Quota Vs Pooling: Do They Need Each

Modesto, Calif., (April 25, 2017) – Quota has been a big topic lately as CDFA works toward the potential implementation of a stand-alone quota program should a FMMO be voted in California. Not only is it a complex issue, it is one that drives passion from many in the industry.

In recent weeks, pooling and quota have been discussed together like they’re bread and butter. But while it is true they work well together, their differences are also key to each of their respective roles. The connection between the two is not surprising, considering it is rooted in history: quota was an integral part of the Milk Pooling Plan when it was implemented in 1969. Prior to pooling, producers were paid according to how the handler receiving their milk used it. Under the Pooling Plan, this was no longer the case: producers were now paid a price reflective of the poolwide utilization of all classes. Pool quota was allocated to producers at the time based on each producer’s historic production and Class I usage. While passage of the Pooling Plan required the creation of quota, quota and pooling evolved separately over the years. Because quota is a tradeable asset, it has changed hands many times since 1969 and is not tied anymore to original Class 1 contract holders like it did 45 years ago. The bottom line is: quota is not a necessary ingredient to operate the Pooling Plan. But this certainly does not undermine its importance in any way. Quota is a very valuable asset that has proven to be an effective investment to keep some dairies’ cash flow positive. Bread may not need butter, but it sure can make it better!

On the other hand, butter may be tasty on its own, but it does depend on a reliable surface to spread on; just like quota now relies on pooling funds to operate. Let me take a step back to explain. Each month, handlers submit to CDFA a report detailing the milk purchased from producers and in which class it was used. The total value generated by each class is computed by multiplying each class utilization by its corresponding class price. Summing all this results in the pool value. Quota premiums paid to quota holders come out of that calculated pot of money. Those deducted payments average between $12.5 million and $13 million per month. The quota premium paid to producers in Southern California is set at $0.195/lb of SNF (or $1.70/cwt on standardized milk). Producers in other counties receive a lower value based on their location due to regional quota adjusters. RQAs are a deduction from quota payments and consequently return revenue to the pool. This means that eliminating (or increasing) RQAs would ultimately increase (or decrease) the cost of the quota program to the pool.

Because pooling in theory does not need quota to serve its purpose of revenue sharing among producers, USDA decided in its draft FMMO proposal to leave quota’s fate to CDFA. CDFA hosted a meeting on April 4 to get producers’ feedback (summarized in this Friday Update – <here>); next comes the May 1 deadline for Producer Review Board nominations. The PRB will be tasked with further examining this complex issue. Since a potential FMMO will likely have different pooling rules which will allow pooling volumes to fluctuate from one month to the next, CDFA must determine a way to keep the quota program functioning without the current Pooling Plan. If a set quota premium deduction is taken out of differently sized pools each month, it could impact the milk left in the pool very differently from one month to the next. Let’s take a separate example of a company deciding on fixed health care premiums of $1000 every month. If the company has ten employees, each expects to pay $100 each month to get the benefits. If 5 employees leave, only 5 employees are left contributing $200 each. As you can imagine, employees are likely going to get irritated with the scheme if employees are allowed to come and go.

For the sake of a durable quota program, CDFA must ensure the program’s funding is applicable to at least as much milk as it is now in a consistent manner (in 2016 96% of the milk in California participated in the pool). You can rest assured, WUD will continue working with CDFA in that direction.

by Annie AcMoody, Director of Economic Analysis

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