Depooling—Should I Be Scared?

Modesto, Calif., (April 30, 2018) – Depooling has been praised and vilified; its impact has been exaggerated and understated. And a lot of producers are left wondering: what does it mean to me? One thing sure is certain, it is very different than what we have in California. Class 3, 4a and 4b plants can make the decision to depool on a yearly basis. But, they usually don’t because if they do, California still requires them to pay minimum class prices. Therefore, in 2017 only 2.7% of California milk was Grade A milk not pooled. This number represents milk shipped to a non-pool plant but also milk shipped out of state and producer-handler exempt milk. Two things make the decision to opt outside the pool very different in the California system.

The first one, as I mentioned, is that even if you elect to be a non-pool plant, you are still required to pay the minimum class prices. For example, if a cheese maker elects to operate outside of the California pool, he can enter into a contract with its Grade A shipper, but he is still required to at least pay the minimum class price. In a California FMMO, said cheese maker could enter into a contract that is agreeable to both parties, but no minimum price would be required by USDA. Second, if you own quota in California, you must ship Grade A milk to a pool plant once at least every 60 days to keep your quota. In fact, as testified at the FMMO hearing, “a proportionate amount of monthly quota entitlement will be lost for any milk shipped directly to a nonpool plant”. As a reminder, under a California FMMO, this would not be the case. As per the Quota Implementation Plan (QIP), all Grade A milk under the order would be assessed for quota, regardless of whether it is pooled or not. Therefore, a quota holder would be indifferent as to whether his milk is pooled or not for quota payment purposes.

Under the California system, less than 3% of milk goes to nonpool plants. Under a California FMMO, that percentage would change drastically. While there is no way to determine exactly how much, USDA estimated that on average 42% of manufacturing milk (ie. milk other than Class I) would not be pooled. According to Dr. Stephenson’s analysis, around 56% of manufacturing milk would not be pooled. Looking at 2017, he found that taking such volumes out of the pool for the year would result in a minor negative price impact on pooled milk (-4 cents/cwt). Most of the Class IV, due to its lowest price relative to Class III, would have had an incentive to remain in the pool. To give you an example, in 2017 under the California system, Class 4a averaged below the overbase price 75% of the time. This means producers shipping to Class 4a plants benefited from the pool as the price they received was higher than if they otherwise had not been pooled.

Going back to USDA’s proposed California order, if handlers tried to come in and out of the pool in opportunistic ways (ie try to maximize pool draws and avoid pool contributions within the repooling rules, which are explained in the next paragraph), the impact would be slightly different. While I found that some months could have wider swings, on average monthly depooling could result in the pooled milk price to decline by a range of 5-10 cents per hundredweight. The reason for the decline is that a handler is likely to take milk out of the pool if the class price it is required to pay is higher than the return it would get from being in the pool. Therefore, taking higher valued milk outside the pool reduces the blend price for those left in the pool. As a reminder, Class I milk is always part of the pool.

To prevent wide swings of milk volumes jumping in and out of the pool on a monthly basis, USDA proposed repooling rules for the California order. What this means is that if a handler elects to take milk outside the pool in a given month, the next month he can only repool 125% of the previous month.

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also

READ – September 2018 Issue