Valley dairies challenge milk-pricing rules

Published online on Sunday, Jun. 21, 2009

SACRAMENTO -- California's complicated milk pricing rules have endured for decades as a way to stabilize dairy revenue. But the state-managed "milk pool" is coming under a fresh attack by an unlikely coalition.

A handful of pasteurization plants that milk their own cows want out of the system, saying they can't compete with companies that use out-of-state milk. Also looking for an exit are the state's two raw-milk dairies, which say the pool is unsuited for their unpasteurized products.

The companies scored a big victory recently when legislation granting the exemptions cleared the state Senate. But the fight is only getting started.

Large dairy trade groups say the proposal by Sen. Dean Florez, D-Shafter, benefits a "favored few" -- and could mean even lower milk prices for dairies, which already are hurting from a decline in exports, high production costs and a weak economy. The industry also is saddled with an oversupply that it's trying to reduce by producing less milk and selling cows.

It's unclear how Senate Bill 362 would alter the consumer price of milk, although legislative analysis suggests the change would be slight. Still, the bill is making major waves inside the state's multibillion-dollar dairy industry.

The names on both sides of the fight are familiar to anyone who has walked a grocery aisle.

Bill supporters include Producers Dairy in Fresno, one of a handful of "producer-handlers" in the state, and Organic Pastures, a raw milk dairy in Kerman serving a niche market. Opponents include dozens of stand-alone dairies in the Valley and an association that represents Safeway and Dean Foods.

The milk pool was established in 1967 under Gov. Ronald Reagan to ensure that processors pay dairies similar prices for milk -- no matter if the milk is bottled, or turned into cheese, yogurt, butter or other products.

Supporters concede the system has a socialistic bent, but so does a similar federal program that covers other states. The goal in California is to equalize a market that before the pool tilted in the favor of processors. Dairies fiercely competed for contracts with the bottlers, which used their leverage to extract concessions.

The pool is credited by supporters with transforming the California dairy industry into a behemoth, allowing more dairies to collect consistent revenues. The system is complicated, but basically works this way:

Processors pay into the pool based on the value of the product they are making.

The companies pay more if making liquid, or "class 1," milk and less for cheese, yogurt and other goods in lower classes.

The prices for the commodities are then "blended," or averaged, to determine the prices processors pay dairies in the two milk regions -- Northern and Southern California.

The bill's main beneficiaries are five "producer-handlers" that own cows and bottle milk. The problem, company officials say, is that their processing units pay the class 1 higher price into the pool -- but their dairy units collect the lower pooled price. The difference, in essence, gets redistributed to other dairies.

What's worse, these companies say, is that they compete with processors that ship milk in from outside the state. This milk cannot be regulated by California and producer-handlers say it often is cheaper.

"We're seeing more and more milk come from out of state and we're buying from dairy farmers in state and we're being harmed," said Anthony Gonsalves, a lobbyist for the companies.

The Legislature over the years has created exemptions for producer-handlers so they can process some of their own milk outside of the pool. SB 362 would broaden the exemption so that all of their milk is free from intervention. The companies also buy milk from other dairies. That milk would still run through the pool.