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  September 23, 2010

Judge stalls PMMB Order pending Milk Dealers' lawsuit

At stake: $6.7 mil in 'stranded' premiums paid by consumers; meant for farmers

by Sherry Bunting, Farmshine, Sept. 24, 2010

HARRISBURG, Pa.—The Pennsylvania Association of Milk Dealers has sued the Pennsylvania Milk Marketing Board (PMMB), saying the Board’s June decision, to change the over-order premium calculation for dealers who purchase milk from dairy farms both in and out of state, “violates interstate commerce rules” and would cause “irreparable fiscal harm to the dealers.”

The PMMB Order A-968 was set to take effect October 1, 2010. Last week, however, U.S. Middle District Judge William Caldwell issued a preliminary injunction putting the Order on hold until the dealers’ lawsuit against PMMB is resolved.

Joining the PA Association of Milk Dealers in their lawsuit against PMMB are a Maryland dairy farm that ships to Rutters Dairy, based in York, Pa. and an Ohio dairy farm that ships to the Sharpsville, Pa. milk plant owned by Dean Foods, based in Dallas, Tex.

Pennsylvania Secretary of Agriculture Russell Redding expressed his disappointment this week over the federal court injunction that temporarily stalls the state Order, which would generate higher milk payments to the state’s dairy producers. This change was slated to bring an estimated $6.7 million in “stranded premiums” back to dairy producers.

“Stranded premiums” is a term that refers to the portion of a 25-cent-per-gallon portion of the state-minimum milk price that consumers pay at retail, which is intended for the dairy producers, but which processors have had the ability to keep in certain instances rather than return to the producers.

“I am extremely disappointed that Pennsylvania’s dairy farmers may not receive the money owed to them for their milk, as determined by the Milk Marketing Board in June,” said Redding in a statement released Wednesday, September 21. “At a time when dairy farmers are struggling to make ends meet, this legal posturing is an unfortunate, but temporary, interference that hurts Pennsylvania’s consumers and producers. The Milk Marketing Board’s Order is the right thing to do and provides true benefit to our 7,400 dairy producers. We must remain proactive in ensuring the largest sector of our agriculture industry remains viable today and in the years to come.”

In their motion for injunctive relief, the plaintiffs said the PMMB’s Order would cause them (the affected dealers) to pay more while those dealers that purchase only Pennsylvania milk would see no increase in their per unit cost. Their argument is that the affected dealers’ business model is based on the “status quo,” and that this change from the “status quo” would be fiscally harmful to them.

The defendants argued that the new formula for calculating the over-order premium “will place Pennsylvania milk dealers who rely in part on out-of-state milk suppliers in no worse position in regards to their obligations created by Pennsylvania’s over-order premiums than the dealers who purchase exclusively from Pennsylvania producers.”

That’s it in a nutshell. Pennsylvania dealers who rely only on Pennsylvania milk are already paying the amount they receive in the minimum wholesale price that is earmarked for dairy farmers according to the state’s Milk Marketing Law.

On the other hand, the dealers that rely on both in-state and out-of-state suppliers have built a business model around the status quo, which has allowed them to reduce their obligation to Pennsylvania producers by the amount of out-of-state milk they purchase—and yet, they have continued to receive the over-order premium paid by consumers on all their Pennsylvania milk sales. This premium has been around 25 cents per gallon (or $3/cwt) over the past year.


The only change the PMMB Order A-968 actually would make is to require those affected dealers that purchase milk from both in-state and out-of-state farms to pay the premium to Pennsylvania farmers for either the amount of milk they purchase from the in-state farms or the amount of in-state Class I sales they actually have collected the premium on—whichever is the lower quantity. They are not being asked to pay Pennsylvania farmers unless they have commensurate Pennsylvania Class I sales to cover those in-state milk purchases.

Part of the problem that led up to the Board’s Order is that milk plants on the state’s borders have been able to ‘swap’ their in- and out-of-state milk purchases and sales through creative accounting. Until now, regulations allowed milk dealers and handlers to reduce their obligation to Pennsylvania farmers by the percentage of out-of-state milk they purchased—even if they had regulated Class I fluid milk sales within the state that were equal to the amount of milk they purchased from in-state farms.

In February, the PMMB staff, with the support and blessing of Governor Ed Rendell and the Pennsylvania Department of Agriculture, brought a proposal to the Board, seeking to end the ‘swap.’ Governor Rendell and the Department of Agriculture have worked since 2006 to encourage the PMMB to actively use its full authority to influence price at the state level.

In a 3-0 decision on June 2, the Board favored the staff’s proposed change in the premium calculation for dealers and handlers that have sales of Class I fluid milk within Pennsylvania and purchase the milk from both in- and out-of-state farms.

Previously, the amount paid to producers was pro-rated based on the ratio of milk purchased from Pennsylvania producers compared to the total purchase amount, which included out-of-state supplies. For instance, if half of the milk a processor purchased is from Pennsylvania, the over-order premium obligation to those farmers is reduced by half. The other half is kept by the processor despite the Milk Marketing Law, which states it is to be given to producers.

Let’s boil it down to this ultra simple equation: If a Pennsylvania licensed milk dealer sells two gallons of retail milk in Pennsylvania, but one gallon came from an Ohio farm and another gallon came from a Pennsylvania farm, the PMMB’s new calculation would require the dealer to pay the Pennsylvania farm the full premium it received on that one gallon: Nothing more, nothing less.

Remember, if the dealer sold both gallons in the state of Pennsylvania, a Pennsylvania consumer paid 25 cents of “farmer premium” money for each gallon. That dealer would still be receiving the consumers’ quarter on both gallons – 50 cents total. But the dealer’s obligation under the new Order A-968 would be to pay the 25 cents on the PA gallon while receiving 50 cents for both gallons.

Under the “status quo,” which the dealers are suing to preserve, the dealer is only obligated to pay half of the premium on the gallon that came from the Pennsylvania farm, which in this “simple equation” would be 12 ½ cents. But remember, in this simple equation, the dealer actually would receive two quarters from the consumer—a total of 50 cents—one quarter for the gallon of milk that was sourced to an Ohio farm and one quarter for the gallon that was sourced to a Pennsylvania farm. Status quo means the dealer gets to control 37 ½ cents of the consumer-paid premium for those two gallons of milk because the dealer (under status quo) can cut in half the obligation to the Pennsylvania farm even though he sold both the PA milk and the Ohio milk in Pennsylvania and collected the consumers’ quarter on both gallons.

That’s a business model that would be “irreparably harmed,” as stated in the plaintiff’s motion.

It is the farmers’ quarter that is at issue. Every time Pennsylvanians purchase milk for their families, they are asked to pay this over-order premium, which is calculated separately from the cost recovery and 2.5 to 3.5% profit margin the dealers and retailers are already guaranteed in the state minimum retail milk price.

The only piece of the state minimum retail milk price that is floating around, sued over, and debated, is the over-order premium—the now 25-cents-per-gallon markup that the PA Milk Marketing Law clearly intends to be paid to the dairy farmer.

The lawsuit is expected to go to trial sometime in the next six to nine months. Until then, the “status quo” will continue. Stay tuned.

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