified use values for their milk, and those values make up the CSO marketwide pool. Each month, CDFA deducts quota monies from the CSO marketwide pool before a marketwide blend price, otherwise known as the overbase price, is calculated. CDFA then announces the quota and overbase prices
19
to be paid to California dairy farmers. As a result, in general, nonquota milk receives the market's overbase price, and quota milk receives the overbase price plus an additional $1.70 per cwt. CDFA enforces payments of both quota and overbase prices. Record data shows that the deduction from the CSO marketwide pool to pay quota premiums is approximately $12.5 to $13 million per month. Numerous witnesses estimated, at quota market prices at the time of the hearing, the asset value of quota at $1.2 billion.
19
The record reflects that CDFA also announces a base price that is equal to the overbase price. For simplicity, this decision will refer only to the overbase price.
The record reflects that the California quota program is funded by California producers. All handlers regulated through the CSO pay minimum classified use values, and it is only once those values have been pooled that the quota value is deducted from the pool. Data on the record indicates that all California dairy farmers, including quota holders, receive $0.37 per cwt less, on average, for all of their milk marketings in order to fund the $0.195 per pound of quota SNF payment to quota holders.
This decision continues to find the California quota program could be maintained, administered, and enforced by CDFA and that a California FMMO should operate as a stand-alone program. As is currently done in all FMMOs, handlers would pay classified use values into the pool, and all producers, both in-state and out-of-state, would receive a FMMO blend price reflective of the market's use values. It is through this structure that a California FMMO could ensure the uniform payment and trade barrier provisions of the AMAA are upheld.
Should CDFA determine it can continue to operate the California quota program through the use of producer monies, as is the current practice, the proposed California FMMO could recognize quota values through an authorized deduction by handlers from the payments due to producers for those dairy farmers determined by CDFA to be participants in the state-administered California quota program. The amount of the deduction would be determined and announced by CDFA.
Currently, FMMOs allow for authorized deductions, such as the Dairy Promotion and Research Program assessment, from a producer's milk check. The proposed California FMMO would similarly authorize a deduction for the state-administered California quota program. The California FMMO would allow regulated handlers to deduct monies, in an amount determined and announced by CDFA, from blend prices paid to California dairy farmers for pooled milk, and send those monies to CDFA to administer the quota program. CDFA would in turn enforce quota payments to quota holders.
In essence, this decision proposes that the California quota program could continue to operate in essentially the same manner as it currently does. The record reflects that the California quota program already assesses California producers to pay quota values to quota holders. While producers may not see this as an itemized deduction on their milk checks, their overbase price is lower than it otherwise would be if there was no quota program. This is a result of deducting the quota value from the pool prior to calculating the overbase price.
The California FMMO would authorize deductions from those California producers whose milk is pooled on the order. As this decision will later explain, the proposed California FMMO would have performance-based pooling standards that allow for manufacturing milk to not be pooled. CDFA would be responsible for the collection of California producer monies for milk not pooled because a California FMMO would only apply to producer milk as defined by the order. USDA and CDFA could cooperate by sharing data through a memorandum of understanding to facilitate CDFA administration of the quota program.
The Department received 13 comments supporting the recommendation to continue the California quota program under the authority and direction of CDFA, with FMMO cooperation for relevant information sharing. Comments expressing support for the proposed recognition of California quota program in the recommended California FMMO were received from the Cooperatives, the Institute, CPHA, HP Hood, Select, Producers, WUD, MPC, Pacific Gold,
NAJ, The Kroger Company (Kroger), CDC, and other individuals. Several commenters stated that the proposed recognition resolved concerns raised during the hearing regarding inclusive pooling, uniform pricing and interstate trade barriers.
Comments filed on behalf of the Institute stated that the Department's solution acknowledges the “recognize quota” language of the 2014 Farm Bill without violating the AMAA's requirements for uniform pricing. The Institute was also of the opinion that permitting CDFA to operate a standalone quota program through authorized deductions from producer payments allows the Department to avoid any potential interstate commerce issues relating to quota.
Comments filed on behalf of the Cooperatives also supported the Department's proposed recognition of the California quota program, as well as CDFA's continued administration of quota as a standalone program. The Cooperatives stated that the Department's decision properly recognized quota values and protected the financial investment of the California quota holders. The Cooperatives stated their support is contingent upon CDFA continuing the quota program as proposed by the Department, and added that if CDFA were unable or unwilling to maintain the program without diminishing quota value, the Cooperatives would withdraw their support of the Department's decision. The Cooperatives proposed that specific references to the applicable California statute and regulations that pertain to the California quota program be added to the proposed California FMMO.
Comments submitted on behalf of WUD supported the Department's treatment of the quota program, but requested that the producer referendum be postponed until CDFA determines how it will operate the program.
CDFA submitted a comment confirming its ability to establish a standalone, producer-funded quota program as proposed by the Department, and stated its aim to reach a conclusion prior to a California FMMO producer referendum. In its filed comments, CDFA indicated that it would work toward a solution with the intent of concluding its process before a California FMMO producer referendum was held so California producers would have the pertinent information needed to make an informed decision.
The Department continues to find the proper recognition of quota under the proposed California FMMO is to allow for authorized deductions from producer payments in accordance with the California quota program, as determined and administered by CDFA. As the Department finds this rulemaking proceeding is separate from CDFA's handling of the quota program, language referencing the CDFA regulations for administering quota is not included in the proposed California FMMO. Standalone language in the proposed California FMMO references the California quota program.
Regarding the treatment of exempt quota as addressed in Proposal 3, this decision continues to find that exempt quota is part of the California quota program and therefore its proper recognition should be determined by CDFA. The record demonstrates that exempt quota was initially granted when the California quota program was established, and like regular quota, the provisions have been adjusted numerous times through both California legislative and rulemaking actions. This decision continues to find the continuation of exempt quota, in whatever manner appropriate, should be determined by CDFA.
The record reflects that under the proposed FMMO, the four California producer-handlers who own exempt quota would likely become fully-regulated handlers because their sales exceed three million pounds per month. These fully-regulated handlers would be required to account to the marketwide pool for all of their Class I utilization and pay uniform FMMO minimum classified prices for all milk they pool. The CPHA witnesses testified that exempt quota is held on the producer side of their businesses. CDFA could best determine how those producers holding exempt quota should be compensated for their exempt quota holdings. Such compensation cannot be made by reducing the minimum Class I obligation of FMMO fully-regulated handlers without undermining the uniform handler payment provision of the AMAA.
Comments submitted on behalf of the CPHA expressed provisional support for the proposed treatment of quota, assuming all aspects of the current program, including exempt quota, would be maintained by CDFA. CPHA asked the Department to reopen the comment period pertaining to the quota program until CDFA releases a final statement detailing their plan to administer the quota program in its entirety. CPHA stated that until such time their comments on the recommended decision would be incomplete.
This decision does not find justification for reopening the public comment period. CDFA has publically outlined the steps it intends to take to preserve, plan for, and operate the California quota program. CDFA has publically stated it intends to complete a producer referendum and release the results before a FMMO producer referendum is held. California producers will be able to consider that information when voting on the proposed California FMMO.
Throughout the hearing, and in post-hearing briefs and comments filed in response to the recommended decision, dairy farmers and their Cooperative representatives stressed that while a California FMMO would provide them a more equitable price for their milk, entry into the FMMO system must not diminish or disturb, in any form, California qu
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