guest editorial/opinion
Perspective: Legal Edge

Ben Yale, recognized as an expert in dairy law and policy, represents dairy interests throughout the country in legislation, litigation and administrative issues. The statements made here are his own. He is a guest columnist for this week’s issue of Cheese Market News®.

Take this quiz on the future of federal milk marketing orders

What do you think of the FMMOs?

A. Federal Milk Marketing Orders will be dead!
B. Federal Milk Marketing Orders should die! And soon!
C. None of the above.

Based on my informal survey, those of you who said “C” are in the minority and you are wrong. The rest of you are in the majority. You, too, are wrong.

The prophecy of impending death of the federal milk orders is not new. It was foretold in 1995, but 12 years and two Farm Bills later, they still exist. But not without slippage. Idaho and Utah producers killed their order. Congress has outlawed including Nevada in any marketing area. Recently, Upper Midwest producers barely kept their order. Now that USDA is about to raise Class I prices, those on the edge in the first vote are likely to fall into the “No” camp on the second vote. If the Upper Midwest goes, the Central and Mideast orders will not be able to withstand the pressure from the additional milk pooled. Like dominoes the orders will then unravel one by one. There is a serious and unanswered debate as to whether there legally can be less than 10 orders.

Among those who think the orders should die are the milk buyers who believe orders raise milk prices too high and the producers who believe the orders have failed to raise them high enough. Producers in the Southeast believe with good reason that the federal orders have contributed to the decline of production in the region and the day the orders disappear is the day the recovery in the region begins. There is frustration by some in the overpooling of milk in some orders, the underpricing of milk in others and that the current structure makes it impossible to truly fix either problem.

That FMMOs are not universal is a another reason cited as for why they should end. The third-largest milk-producing state, Idaho, is not in any marketing order. No. 1, California, has its own national pricing and state pooling system. (Yes, national, see below.) Since milk and milk products move in national markets, region- and state-specific regulations impose expensive inefficiencies in those markets. Unregulated markets are better able to compete with the state orders and render them obsolete.

On the other hand, there are those who see that orders are neither dead nor should they be. Despite problems facing the dairy industry, killing the FMMOs is not the answer. We, after all, are the industry we are today because the FMMO system provided stability and risk reduction that allowed the industry — producers and processors alike — to grow. Without FMMOs, there would be no price protection and producers would be given too little for their milk which would lead to disorderly marketing.

But many who say they are satisfied with the status quo say so because they have no concept of a milk marketing world without them, or the concept they do have is one of utter disaster and loss.

Therein lies the answer to the quiz— “D. All of the above.” The current structure of the FMMOs is for a dairy industry of the middle-20th century — an industry that no longer exists and will not return. Regulations for a dead industry probably are dead or should be. Today there are larger markets, larger buyers, larger cooperatives, larger producers, larger herds and greater milk production. The distinct parochial dairy markets of the past merged into national, international markets.

State regulation, not the FMMOs, drives the national regulatory scheme. Because the FMMO captures California product prices in the NASS figures and national markets arbitrage the market with the rest of the country, whatever is set by CDFA for California becomes a de facto national price. The state system unabashedly has been designed and maintained to grow market share at the expense of everyone else. Today it markets dairy products at a rate of about 16 billion pounds per year of milk equivalent outside of California. That would make it the second- or third-largest producing state after itself! For example, when last year CDFA reduced the 4b (cheesemilk) price, markets in the rest of the nation immediately adjusted their prices down to maintain the prior relationship. The result was intense margin pressure on cheese plants outside California and further reduced revenue to the producers who supplied Class I and III markets — a loss of hundreds of millions of dollars outside of California.

It is not that the concept of regulation is wrong, it is just that we are all reaching the conclusion that the regulations we have are wrong. There are places where government can work and help and there are areas where it can hurt. Regulate under the first and avoid the second. All that aside, the Agricultural Marketing Agreement Act provides the ability to provide meaningful and useful regulation to propel the industry nationally into the future. Within its powers we could provide an opportunity for economic health for producers and processors.

From the outset, the focus has to be on producer economic health over processors. If you have healthy producers and plants go out, producers will rebuild the plants. If producers stop producing, the plants will not build new producers. Just look in the Upper Midwest. As production dropped, plants did not build new farms, but in the Southwest where there were producers, they helped build plants. The problem today is that the focus of regulations is the other way around.

In this analysis we could consider replacing pooling as a risk management tool with other tools, establishing a clearing house of information to create transparency in what producers receive for milk and what plants receive for products, creating a series of mini and single handler pools to move Class I at the cost of the processors, not producers, providing audits of contracts and quick and efficient contract dispute resolution, facilitating producers to set off their costs to processors and processors theirs to consumers and truly telling producers the real supply and demand.

In the end, the answer is “E. The question is wrong.” We should be asking and answering the right question, not grumbling about the ineptitude of the current programs. We have within this industry the talent, experience, wisdom and capacity to create a 21st-century national regulatory scheme. In or out of the Farm Bill, it needs to be done now before the industry — producers and processors — are dead, making any regulatory scheme irrelevant.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.