California Dairy Industry Adoption of FMMO Brings Some Growing Pains

Pricing discrepancies resolved, but quota system receives mixed reviews

California adopted USDA’s Federal Milk Marketing Order system of pricing and pooling milk on Nov. 1, 2018, resolving price disparities between California and the rest of the United States. According to a new report from CoBank’s Knowledge Exchange division, the FMMO did not change the underlying market forces that determine what milk produced in California is worth. It only nudged the regulated price higher and added safety valves to pay milk under class prices if supply exceeds demand.

Processors gained flexibility while producers gained access to higher regulated prices, according to the report. The traditionally stable landscape of milk utilization in California has changed as processors make monthly pooling decisions, which has led to some concern among producers.

In addition to the uncertainty created by processors’ new flexibility under the FMMO, the regulated system added a regional pricing component that did not exist in the California system. The one-state, one-minimum blend price was replaced by five pricing zones, which values milk based on where it is received. The transportation allowance system was eliminated with the FMMO, and along with it went strong incentives to move milk to certain markets.

California’s quota system under the California Department of Food and Agriculture remains relatively intact, but it faces uncertainty as some non-quota holders would like to see it go away.

Many organizations have clients on both side of the quota issue, whether they be trade associations, lending institutions or feed suppliers, according to the report. Some organizations stand to lose investment and income while others stand to gain an additional 38 cents per cwt each month. Debate surrounding the quota will be ongoing.

The transparency of the FMMO gives California producers hope that they are finally on a level playing field with the rest of the country. In the short term, it may appear so for many. In the long run, with additional transportation costs no longer subsidized, processors will have incentives to move milk around differently, make different processing decisions or charge additional hauling costs.

Until USDA launches a national hearing to change the pricing formulas, both producers and processors now have a new system that gives them something they were looking for.

Read the full report, How the California Dairy Industry is Faring Under its New FMMO, on cobank.com.

About CoBank

CoBank is a $138 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 70,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.

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