California Department of Food and Agriculture

CDFA Statement on Milk Pricing 10-18-12

While there are some signs of optimism for farmers due to increases in milk pricing in California in recent months, the Department of Food and Agriculture remains very concerned about the business climate facing our dairy families. The outlook for feed continues to be dire. On top of drought impacts that have already played a large part in this crisis, the USDA has adjusted its corn production forecast slightly downward, which will mean more high-cost pressures on farmers who must purchase most if not all of their feed.

On the pricing side, the minimum milk price that will take effect November 1 (Class 1, fluid milk) will be $23.17 per hundredweight, one of the highest prices on record. The minimum price has risen 30 percent since June 2012. During a five-month period between May and September 2012, the minimum price of Class 4b milk, which includes whey pricing and is used to make cheese, increased from $13.56 per hundredweight to $17.50 – also a jump of nearly 30 percent. Further increases to these prices are anticipated for December. Over the last year, the Department has made modifications to the whey factor scale of up-to 50 cents per hundredweight based on commodity prices. Additionally, some milk buyers have announced they will add a whey revenue-sharing premium for their milk producers immediately, equating to an increase of approximately 50 cents per hundredweight. So we are seeing some positive activity in the milk market driven by changes in supply and demand.

There have been many questions over the last several months about differences in federal prices and the prices here in California for milk that is used to make cheese (Class 4b). The federal price is higher due to several factors, including a surplus of milk and a shortage of plant capacity in California compared to states in the federal system. Also, California's distance from the highest-consumption cheese markets in the Northeast results in a lower price here because of transportation costs to that part of the country. And, for that particular class of milk, the federal minimum price is not always required, meaning that processors can and will pay less if market conditions warrant. In California, the minimum price is mandatory, so the price level carries more potential significance.

We know that changes to producer prices take time to make their way to the bank accounts of farmers. Given the very difficult economic climate, that's a huge concern. We're also watching consumption trends closely. High retail prices for milk that track the increases in the minimum price could magnify a 40-year downward trend in per-capita consumption of fluid milk. For example, there was a 7 percent decrease in gallon milk sales at retail between January 2011 and January 2012.

All of this points to the urgent need for the Dairy Future Task Force, which is being asked to assess challenges and make recommendations for changes to the regulated pricing structure for milk, so that there is long-term stability in the industry. The task force is asked to begin by reviewing McKinsey Report, which was commissioned by the California Milk Advisory Board and provided concepts for sustainability and industry growth over a 20-year period. This is the kind of intense industry self-evaluation and possible options for change that are required – an important starting point for the task force's work. The Department is hopeful this will create the momentum to implement meaningful change, with the end result being a healthy California dairy industry.

Return to: How Milk Pricing Works