Category Archives: dairy markets

Editorial: What was really behind ‘rockier road’ this summer? USDA revisions show fewer cows, less milk June-August

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By Sherry Bunting, Farmshine, October 27, 2023

EAST EARL, Pa. — In the June 30 and July 7 editions of Farmshine, we covered the milk market conditions behind the drama that sent farm-level milk prices spiraling lower. The two-part “rockier road for milk prices” series explored factors and asked questions about a situation that was not making sense.

Farmshine readers will recall that we questioned dubious math on the huge milk price losses in farm milk checks – far beyond the predictions for modest declines – in the April through August period. 

We questioned the accuracy of government milk production reports and the USDA’s World Ag Supply and Demand Estimates that kept telling us there would be more milk cows on farms and that milk production would continue higher for the year because of… more cows.

We doubted this was possible given the semiannual cattle inventory reports over the past year showing static to shrinking milk cow numbers and major shrinkage in the number of dairy heifer replacements (down 2% in Jan. 1 inventory, down 3% in mid-year inventory, a drop of over 100,000 head!). We have reported the escalating dairy replacement cattle prices setting multi-year record highs that are bearing these inventory numbers out.

We asked: Where are all these cattle coming from?

The June and July two-part series also indicated the 51% increase in the volume of Whole Milk Powder (WMP) imports coming into the U.S. compared with a year earlier in the January through May period — the highest volume for that 5-month period since 2016. (WMP is basically dehydrated milk for use in making any product or reconstitution.)

We also consulted Calvin Covington for his read of the situation. He reported to us that his calculations showed a 15% cumulative increase in total milk solids imported January through April, and that this extra volume was equal to 63% of the year over year increase in ending stocks on a total solids basis.

Well, what do you know! On Thursday, October 19, USDA issued its monthly milk production report for September. The report also went back and revised downward the previously reported totals for milk production and cow numbers for April through August.

Lo, and behold, in June and July while markets crashed, U.S. farms milked 13,000 and 34,000, respectively, fewer cows than a year ago. The September Milk Production report has now gone back to shave around 0.1% off of several months of previously reported milk production, and it has revised milk cow numbers lower than previously reported as follows: The May revision added 1000 head vs. prior report, the June revision shaved 4000 head off the prior report, July’s revision shaved 11,000 head, and August 14,000 head.

How convenient that while the Milwaukee Sentinel and area news stations were reporting five weeks of milk dumping in the sewers during June and July, and USDA Dairy Market News was reporting six to eight weeks of spot milk loads selling at $10 to $11 under the abysmal Class III price as it hit multi-year lows, the USDA reports had been telling us we were milking more cows than a year earlier, and those cows were making more milk.

Prices had plunged by more than 37%, and no one was talking about the scale-back of mozzarella cheese production and the ramp up of whole milk powder imports.

Sure, they were talking about the softening of dairy exports, and maybe that’s the point. The industry had to get the U.S. price levels below global levels in a hurry to honor the global goals set by the national dairy checkoff under previous USDEC president Tom Vilsack to keep growing exports on a Net-Zero pathway to get to 20% of milk production on a solids basis.

We wrote with concern in June and July about how even those prior numbers did not make sense at those previously incorrect levels, how a tiny change such as milking 7000 more cows in May vs. year ago and a little more milk per cow through the period could result in prices falling this hard in June and July. We have even more questions as even those small supply-margin factors have now been edited by USDA to be lower than previously reported for the April through August period.

Cow numbers have always been a driver for milk prices. Now we know there was an average of 21,000 fewer cows milked in the June-July period. And, by July, there were actually 34,000 fewer cows on U.S. farms vs. year ago.

For the Q-3 July through September period, the revisions show an average of 33,000 fewer cows nationwide compared with the third-quarter of 2022. Maybe this will also be revised lower in the future — as it includes the number of milk cows on U.S. farms in September that is now said to be 9.37 million as a preliminary figure.

In the space of six months, U.S. total milk production has gone from running 1% above year ago in Q-1 to nearly 1% (0.7%) below year ago in Q-3. But within that difference lies a revision that begs big questions about what was really going on while prices were plunging.

According to the tables in the September milk production report, the reality of the situation in June and July — while milk prices hit rock bottom and milk was being dumped and sold for $10 to $11 under class — we were already milking 13,000 fewer cows in June compared with a year ago and a whopping 34,000 fewer cows in July vs. year ago, according to these revised numbers. Now, in September, we’re milking 36,000 fewer cows in the U.S. vs. year ago.

In fact, these revised reports show that milk cow numbers have fallen by 74,000 head from the March 2023 high-tide – an unrevised and supposed 9.444 million head — to the August revised number of 9.376 million head and the September preliminary 9.37 million.

Think about this for a moment. We had unprecedented sets of proposals for milk pricing formula changes flowing into USDA in April and May with USDA announcing in June that a hearing of 21 proposals in five categories of formula changes would begin August 23rd.

While this was staging, we saw milk pricing drama unfold.

How useful this drama was for processors during the first eight weeks of the USDA Federal Milk Marketing Order hearing that has now been postponed due to “scheduling conflicts” to pick up where it left off on Nov. 27. 

How convenient it was for processor representatives to be able to point to dumped milk, below-class spot milk prices and negative premiums as justification for their proposals to increase make allowances while attempting to block farm-friendly formula changes — all in the name of investments needed in capacity to handle “so much more milk!”

(A year earlier, Leprino CEO Mike Durkin warned Congress in a June 2022 Farm Bill hearing that, “The costs in the formula dramatically understate today’s cost of manufacturing and have resulted in distortions to the dairy manufacturing sector, which have constrained capacity to process producer milk,” he said, calling the situation “extremely urgent” and warning that immediate steps needed to be taken to “ensure adequate processing capacity remains.”)

Fast forward to the first eight weeks of the USDA FMMO hearing in Carmel, Indiana in August, September and October. We listened as large global processing representatives (especially Leprino) pontificated about how the make allowances are set too low, saying USDA is setting the milk prices too high. They pointed to all of the drama this summer as proof that farmers are suffering because processors can’t afford to invest or retain capacity to handle “all this extra milk.”

Now here we are, September milk production nationwide is down 0.2% from a year ago, product inventories are tight to adequate, prices have improved… but along the way the industry managed to shake out hundreds of dairy farms — large and small — that have liquidated during the steep downhill slide this summer that so few were prepared for, as no one had a clue it would be this bad given the tight number of milk cows and replacements steadily reported in inventory.

What was really behind the dairy cliff we just experienced, where even USDA Dairy Market News recently reported a significant number of herds milking 200 cows or less have recently liquidated in the Upper Midwest?

With record WMP imports, a pull-back in fresh Italian cheese production, and other elements behind the scenes… was the fall-out of a so-called milk surplus manufactured to prove a point? (Remember, Leprino’s Durkin warned that if make allowances aren’t raised, sufficient processing capacity may not remain. And take note that other Leprino representatives warned during the USDA FMMO hearing last month that they may not invest in U.S. processing capacity in the future, if make allowances are not raised and FMMO minimum prices lowered.)

Or was the fall-out this summer manufactured to fulfill the dairy checkoff’s goals for exports? You see, we are told there was excess product in Europe and New Zealand, and our overseas sales were softening, but still well above 2020 and about even with 2021. The industry is driven to get the deals to secure more global market each and every year, even if the means to those ends are detrimental to how we serve our domestic market in the future.

Given the pullback in mozzarella production during this “rockier road for milk prices”, we have to wonder about the testimony of Leprino representatives in the FMMO hearings. They have been doing the loudest complaining.

Leprino is also a major strategic partner with DMI and the organizations under that umbrella: USDEC, Innovation Center for U.S. Dairy, Net Zero Initiative, and on and on.

They want FMMO milk prices lowered, they said, so they can pay premiums again (?), and they believe you, the farmers, should help pay for their sustainability pledges within the make allowance formulas as a cost of doing business.

They likely want to free up capital out of the FMMO pricing levels to pay for Scope 3 emissions insets from RNG-project dairies to compete with other industries that can buy those renewable clean fuel credits as offsets.

They likely want to use your milk money to pay for concentrated manure-driven expansion in the Net Zero wheel-of-fortune pathway that has been constructed with your checkoff money.

They want FMMO make allowances high enough to cash flow plant capacity investments based on byproduct whey, while they make mozzarella cheese that is not surveyed, is not price-reported, and is not included in the end product pricing formulas for dairy farm milk checks.

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Part One: What’s driving rocky road for milk prices?

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The stunner in the USDA FAS data is the U.S. imported 51% more Whole Milk Powder (WMP) in the January through May 2023 period vs. year ago. Looking at import volumes vs. All Milk prices, Fig. 1 shows the pattern: From 2008 to today, whenever there is a period of high farm milk prices, WMP imports increase, and farm milk prices fall. While cheese imports are down 3% YTD, non-cheese dairy exports are up 80% for a 9.2% total increase based on straight volume. Retired co-op executive Calvin Covington recently figured the January through April imports up 15% on a total solids basis. Graphic by Sherry Bunting compiled from USDA FAS and NASS data

— WMP and other imports accelerate, cow-less lab-protein analogs become ‘extenders,’

— Class I sales keep declining, fresh Italian cheese production down, inflation drives CPGs to reduce unit-sizes,

— RNG-driven dairy construction accelerates concentrated growth in cheese-heavy Central U.S.

By Sherry Bunting, Farmshine June 30, 2023

EAST EARL, Pa. — Current milk futures and dairy commodity markets have turned sharply lower and signal a rocky road ahead for farm level milk prices. Because of the lag times built into federal milk pricing, the most recent steep losses in spot cheese markets will hit the Class III price and create more Class I mover losses via the ‘average of’ method to hit milk checks in July, August and September. 

Factors driving this include: declining Class I sales and fresh Italian cheese production, inflation-driven unit-size shrinkage, two months of reduced dairy exports and five months of increased dairy imports, and the advertising of cow-less lab-protein analogs as ‘extenders’ for food processing.

The May Milk Production Report confirmed that the Central U.S. is, indeed, “awash in milk.” Part two of this series will zoom into the geographic shifts in the concentration of milk growth, driven largely by Renewable Natural Gas digester projects for the California RNG gold rush. Much of the new dairy construction in the cheese-heavy Central U.S. is focused on manure to energy, not necessarily on milk and cheese to consumers.

The Production Report was released after the futures closed on June 21. In the next four trading sessions from June 22 through 27, Class III contracts for July through September lost $1.50 per cwt, on top of previous losses of more than $2. 

By June 28, the expiring June Class III milk futures contract was at $14.92, and at $14.91 in the June USDA announced.

The ‘market’ has simply ignored USDA’s May 30 announcement that the government will bring in a ‘game changer’ to purchase 47 million pounds of cheese for food banks and schools as block and barrel cheese plunged to $1.31 and $1.39 per pound, respectively, by Tues., June 27.

USDA confirmed last week that the first round of its bid solicitations for the first phase of the 47 million pound cheese purchase won’t open until October. Bids and deliveries will come in stages from fourth quarter 2023 through mid-2024. 

This means cheap milk will make cheap cheese, which could get even cheaper if inventories build in anticipation of selling that cheese at a tidy profit into the seasonal demand increases that begin in October, along with these announced government cheese purchases. (Who needs a make-allowance raise with this game in town?)

For the past several weeks, USDA Dairy Market News has been reporting spot loads of milk in the Central U.S. selling as much as $11 per cwt below the Class III price. DMN also reports milk from the Central U.S. growth region is moving farther to find a home. We are also hearing from readers about substantial milk being dumped in the Midwest, while a few independent dairies in Minnesota, one milking over 1000 cows, have been told by their creamery that their milk is not needed after schools close.

May milk production, nationwide, was up only 0.6% from a year ago. The 24 major monthly states were up by 0.8%. Milk cow numbers did not grow from April to May and are running just 13,000 head above year ago. This modest increase comes on the heels of no net gain in milk production for 2022.

All year, the monthly USDA World Ag Supply and Demand Estimates (WASDE) kept increasing the 2023 U.S. milk production forecasts, based on what it said are ‘more milk cows and less output per cow.’ The most recent WASDE walked that production forecast back a bit, but still expects U.S. dairies will milk an average of 9.415 million cows in 2023. 

Then, somehow, the May Production Report pegged the number of milk cows on farms at 9.424 million head, even after the loss of 18,000 milk cows in a fire in west Texas in April. This is how tight the figuring has become on what we are told today is a surplus of milk and a lackluster demand.

The idea of a milk surplus that is big enough to drive these current price losses does not line up with USDA’s Jan. 1 cattle inventory report. So, in May, the WASDE began to walk it back, noting higher feed costs, reduced milk margins and higher beef cattle prices will slow the flow of milk.

Where are the cattle coming from? The Jan. 2023 inventory showed milk cow numbers were virtually unchanged from Jan. 2022 at 9.4 million head. The number of dairy heifers over 500 pounds was down 2% at 4.337 million head — the lowest number since 2006. Within that heifer number, expected calvings from Jan. 1, 2023 to Jan. 1, 2024 were also 2% lower than for Jan. 2022 to Jan. 2023. The next semi-annual cattle inventory report will be released in three weeks on July 21.

The Report’s smaller dairy replacement inventory is believable given the fact that offerings have been selling $300 to $500 per head above year ago levels, and the few weekly dairy cattle auctions throughout the U.S. have seen offerings down 30% below year ago… until June, when prices came under pressure on a suddenly increased offering at auctions over the past two weeks. 

Meanwhile, dairy cow slaughter rates are also increasing, according to USDA, especially in the Midwest and Southwest, up 31 and 47% above year ago, respectively.

While the WASDE has forecast per-cow output to fall by 55 pounds per cow per month in 2023, the May Production Report pegged an 11-pound per-cow per month increase.

This means, it took just 13,000 more cows nationwide, and just 11 more pounds of milk output per cow per month to flip the switch to sharply lower milk prices based on – suddenly — too much milk? (Geographic concentration of milk growth plays into this equation, and we’ll discuss that in Part Two.)

In Part One, we look at the other supply and demand factors that are having a direct impact on where farm level milk prices are headed. These factors fill in the gaps left by the perplexing and contradictory sets of USDA dairy data.

I.               Fresh fluid milk sales and fresh Italian cheese production both declined, pushing more available spring-flush milk into storable products.

Fluid milk sales January through April were down 2.8% from a year ago, and as bottlers slowed school packaging ahead of summer recess, the June 5th Dairy Products Report showed April production of fresh (made to order) Italian cheeses also declined 2.6% vs. year ago.

Meanwhile, butter production was down 4.9% while nonfat dry milk production increased just 1.9%, and skim milk powder production was down 22.4%. This put more of the available ‘spring flush’ milk into production of American cheese, up 2.3% vs. year ago in April, and the accompanying dry whey and whey protein concentrate production up 1.7 and 7.2%, respectively. 

Record volumes of dry whey and cheese have been coming to the daily CME spot auction, driving down the spot prices that drive the National Dairy Product Sales Report prices that are then used in federal class and component pricing formulas.

II.            Inflation pressures consumer demand, but inventories are not burdensome.

The May Cold Storage Report released on June 23 was a head-scratcher. Despite the ramped up American cheese production in the Dairy Products Report, the Cold Storage Report showed both the total amount of cheese in inventory, and the amount of American cheese in inventory, are both actually down 1% from a year ago at the end of May, while butter inventory was up 14% against last year’s higher-price-driving short supply.

Meanwhile, producers in the Midwest are being told that milk co-ops and buyers are facing cheese sales declines and that there’s not enough capacity to process all the milk now being produced in the region, with the existing capacity also experiencing labor and transport disruptions.

Dairy demand has stagnated, the analysts say, after months of high inflation. The May dairy consumer price index (CPI) was more bearish than the overall CPI. Dairy CPI was up 4.6%, with cheese up 3.6%, ice cream up 8% and other dairy products up 9.3% while whole milk decreased 3.4% and other non-whole milk increased 0.6%.

Inflationary pressure is driving some consumer packaged goods companies (CPGs) to trim unit-sizes for an appearance of stable consumer pricing. For example, we see unit-size shrinkage in cheese packages and slices. Not all American cheese slices today are 8 ounces, some are 6. Such moves effectively ration demand. 

III.            The stunner is dairy imports, up 9.2% with Whole Milk Powder imports up 51% year-to-date.

Looking at import volumes vs. All Milk prices, the pattern is clear (Fig.1). From 2008 to today, whenever there is a period of high farm milk prices, Whole Milk Powder (WMP) imports increase, and farm milk prices fall. 

WMP is basically farm milk from another country, in bulk dried form, not a specialized product. It can be used in processing virtually any dairy product, containing all of the milk components — both fat and skim solids.

From December 2022 through April 2023, the U.S. imported the highest percentage of dairy production equivalent since 2016. And there is more milk equivalent comparison today than in 2016. The National Milk Producers Federation’s monthly market report confirmed this. 

Then May imports worsened this trend. 

Digging into the June 12 USDA Foreign Ag Service (FAS) Import Circular, the U.S. imported 80% more non-cheese dairy products from January through May vs. year ago. At the same time, cheese imports were down 3.3%. Combined, the total cheese and non-cheese imports were up 9.2% vs. year ago.

But the stunner in the data is the U.S. imported 51% more WMP in the January through May 2023 period vs. year ago. 

It’s no wonder that the USDA Dairy Market News reported on June 15 that, “Dry whole milk processing (in the U.S.) is limited, despite hearty milk volumes.” 

The report went on to say that even as seasonal milk output recedes “market contacts suggest dry WMP market tones may remain steady (at the current lower price levels) due to lighter demand.”

Not surprising, given the U.S. imported more WMP in May (550,000 kg) than for any month since April of 2020. WMP was imported at a record-setting pace during the pandemic while milk was being dumped in the U.S. and production-base-programs were tightened on U.S. dairy farms by milk cooperatives and buyers. 

As the cumulative 2023 WMP imports accelerated in May, milk prices are set to take the sharp turn lower.

The year-to-date imports of butter, butterfat and butter oil are also well above year ago as part of that 80% increase in non-cheese imports January through May 2023 vs. year ago.

The June WASDE raised dairy import forecasts, yet again, especially on a fat basis, and it again lowered dairy export forecasts. The Report sees butter and nonfat dry milk (Class IV) continuing to sell stronger on better demand, while demand and prices for cheese and whey (Class III) are further reduced. 

This combination reduced the WASDE forecast for the 2023 All Milk price to $19.95, down 55 cents from the May forecast. Part of this is the Class IV over III divergence that is substantially lowering the Class I fluid milk price under the ‘average of’ method, which took more than $1.00 off the advance Class I price mover for July, announced last week at $17.32. It would have been $18.34 using the previous ‘higher of’ method.

IV.          Lab-created dairy protein analogs are advertised to processors as ‘extenders.’

Another emerging factor is the lab-created dairy protein analogs, which are the excrement of microorganisms that have been bioengineered with bovine DNA. These proteins are advertised in dairy food and manufacturing magazines as carbon-footprint-lowering, interchangeable ‘extenders’ for production of cheese, ice cream and other dairy foods.

The companies that are ramping up this fermentation-vat-lab-protein are doing limited consumer marketing. Mainly, they pursue a B2B model (business to business, not business to consumer) and try to capitalize on ESG scoring benefits based on who-knows-what-calculations that large processors are seeking as they navigate the investment, credit, and retail shelf-space ESG decisions up and down the supply chain.

No one knows how much lab-dairy-protein is being used at this time — or in what brands of dairy products — because these proteins do not have to be labeled, and they are not part of any dairy market or production report.

The Bioengineered Food Disclosure Law was passed by Congress in July 2016, and USDA established the national mandatory standard for disclosing foods that are, or may be, bioengineered in December of 2018. This Standard was implemented on Jan. 1, 2020 with mandatory compliance for all food manufacturers by Jan. 1, 2022.

According to USDA, the Standard defines bioengineered foods as “those that contain detectable genetic material that has been modified through certain lab techniques and cannot be created through conventional breeding or found in nature.”

The lab-dairy-protein-analogs are the harvested excrement of fermentation-vat-grown bioengineered yeast, fungi and bacteria, so BE labeling is not required due to the ‘detectable genetic material’ loophole. The modified genetic material is in the microorganisms, not their excrement.

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USDA inches closer to a national FMMO hearing

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Consensus evident on some key proposals, such as returning the Class I mover formula to the ‘higher of’; but 10 packages contain over 30 variations and a few new biggies.

New to the party are:

  • AFBF wants to end ‘advance’ pricing of Class I;
  • NAJ wants uniform component-based pricing of Class I in all Orders;
  • MIG, made up of 7 fluid processors want organic exemptions, an assortment of new credits, and they want to knock $1.60 off the Class I differentials, forgetting they already get over $3.00 in ‘make allowance’ credits while not incurring those costs
  • California Dairy Campaign seeks an extension to consider alternative pricing formulas
  • Some proposals want to drop products (500-lb barrel cheese) from the FMMO formulas and price surveys, others want to add products (ie. 640-lb block cheese, mozzarella, unsalted butter)
Dana Coale, Deputy Administrator (top, left) and Erin Taylor, Director (top, right) and their USDA Dairy Division staff engaged with leads for 30 hearing proposals contained in packages submitted by 10 organizations in the pre-hearing information session Friday, June 16. Tim Doelman (bottom), CEO of Fairlife, a Coca-Cola subsidiary, explains one of the Milk Innovation Group’s (MIG) proposals that bucks the consensus on going back to the ‘higher of’ in setting the Class I mover. MIG wants to keep the averaging method with their ‘Floored Adjuster” proposal. He said returning to the ‘higher of’ prevents processors from forward-pricing their milk like soda and other beverage companies do for other ingredients. MIG also wants to knock $1.60/cwt off the current Class I differentials, and they want an assortment of new credits (obviously forgetting that fluid milk processors already get more than $3/cwt in various Class III and IV product manufacturing credits. These so-called ‘make allowances’, are built in as credits on the Class I and II prices also, for costs that fluid processors do not incur.) Zoom screen capture

By Sherry Bunting, Farmshine, June 23, 2023

WASHINGTON – In preparation for a potential national Federal Milk Marketing Order (FMMO) hearing, the Dairy Division of USDA’s Agricultural Marketing Service had a pre-hearing information session Friday, June 16. During the day-long session, held virtually through zoom, Deputy Administrator Dana Coale, Director Erin Taylor and others heard presentations of the more than 30 pieces contained in proposals submitted by 10 organizations, and they engaged in questions for clarification as well as accepting requests for data before the 10 proposals were to be modified for final submission June 20.

While the Secretary of Agriculture has not yet declared a hearing, the AMS Dairy Division has publicized the timelines and action plan.

Coale stated that mandated time frames by Congress, govern the amount of time from the point at which a proposal is received to the end of a hearing 120 days later. “All of our proposed time frames are based on keeping us focused to meet the 120-day mandate,” she said.

“Once submitted, USDA will further evaluate them, and the Secretary will make the determination,” said Coale. “If the Secretary intiates rulemaking, you will see a hearing notice containing all proposals to be heard. This will be mid- to late-July, and we would expect to move forward – if a hearing is initiated – on Aug 23 as the start of that hearing.”

The location will be Carmel, Indiana, and because of the new time constraints, new procedures will be put in place, she said.

“Expect to see a very different process than customarily done to create a very efficient process while maintaining transparency and a robust evidentiary record,” she explained, noting this includes a process for submitting testimony in advance, and a naming vs. numbering convention for exhibits.

After the hearing is noticed, there will be another information session, said Coale.

“It takes an entire village,” she stressed. “Ex parte communication does not begin until a hearing is noticed, so if you have questions or need explanation or discussion on data for submitted proposals, contact us at fmmohearing@usda.gov”

The marquis proposal is the comprehensive package submitted by National Milk Producers Federation (NMPF) that set into motion the Secretary’s call for other proposals. The NMPF package has five proposals, previously reported in Farmshine through various articles since the October stakeholders meeting hosted by American Farm Bureau in Kansas City in October 2022.

Retired cooperative executive Calvin Covington is the lead on one of the five NMPF proposals, which seeks to update skim components to more accurately reflect the percentage of protein, nonfat solids and other solids in a hundredweight of milk today.

Covington said he also expects to testify on the NMPF proposal to raise Class I differentials with a new pricing surface map, something that has not been done since 2007-08, and the proposal to return the Class I base price ‘mover’ to the ‘higher of’. The current average plus 74 cents method has been in place since May of 2019, which produced unintended consequences and losses for dairy farmers.

In a phone interview Tuesday, June 20, Covington explained that after more than a year of task force meetings and discussions via NMPF with its members and their farmer members, “We’ve gotten this far, and we have got a consensus,” he said of the NMPF package.

In addition to updating skim components and Class I differentials and changing the Class I ‘mover’ back to the ‘higher of,’ the NMPF package includes a proposal to modestly update make allowances and to discontinue the barrel cheese price in the Class III protein formula while allowing 45-day forward-priced nonfat dry milk and dry whey to be included in the formula price survey instead of the current 30-day forward-price limit.

“It took a year, and that’s pretty good, to have coast-to-coast consensus on five major proposals,” said Covington. “Then you also read the Farm Bureau’s proposal and there’s pretty good consensus there too.” 

Central to both the NMPF package and AFBF package of proposals is strong support for returning the Class I mover formula back to the previous ‘higher of’ method.

(Farmers have had a cumulative net loss of nearly $950 million, equivalent to losing 53 cents on every hundredweight of milk shipped for Class I use for the past 51 months or 15 cents per hundredweight on the FMMO blend price for all milk across all 51 months — since the change to ‘average of’ was made in May 2019 via the 2018 Farm Bill. In fact, the July 2023 Class I mover was announced June 22, 2023 at $17.32, which is a whopping $1.02 below the $18.34 it would have been under the ‘higher of’ method.)

AFBF supports NMPF’s proposal to restore the Class I mover to the ‘higher of’ Class III or IV, to drop the barrel cheese price from the Class III component and price calculation, to update component values into Class III and IV formulas, and to update Class I differentials, but notes this should be done through careful review where changes are based on a transparent record.

AFBF chief economist Roger Cryan stated that AFBF will defer to NMPF for substantiation on the Class I mover change, but if by any chance NMPF would back away from this proposal, Farm Bureau wants it kept on the table and will defend it.

On adjustment to Class III and IV product make allowances, AFBF supports this under the same logic as the NMPF proposal, but states that “such adjustment cannot be fairly undertaken except in using the data from a mandatory and audited USDA survey of, at least, those plants participating in the National Dairy Product Sales Report (NDPSR) survey.” 

The difference is NMPF says it will seek mandatory surveys through legislation, whereas AFBF sees USDA as already having the authority to do this.

AFBF’s package includes some “new” proposals as well. One would add 640-pound block cheese to the Class III component and price formula and the NDPSR survey and another would add unsalted butter to the butterfat and protein calculation and the NDPSR survey.

AFBF includes a proposal to update the Class II differential to $1.56 to account for current drying costs and to adjust formula product yields and include an adjustment to the ‘make allowances’ for cooperatives and plants that “balance the market.”

The AFBF package also cites “universal milk check transparency requirements” regarding clarity to be shared on producer milk checks regarding pooled volume, Order value and actual payment for pooled and nonpooled milk.

AFBF seeks a seasonal Class I differential adjustment to “address seasonal differences in supply and demand.”

The most notably divergent AFBF proposal is one that seeks to eliminate the advanced pricing of Class I milk and components and the advanced pricing of Class II skim milk and components. It would base both on the 4-week “announced” Class III and IV components and prices instead of the 2-week “advanced” pricing factors. The advanced factors are calculated for a given month during the first two weeks of the previous month and have been part of FMMO pricing for decades.

Edge Dairy Farmer Cooperative, representing farmers in nine Midwest states shipping to 34 processors also proposes ending advanced pricing of Class I.

A newsflash proposal came from the Milk Innovation Group, which was formed within the last few years and testified at the recent Southeast FMMO hearings. 

MIG is made up of seven companies — Anderson Erickson Dairy, Aurora Organic Dairy, Danone North America, Fairlife, HP Hood, Organic Valley/ CROPP Cooperative, and Shamrock Foods.

They want to REDUCE Class I differentials, whereas NMPF and AFBF support updates that increase them. 

MIG companies want to establish Class I differentials that remove the “Grade A compensation” portion that has been built into all Class I differentials from the beginning, as well as removing the “market balancing compensation.” 

Together, these removals would account for the $1.60 per hundredweight base differential that all FMMOs receive. As explained in the pre-hearing session, this would have the net effect of reducing Class I differentials (and producer pay prices) by $1.60 per hundredweight across all FMMOs.

In their justification, MIG writes that it is “far past time for the base Class I differential to be reconsidered in light of market changes, including the exploding growth of dairy beverage alternatives… and the exponential growth of non-fluid milk products often sold in the export market.”

(In this reporter’s analysis and opinion, reducing Class I differentials instead of raising them, ignores the fact that every Class I fluid milk processor – including the aseptic, ultrapasteurized, organic, ultrafiltered and other ‘specialty’ fluid milks – are already getting more than $3.00 per hundredweight embedded as a processor credit in the Class I base price mover by virtue of the cumulative sum of all product make allowances on the Class III and/or IV pricing factors used to establish that mover, but since they don’t make Class III and IV product, they don’t incur these costs. Now they want $1.60 more, plus “assembly” and other credits?)

The MIG also proposes exempting processors of Class I organic milk from paying into FMMO pools as long as they show they pay their producers at least the minimum FMMO price. There are a few other guard rails to this. 

They also want to receive “assembly credits,” specialty credits, and a higher shrink credit (forgetting that they already get make allowance credits that don’t even apply to them).

Citing the “unequivocal decline in Class I sales,” the MIG sets the stage with its package of proposals to transition further away from pricing mechanisms that support local fresh milk in favor of aseptic, extended shelf-life milks and specialty products. Some of the companies in the MIG are making dairy beverages that are not even Class I, and several are getting big into plant-based and other non-milk alternatives and blends. (Is that a conflict of interest?)

USDA AMS also accepted further information on the prior petition by the International Dairy Foods Association (IDFA) and Wisconsin Cheese Makers Association (WCMA) to update make allowances. With this additional information, their petitions are back on the table and are based on voluntary cost surveys.

Additionally, IDFA submitted a proposed alternative method for establishing the Class I mover they call the “Floored Class I Mover proposal.” This is IDFA’s response to NMPF’s proposal to return Class I to the ‘higher of.’

The IDFA alternative is described as using the current simple average of the Class III and IV advance pricing factors to set the base Class I price, and floor the adjuster at the current 74 cents — while allowing that adjuster to increase if a two-year look-back shows it was deficient vs. the higher of. This is a complex two-years back “making producers whole” in the two-years forward with the adjuster always being floored to go no lower than 74 cents even if it turns out that this method benefited farmers vs. the ‘higher of.’

The IDFA Class I proposal contains several pages of justification for the averaging method built around “preserving price hedging and risk management” for processors, particularly those in the ‘value-added’ category,” such as ultrafiltered and aseptic Class I milk products.

But it doesn’t end there…

National All Jersey (NAJ) brought forward its proposal, explained by Erick Metzger. “One mirrors NMPF’s proposal to update skim component factors in the Class III and IV formulas, except we want to see it be a simple annual update based on the previous year’s average, with an appropriate lag time to address risk management tools instead of being based on a three-year average,” he said.

In addition, NAJ proposes that FMMOs 5, 6, 7 and 131 (the Southeastern Orders and Arizona) become multiple component pricing (MCP) Orders instead of pricing on a fat/skim basis.

NAJ also proposes Class I payment requirements to be based on MCP pricing instead of skim / butterfat in all FMMOs, nationally.

“We are proposing uniform pricing across all orders — both on how processors pay for components and how producers are paid for components,” said Metzger. “Extensive updates are needed to Orders 5, 6, 7 and 131, and the needed Order language already exists in the other Orders.”

The NAJ proposal notes that Class I should be paid on actual solids, instead of valuing the skim on a skim basis. “In our proposal, it would be valued or priced on actual skim components,” he said.

What this means is if a dairy farm’s actual components processed (in Class I) were below the standard components in the Class III or IV formulas, the processor obligation would be less; and if the farm’s skim components are greater than the standard, then the obligation of Class I processors to the pool would be more. In short, accounting for actual skim components in the NAJ proposal, would replace the current pricing of Class I skim on a pounds of skim basis.

Select Milk Producers cooperative submitted proposals to update product yields to reflect “actual farm-to-plant shrink,” to update the butterfat recovery factor and to update nonfat solids yields. According to their own limited 5-year-average analysis the three proposals combined would net 13 cents/cwt on the Class III price and 42 cents/cwt on the Class IV price, but they’ve requested more data from USDA AMS to analyze — if their proposals are accepted for a hearing.

For its part, Edge Cooperative states in a cover letter to its proposals that a hearing should occur after the farm bill. “There is no imminent crisis that would present a compelling reason to initiate a hearing before the next farm bill is enacted,” the proposal states.

In the farm bill, Edge seeks a mandatory cost of processing survey before make allowance updates could be heard. Edge also seeks legislative language to expand flexibility to base individual FMMOs around something other than uniform pricing, to be determined on an Order by Order basis. This “flexibility” was explained by Lucas Sjostrom and Marin Bozic at the Farm Bureau stakeholders meeting in Kansas City last October.

However, Farm Bureau’s package of proposals asserts that there is no reason to hold off on a hearing while waiting for a farm bill, and indeed seeks the fastest resolution to the Class I ‘mover’ issue. Furthermore, Congress previously mandated timelines that don’t allow “waiting” once proposals are received by USDA. This process is in motion, unless Secretary Vilsack refuses a hearing on any of the proposals.

AFBF, in fact, cited areas of the Agricultural Agreement Act that give USDA authority to do mandatory cost surveys, without further legislation, because the Secretary has discretion to require any reporting deemed necessary from FMMO participating plants.

On the Class I ‘mover, Edge proposes two options, either a Class III-plus option if the ‘advanced pricing’ is retained or if the ‘higher of’ option is used, then to base it on final 4-week announced skim milk prices each month. This option would effectively end the 2-week advanced pricing factors and advance pricing of the Class I ‘mover,’ which has also been proposed by AFBF.

The Edge proposals include a request to align make allowance changes so that they don’t impact ‘risk management tools’ and a proposal to add Order formulation language about the information handlers shall furnish to producers with the intent of “transparency in producer milk checks.”

The California Dairy Campaign’s proposal asks USDA to extend the proposal deadline and to add mozzarella to the Class III component and price formula and the NDPSR survey. They also want consideration of “alternative pricing formulas that guarantee dairy farmers are paid according to current market rates.”

The California proposal includes a National Farmers Union (NFU) Dairy Policy Reform Special Order of Business that was passed at the 2023 NFU Convention in San Francisco. It states opposition to the call for a federal milk marketing order hearing, noting that, “If a hearing is granted, it is essential that any modifications to the federal order minimum pricing formulas take into account the volume and value of all dairy products, particularly high-moisture cheeses such as mozzarella.”

Dairy Pricing Association (DPA) submitted a few proposals explained by Wisconsin dairy farmer Tom Olson. One seeks to pay Grade B milk at FMMO minimums, but without a producer price differential (PPD).

DPA also proposes a supply-balancing feature, whereby milk handlers notify farms at least 7 days prior to milk disposal action, stating the baseline production needs, how much to reduce production, and for how long, with farmers making this reduction by dumping (or not producing) this milk.

In effect, the DPA proposal includes a processor-led supply management program, not a government intervention. But to do it, the FMMOs would be the arbiter, and therefore all Orders would have to be amended to require 100% mandatory participation and pooling of all U.S. milk. Something like that may require legislation since a producer referendum bloc-voted by cooperatives could vote it down, and it’s unclear how unregulated areas would be included since states like Idaho already voted the FMMOs out.

Currently, only Class I milk handlers are required to participate in FMMOs within marketing areas that have FMMOs. Participation is voluntary for most Class II, III and IV processors. Over the past three years, roughly 60% of total U.S. milk production has been pooled on FMMOs.

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Understanding the factors as action on FMMO ‘modernization’ unfolds

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Using the Northeast as an example of a multiple component pricing Federal Milk Marketing Order that still has significant Class I utilization, Dr. Chris Wolf showed how long-term trends and other factors have reduced the Class I utilization and Class I revenue from 50% in 2000 to 34% in 2021 in FMMO 1. The most dramatic part of this decline occurred after 2010 — leaving not enough money to go around with less Class I value in the pool. FMMOs were structured for Class I fluid markets not for the dairy product and export markets where growth is occurring today. Screen capture from Center for Dairy Excellence Protecting Your Profits webinar with CDE’s Zach Myers and his guest Dr. Chris Wolf, Cornell University dairy economist.

By Sherry Bunting

WASHINGTON – There are irons in two fires when it comes to federal milk pricing and dairy policy. One is to do modernization through the Federal Milk Marketing Order (FMMO) hearing petition process. The other is to make some adjustments or seek authorizing language through the dairy title of the 2023 Farm Bill.

On the farm bill front, the May 12 CBO baseline score shows this could be the first trillion-dollar farm bill. Food assistance programs, like SNAP, are eating into the capacity to do other things, say top-level staff for the Senate Ag Committee. 

For dairy and livestock, the Dairy Margin Coverage (DMC) baseline now includes $1 billion in additional outlays projected over the 10-years, while livestock disaster outlays have doubled – even without making any changes in these programs that some are suggesting.

Still, farmers and organizations that represent them are seeking some expansion for the DMC, livestock disaster, and other programs and safety nets, and some are seeking language to instruct the Secretary to do hearings on the Class I ‘mover’, or to expand the flexibility of the scope of a hearing, or to require mandatory reporting germaine to things like raising make allowances. 

The jury is out on whether a farm bill gets done by September 2023 after the May 12 baseline was announced by CBO in the current political environment, but members of the House and Senate Ag Committees and their chairpersons are gathering information in earnest toward that goal.

On the FMMO hearing front, as previously reported in Farmshine, the USDA responded April 28 to the March 30 petitions from two processor organizations by asking for more information instead of granting or denying a hearing on their make allowance update request.

The two petitions from International Dairy Foods Association (IDFA) and Wisconsin Cheese Makers Association (WCMA) both requested a hearing focused exclusively on updating the ‘make allowances’, which are processor credits that are subtracted from the wholesale end-product prices used to derive farm level milk class and component prices.

Make allowances were last updated in 2008 using 2006 plant cost data.

Four days later on May 2, the National Milk Producers Federation (NMPF) submitted its petition seeking an FMMO hearing on a range of national amendments.

NMPF is petitioning USDA for a hearing on these five items:

1.     Increase make allowances in the component price formulas to the following levels: Butter   $0.21 per pound, Nonfat dry milk $0.21 per pound, Cheese  $0.24 per pound, Dry Whey $0.23 per pound 

2.     Discontinue use of barrel cheese in the protein component price formula

3.     Return to the “higher-of” Class I mover

4.     Update the milk component factors for protein, other solids, and nonfat solids in the Class III and Class IV skim milk price formulas

5.     Update the Class I differential pricing surface throughout the U.S.

Not noted within this list is a point that NMPF’s board approved on the legislative front, and that is to seek language in the 2023 farm bill directing USDA to do periodic mandatory and audited plant cost surveys instead of voluntary surveys for future hearings on make allowances.

The American Farm Bureau Federation took a positive approach in their response letter to USDA, showing support for the fact that NMPF’s petition is comprehensive and includes areas of strong consensus among farmers such as returning the Class I mover to the ‘higher of.’

However, AFBF president Zippy Duvall also points out in the response letter that the Secretary of Agriculture already has the authority under the Agricultural Marketing Agreement Act to require processors to provide information relevant to FMMO pricing. This could include mandatory surveys of plant cost data when used to determine the processor credit, or make allowance, in the pricing formulas.

It is Farm Bureau’s position that make allowances should only be updated based on mandatory and audited plant cost surveys.

This leaves a bit of a loophole in the discussion about how to acquire the data to make current or future updates. The Secretary may have the authority to require data from plants that participate in FMMOs. However, it is unclear if the Secretary has this authority to require cost data from plants that do not participate in the FMMOs.

The end-product pricing formulas are based on wholesale prices that are collected mandatorily by USDA AMS on a weekly basis through the Livestock Mandatory Reporting Act on only those products that are used in FMMO formulas. This includes butter, nonfat dry milk, dry whey and 40-lb block and 500-lb barrel cheddar cheese.

The USDA AMS weekly National Dairy Product Sales Report surveys 168 plants for this price data. Therefore, if make allowances are updated as processor credits against those prices, then all 168 plants should have to report their costs, and only the costs that pertain to those specific products, whether or not they participate in FMMOs. In a recent voluntary cost survey, more than 70% of those plants did not report their cost data.

During a Center for Dairy Excellence Protect Your Profits zoom call recently, risk management educator Zach Myers had as his guest Cornell dairy economist Dr. Chris Wolf to talk about the FMMO reform process and background from an economist’s perspective.

Dr. Wolf gave some important and relevant background and statistics.

The FMMOs have been around for 85 years and were created because of disorderly milk marketing conditions. Their primary function is to make markets function “smoothly” with a second stated objective to provide price stability.

“If we were to re-do them today, I would say price adequacy should be addressed,” Wolf opined, noting that “we have times that the milk prices are very stable, but not very adequate.”

Other stated objectives of FMMOs are to assure adequate and wholesome supplies of fluid milk and equitable pricing to farmers.

“These things are still important today,” Wolf suggests, adding that the auditing, certification and a certain level of market information that is provided by the FMMOs benefits all participants and contributes to the public good.

He explained that FMMOs are changing.

“The primary sources of dissatisfaction with FMMOs in recent years arise because there is not enough money to go around, and some of this is related to the longer-term trends (in Class I sales),” Wolf explains.

He showed that while per capita dairy consumption has been increasing roughly three pounds per person per year, the decline in Class I fluid milk is the underlying factor.

“It really is startling how much of that decline (in Class I) in most areas really happened since 2010,” Wolf illustrated with graphs.

Not only did per-capita fluid milk sales decline more rapidly since 2010 than the already long-term decline charted since 1980, but population growth in the U.S. also stalled — so the total Class I sales have been hit with a double-whammy.

“This relates back to where the value is in the Orders, with most of the decline in the past 20 years occurring in that second half, — since 2010,” he explains.

(The Healthy Hunger Free Kids Act of 2010 was the precursor to USDA removing whole and 2% unflavored and flavored milk from schools and requiring flavored milk to be fat-free. Today, USDA has a proposed rule that could eliminate flavored milk until grade 9 as reported previously in Farmshine).

Because Class I has to participate in FMMOs, the FMMOs were “intentionally structured” in a way that the Class I revenue has always tended to be the highest class price because the FMMOs are in place to structure the fluid milk market, and so Class I accounted for at least 50% of the pool revenue – until 2010.

“We finished 2021 at 34% (down from 50%),” Wolf notes. “So there’s not enough money to go around with less (Class I) value in there.”

What changed? Wolf notes some of the long-term trends.

“First, exports are now 18% of U.S. milk solids production when it used to be that the U.S. exported about 5%… Milk beverage consumption is down while cheese, butter and yogurt are all up. We are still importing 4 to 5%, but as a large net-exporter now,” he says, “The U.S. is basing bulk commodity product prices off the world market. This introduces more outlet for milk but brings back the issues that come with international price-setting, overall,” he explains.

Another change, according to Wolf, is the level of consolidation at every level of the supply chain.

Wolf went over some of the make allowance data based on existing voluntary surveys as well as a prior California state order audited survey. He showed there is a wide range in costs between older and smaller plants vs. larger and newer plants. When determining where to set make allowances – as an ‘average’ or at a percentile of this wide range — there are regional impacts to consider, he suggests.

Wolf also took webinar attendees through the steps of a hearing that can take at least a year or more to complete and he dug into the make allowances from an economic perspective and some of the other pieces of potential reform. Over the next few weeks, we’ll continue to examine them in this series.

The Center for Dairy Excellence Protecting Your Profits webinar with Zach Myers and Dr. Chris Wolf can be heard as a podcast at https://www.centerfordairyexcellence.org/pyp/ or viewed on YouTube at https://www.youtube.com/watch?v=YEMDA4iWyNw