Guest Editorial
The California whey

by John Umhoefer

John Umhoefer is executive director of the Wisconsin Cheese Makers Association. He is a guest columnist for this week’s issue of Cheese Market News®.

The record-setting price for dry whey powder in 2007 distressed cheese manufacturer balance sheets from coast to coast. In breath-takingly swift action last fall, California regulators opened their milk price formulas to public hearing and crafted a new approach to setting a value for whey.

The state’s answer, a simple, non-volatile value for whey in the price paid to dairy producers, is under scrutiny by an ad hoc committee of California producers and processors. On Jan. 9, Wisconsin Cheese Makers Association wrote A.G. Kawamura, secretary of the California Department of Food and Agriculture, the letter below. Our message: California got it right.

Dear Secretary Kawamura,

California’s Department of Food & Agriculture acted appropriately by addressing volatile dairy product prices and rising costs of production in its Nov. 20 hearing decision on milk price formulas.

Regulating the value of a free-market commodity such as milk is a difficult job. Dairy product prices are more volatile than ever before and costs of fuel, employee benefits, energy, ingredients and packaging oscillate around record price levels. While no formula can attend to daily and monthly changes in costs, California has developed a regulatory structure to adjust its formulas more swiftly, and thus more fairly, than milk price formulas in federal milk marketing orders.

In November, California corrected a fundamental flaw found in the state (and federal) price for cheesemilk. Both California and federal order price formulas provided a value for dry whey powder to dairy producers, yet hundreds of medium and small cheese manufacturers in California and in states governed by federal orders do not produce (or gain revenue from) dry whey powder.

For nearly 10 years, dating back to our Association’s original concerns with federal milk price reforms completed in 2000, Wisconsin Cheese Makers Association has spoken out against a value for dry whey in the price formula for cheesemilk. As our Association stated in written comments to USDA on April 30, 1998:

“The addition of a dry whey price in the value of ‘other solids’ assumes that cheesemakers derive this value from the marketplace. This is not true. Many Wisconsin cheese manufacturers sell whole, wet whey to other processors for processing at a percentage of the dry whey price. USDA’s formula would overstate the value of other solids and place some cheese manufacturers at a competitive disadvantage.”

In 2007, rising prices for dry whey powder lifted the Class III (cheesemilk) price in federal orders. In April through June, the dry whey value added more than $3.00 to the milk price cheesemakers paid to dairy producers. Overall in 2007, dry whey added an average of $2.39 to the milk price, nearly five times the average value in the previous five years.

More than 90 percent of cheese factories in Wisconsin do not produce dry whey, and dozens sell their skimmed, wet whey for a fraction of the dry whey price. The federal order Class III price in 2007 forced cheesemakers to pay more for their milk than the revenue they earned and cheesemaking margins remained negative for months.

Your state has addressed this flaw with an elegant pricing solution that eliminates the deep impact of a fluctuating whey price on cheese plant margins. The value of whey in the new CDFA formula is fixed and reduced, reflecting an industry that markets some, but not all, whey as dry whey powder.

California’s decision creates a significant difference between federal order price formulas and California’s formulas. In the attached letter, Wisconsin Cheese Makers Association has urged USDA to address this difference with swift changes to federal make allowances for cheese and dry whey. While a long-term solution to the Class III milk price formula is needed to address dry whey, USDA can alter make allowances quickly as a final decision is pending on these allowances.

CDFA’s changes to the 4a and 4b milk price formulas Nov. 20 addressed price volatility that seriously threatens the future of several cheese manufacturers in the Golden State. As this solution can lower the regulated 4b price for milk, milk buyers in California have the opportunity to provide price bonuses to dairy producers to secure adequate supplies of fresh milk for cheesemaking. Milk prices that reflect the needs of the free market, rather than rigidity of complicated formulas, should be the ultimate goal of any regulatory pricing system.

With best regards,
Wisconsin Cheese Makers Association

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