California's Federal Order: Here's What it Means for Your Milk Price
On Feb. 3, 2015, California Dairies Inc., Land O’Lakes and Dairy Farmers of America proposed enacting a Federal Order in California. This spring, those cooperatives and producers voted in favor of a Federal Order, and come Nov. 1, it will become operational.
Because California produces almost a fifth of the nation’s milk, the impact of the order will cause ripples in the surface of milk prices from Los Angeles to Minneapolis and from Boston to Miami. Whether those ripples grow into waves remains to be seen. California’s new Federal Order will be implemented at the same time world markets continue to churn and trade wars potentially disrupt U.S. exports.
It’s difficult, then, to predict what influence California’s new Federal Order will have on California and the rest of the country. Geoff Vanden Heuvel, a former dairy farmer and economic consultant for California’s Milk Producer Council, sums it up this way: “We think it will be better. We know it will be different.”
A Different Ball Game
For starters, California processors will have to learn how to move milk around the state without the millions of dollars in transportation credits California’s state order provided. The Federal Order provides no such incentives.
Two of the major players in the state, Land O’Lakes and Dairy Farmers of America, have very little milk production in the Los Angeles basis where the bulk of California fluid milk is consumed, and they have little or no fluid processing. The trick, Vanden Heuvel says, is to get fluid milk buyers to contribute dollars to aid that movement.“
Longer term, quite a lot of cheese milk will never be pooled,” Vanden Heuvel says. But non-pooling plants will still have to pay competitive prices to attract milk, he says. And therein lies the hope of better prices for farmers.
In March, USDA provided an updated Regional Econometric Model that estimated a whole host of possible production, product use and price changes that could result from the implementation of the Federal Order in California. The projections were compared to current baseline numbers, and went out for a decade as the industry in California and other states adjusted to the new conditions.
The model projected a 57¢ per cwt. bump in the California all-milk price in the first year of implementation of the Order. Those prices decline to 30¢ to 40¢ per cwt. above baseline levels as time moves on and more of a supply/demand equilibrium is reached.
Annie AcMoody, an economist with Western United Dairymen, say those estimates appear to be “realistic and in the ballpark. But there could be a restructuring of pricing as markets adjust.” Because of California’s tight milk market, plants are having to bid for milk and farmers are currently receiving fairly strong premiums, she says.
The initial fear in the rest of the country was the enactment a Federal Order in California would ramp up California milk production, causing prices to decline nationally. But because California is so distant from the population centers of the Midwest and East Coast, California cheese makers will still be burdened with the cost of getting that product to those markets.
Consequently, cheese prices in the Midwest could actually increase. That, in turn, could cause an increase in the Class I mover and boost Class I prices nationally. But increasing milk production will also affect other classes, reducing those prices. So farmer revenue will depend on the product mix and class utilization within each order. Economists say predicting regional effects is incredibly difficult and is nowhere near an exact science.
Having said that, USDA is projecting the all-milk price to average 8¢ per cwt. higher nationally during the next decade with a California Order in place. National milk production is projected to rise, likely due to increasing milk prices in California, Idaho and the Midwest. Total U.S. milk production is expected to rise 150 million pounds in the first year and 830 million pounds per year by 2026.
The bottom line in terms of producer revenue: There will be winners and losers. Nationally, producer revenue is expected to increase $284 million per year on average during the next decade. California producers will see the bulk of this increase, with revenues up an average of $269 million per year.