BILL ANALYSIS                                                                                                                                                                                                    



                                                          AB 1470
                                                          Page  1


Date of Hearing:   May 12, 1999

               ASSEMBLY COMMITTEE ON AGRICULTURE 
                      Dennis Cardoza, Chair
        AB 1470 (Cardoza) - As Amended:  February 26, 1999
  
SUBJECT  :   Market milk: pooling of Class 3 milk and processing  
plant election.

  SUMMARY  :   Requires dairy processing plants to elect annually to  
receive market milk, and that all milk used to produce Class 1,  
Class 2, and Class 3 milk products, shall be market milk and  
pooled, except for dairies producing manufacturing milk that  
were in business prior to December 31, 1998 may be used to  
produce selected Class 2 and Class 3 products.  Specifically,  
  this bill  :  

1)Requires a dairy processing plant receiving market milk (Grade  
  A) to elect each January 1, beginning in January 1, 2000, to  
  receive market milk for the next 12 month period.
2)Requires all milk used to produce Class 1, Class 2, and Class  
  3, as defined, dairy products to be market milk and pooled in  
  the state milk pooling program.
3)Exempts from # 2, milk from dairies producing manufacturing  
  milk (Grade B) and permits it to be used to produce selected  
  Class 2 and Class 3 products, if the dairies were in business  
  prior to December 31, 1998 and had not produced market milk  
  prior to that date.

  EXISTING LAW  authorizes the milk pooling program with payment by  
processors for milk based upon the end usage of milk, using a  
formula for fat and solids-non-fat content which is tied to  
national cheese and butter prices, and neighboring states' fluid  
milk prices. Current law authorizes these monies to be pooled,  
equalized and distributed to producers.  Milk products are  
defined in 5 classes:
  Class 1:  fluid milk, lactose reduced milk, and UHT (ultra  
high temperature) milk sold in-state.
  Class 2:  fluid creams, sour creams, buttermilk, cottage  
cheese, yogurt and UHT milk sold out-of-state.
  Class 3:  ice cream, ice milk, light dairy dessert, sherbet,  
frozen yogurt, and frozen mixes.
  Class 4a: butter, powder.
  Class 4b: hard cheeses.








                                                          AB 1470
                                                          Page  2

The Milk Pooling Act requires Class 1, Class 2 and certain Class  
3 milk products to be included in the milk pooling program.   
Processors elect to be pool plants or non-pool plants.   
Producers must elect each January, to produce Grade A or Grade B  
milk for a 12 month period. Grade A milk can be used for all  
Classes of products.  Grade B milk can only be used for certain  
frozen Class 3 products, and 4a - 4b products.  

  FISCAL EFFECT  :   No general fund impact.

  COMMENTS  :   In 1968, the California Legislature passed the  
Gonsalves Milk Pooling Act which began pooling milk proceeds for  
producers so that a blended or "equalized" price would be paid  
to all participating producers.  The wholesale or producer price  
for milk is based on the end use of the milk.  These various  
product prices are then blended in the pool and payment is made  
to the producer.   The pool system was intended, in addition to  
equalizing the price received by all milk producers, to  
stabilize the market for producers, and provide a consistent and  
affordable milk supply to consumers.

Originally, bottled milk or Class 1 was included in the pool; in  
1972 some Class 2 products were included, and in 1996 producers  
were required to elect to be in the pool or not.  Not all fluid  
milk is included in the pool program.  The most notable  
exception are the Producer/Handlers (PD's) which are vertically  
integrated operators.  They own dairies as well as processing  
plants and distribution systems.  The market for Class 1 milk  
has been relatively flat for many years (22% of total  
utilization) while Classes 4a and 4b have grown substantially  
(38% and 29% of total utilization respectfully). PD's receive  
the fluid milk price outside of the pool based on a formula and  
their own production.  PD's may purchase milk beyond their  
production, and participate in the pooling system.

The sponsors of this legislation believe that the integrity of  
the pool system is at risk whenever there is possible seepage  
from their 'pooling dam'.  By taking any milk out of the pool  
system the pool suffers and therefore, all producers in the pool  
suffer.  In order to maintain the integrity of the pool, SB 1885  
(Costa) was passed (Chapter 759, Statutes of 1996) to prevent  
producers from jumping in and out of the pool.  Such jumping did  
occur by producers during anomalies in the butter and cheese  
market during opportunities for a producer to receive a higher  
price by going around the pooling system.  AB 1470 is addressing  








                                                          AB 1470
                                                          Page  3

a potentially similar situation with respect to Class 3 products  
and pricing circumstances that would benefit an individual  
producer to the detriment of other producers.

Opponents of this legislation believe this proposal could  
restrict new technologies such as ultra filtration (UF) or  
reverse osmosis (RO) which removes water from the raw milk  
product in a cold process on the farm site.  Further, it could  
hamper processors that are innovative and creates a disincentive  
for them to operate processing plants within California. Under  
federal marketing orders, which are currently under review and  
change, Class 3 milk is not required in their pooling plans.   
Federal orders cover the rest of the United States' production.

AB 1470 will eliminate a potential economic benefit to one or  
more producers, and keep that economic benefit in the pool for  
all producers to share.  According to information provided by  
the Department of Food and Agriculture using basic price  
information only (not using fat/solids-non-fat information), the  
impact to announced pool prices if all Class 3 milk were removed  
from the pool system on a rolling average over the last 24 month  
period, would be an increase to the pool prices by $.004 per  
cwt.  Sponsor's information using a similar analysis but with  
fat/solids-non-fat values and not rolling averages, reflect that  
the pool prices drop.  Using this analysis on 6.5 million pounds  
of Class 3 milk would have removed an estimated $1.66 million  
and $1.25 million from the pool in 1997 and 1998, respectfully.

There are other issues being raised in the California  
Legislature regarding milk pooling, pricing and standards: the  
removal of organic milk from the pool; expanding the PD's  
exemption; changing the standards of California milk (SB 1284,  
Bowen, failed passage in Senate policy committee, and; surveying  
and posting of retail milk prices (SB 419, Speier, heard in  
Senate policy committee 5-11-99).

The committee members need to decide if it continues to be the  
Legislature's policy to keep milk in the pooling process or  
allow milk to be moved in and out of the pool.


  REGISTERED SUPPORT / OPPOSITION  :   

  Support  









                                                          AB 1470
                                                          Page  4

Western Alliance of Milk Producers (co-sponsors)
Western United Dairymen (co-sponsors)
Agricultural Council of California
Danish Creamery Association
California Milk Producers
Thomas and Carol Bess

  Opposition  

Dreyers 
Dairy Institute

  Analysis Prepared by  :    Jim Collin / AGRI. / (916)319-2084