When I enjoy Mt. Tam Cowgirl Creamery Cheese (It’s great!) from California, I never think about 4b. Actually, until yesterday, I never heard of California’s “Class 4b” milk regulation.
“Class 4b,” a part of our nation’s network of pricing rules for milk, is creating huge problems for California dairy farmers. Faced with plunging milk prices and soaring corn prices that made the price of their feed skyrocket in 2009, California dairy farmers were hit especially hard. Now, although average US milk wholesale prices are up, these dairy farmers say the 4b price–the price that determines how much local cheese producers pay them–is too low for them to benefit. As a result, many have moved their herds out of the state, others are going out of business, and all are asking for higher prices.
You can predict the cheese producer response. They say if the price of their milk rises, they will leave California.
Some background: Looking way back to the mid-19th century, when more people started moving from the farm to the city, having a steady supply of milk was a problem. A host of unpredictable supply side variables including seasonal variation, the perishable character of fresh milk, and cost fluctuations meant production from one month to the next was up and down. To make a very long and complicated story much shorter, we can just say that the federal government decided that some price supports that established a minimum were the answer.
Then, states like California implemented their own system of minimum prices. And that takes us to 4b. Divided in numbered classes, 4b just represents a certain category of milk (based partially on fat content).
Finally, as economists, we cannot conclude without a brief look at a price support. As you can see, the horizontal line, the artificial price suggested by government, is above the price that the market might create. As a result, with the quantity supplied greater than the quantity demanded, a surplus is created.
Sources and Resources: If you would like to learn more about milk price supports, I discovered an excellent and readable USDA document that describes the history, looks at states like California, the future and describes some pricing formulas. The complexity is mind boggling. As for the clash between cheese and milk producers, these articles, here and here, provide the facts.