New ‘cost of processing’ report could boost make allowances by almost $1.00 per cwt

By Sherry Bunting

WASHINGTON, D.C. — The USDA released the long-anticipated study on milk price ‘make allowances’ recently. These are embedded in the end-product pricing formulas.

Make allowances are processor credits for transforming raw milk into the four base commodities – cheddar, butter, nonfat dry milk and dry whey that are used in end-product pricing formulas for Federal Milk Marketing Order (FMMO) Class and Component prices as well as the Class I Mover price.

During ADC’s Future of Federal Milk Pricing Forum Feb. 15, set make allowances were cited by panelist Mike McCully as margin guarantees that “encourage commodity production and deter innovation.”

He believes ‘value-added’ products are the path to return more dollars to farmers in the future for all classes, including Class I fluid milk.

“If (FMMO) end-product pricing continues, then the make allowances will have to be raised, and this will come at a cost to producers,” said McCully, referencing the Cost of Processing study commissioned in 2019 by USDA and completed in 2022 by Dr. Mark Stephenson, dairy economics professor at University of Wisconsin-Madison.

In a USDA AMS webinar Feb. 23, Dr. Stephenson talked about the report as well as previous reports in 2006-08 when make allowances were last raised. He observed that today’s plants are more complex with a wider range of products and innovations. Therefore, isolating the costs for the four basic commodities was more difficult this time.

He said 80% of the data came from participation by processing plants owned by cooperatives. Many proprietary plants chose not to participate.

The Class III make allowances for cheese and whey currently total $3.17 per hundredweight, and the Class IV make allowances for butter and nonfat dry milk total $2.17, according to Dr. John Newton, chief economist for the U.S. Senate Agriculture Committee Republicans.

Newton said the new Cost of Processing report shows these make allowances could go up to $4.00 for Class III and $3.12 for Class IV, which represents a nearly $1.00 impact in Federal Order minimum class price reductions if implemented.

“The ultimate result is a reduction in farm milk checks,” said Newton speaking virtually to Kentucky dairy producers at their annual Dairy Partners conference Wed., Feb. 23 in Bowling Green.

“The make allowances are designed to cover the costs of taking raw milk and converting it to these products, where the component value is captured in end-product pricing,” said Newton, observing that they haven’t been raised for more than 10 years, but this hasn’t stopped explosive growth in product production and significant re-blending of farm milk prices in recent years.

“Processors have opportunities to add value in the many other product streams outside of the make allowance and end-product pricing formula, already,” said Newton, noting some of the cumulative numbers and describing this as “effectively a subsidy from farmers to processors to process their milk.”

“This will be a very tough debate, and hopefully farmers are at the table as this debate happens,” he said.

U.S. dairy herds fall below 30,000: Milk’s changing landscape prompts lawmaker’s interest in revitalizing dairy and rural economies in Southeast and beyond

The map shows the annual data released by USDA of licensed dairy herds, cow numbers and milk production by state for 2021 vs. 2020 as the number of dairies fell below 30,000 even though the number of exits, 1799, was below the 20-year annual average (2300) and milk production grew by 1.3% nationwide. Compiled by Sherry Bunting from USDA NASS data.

By Sherry Bunting, published in Farmshine, March 4, 2022

WASHINGTON, D.C. — The U.S. produced 226.3 billion pounds of milk in 2021, up 1.3% compared with 2020, with 56,000 more cows and 1799 fewer dairy herds nationwide.

In fact, the average number of licensed dairy herds fell below 30,000 in 2021 — reported by USDA at 29,858, down 5.7% from 2020. This was less than the larger than average loss of 2550 dairies in 2020 and less than the 20-year average of 2300 exits annually.

The average number of milk cows for the year increased 0.6% in 2021 to an estimated 9.45 million head. Output per cow was slightly higher for the year, but slipped in the second half of 2021 compared with the previous year.

It is important to note that USDA’s annual data released on Feb. 23 computes the average number of cows and the average number of licensed dairy herds for 2021 compared with 2020. This is more like a rolling average for the year. These are not end-of-year numbers.

Furthermore, the landscape of change is getting the attention of some influential lawmakers ahead of 2023 Farm Bill discussions  as interest centers on the economic health of rural communities, and where Dairy thrives, it brings jobs and vitality.

2021 started out strong in production gains, but in the second half of the year, cow numbers began to shrink heading toward 2022, along with output per cow. 

The USDA semi-annual All Cattle and Calf Inventory Report, in fact, estimated 1% fewer milk cows on farms as of Jan. 1, 2022 compared with the previous year and 3% fewer dairy replacement heifers. That is significant compared to the higher 2021 average numbers.

Some of the data shown in the USDA production report raise questions about how milk production is counted and the reliance of NASS on Federal Milk Marketing Order data — given the significant decline in the percentage of U.S. milk production participating in FMMO pools today.

In 2011, an estimated 82% of total U.S. milk production participated in FMMO pools. This fell to 60% in 2021.

Looking over the data, the Eastern Seaboard saw declines in the number of herds, number of cows and in milk production for 2021. The exceptions were New York, Georgia and North Carolina in terms of production.

Starting with the Southeast, past data show the region held its own in 2020, but sustained collective losses of herds, cows and milk in 2021.

The two major reporting states of Florida and Georgia went in opposite directions. As Florida’s trends have pointed lower, Georgia dairies are expanding to take up some of the slack.

In Georgia, where the average herd size has grown by more than 300-head over the past four years, there was an average of 110 dairies in 2021, down by 20, but they milked 1000 more cows to produce 1.5% more milk. The average herd size grew to 745. January’s monthly milk production report shows Georgia is starting the year strong on production and cow numbers as well.

Innovation grants, avid promotion partnerships with retailers and a strong focus on heat stress mitigation, heat-resistance genetics and crossbreeding as well as programs for improved production per cow and milk quality throughout the Southeast are helping progressive herds in some areas take advantage of opportunities to grow or diversify, unless cooperative base programs get in the way.

By contrast, Florida’s dairy herd number fell to 75 in 2021, milking 5000 fewer cows and producing 5.1% less milk, with the average herd size stable at 1440.

North Carolina is not among the 24 major reporting states, but their annual production grew by 2.5%, according to the USDA report, even though they lost 5 dairies and milked 1000 fewer cows.

Virginia is among the 24 major reporting states, and annual production there fell by 3.4% as 54 fewer dairies milked 2000 fewer cows.

Kentucky and Tennessee each had 2000 fewer milk cows with production falling 3.4 and 6.3%, respectively, with 30 fewer dairy herds in Kentucky, 20 fewer in Tennessee.

Collectively, the Southeast region from Virginia to Florida to Arkansas totaled 1,531 licensed dairy herds in 2021 – down 199 (11.5%) from the 1730 reported in 2020. 

Cow numbers in the Southeast region declined by 15,000 head from 430,000 in 2020 to 415,000 in 2021.

During the Kentucky Dairy Partners conference in Bowling Green Feb. 23, John Newton, chief economist for the U.S. Senate Ag Committee Republicans talked about the upcoming 2023 Farm Bill and referenced these herd losses. 

The Kentucky native mentioned Senate Ag Committee Ranking Member John Boozman’s concern about the decline of dairy farms in the Southeast.

“One of the Senator’s dairy initiatives is to look at this. There are only 30 dairies left in his home state of Arkansas. They have lost nearly 90% of their dairies over the last couple of decades. He wants to figure out how to revitalize dairies in the Southeast,” said Newton referencing the secondary map showing the significant exodus.

“Sen. Boozman wants to look at how do we protect the Southeast dairy industry to grow and to revitalize these rural economies so our next generations are not leaving the farm for other economic opportunities,” Newton said, observing that broad band and available labor are two big issues the committee will look at that affect all rural communities.

Newton talked about the average loss of 2300 U.S. dairy farms annually from 2003 to 2020, putting percentages to the numbers and shading the states according to the rate of exodus. States heavily shaded in yellows and reds are losing dairy farms at the fastest rates; however, for different reasons. In the Southeast, Midatlantic and Northeast, the decline in farm numbers is accompanied by a decline in production except for New York, Georgia and North Carolina. Elsewhere, the rapid decline in farm numbers is replaced by larger dairies. States in the Central U.S. like Texas, South Dakota, Minnesota and Wisconsin are seeing significant milk production increases along with decline in dairy herd numbers. This is also true of the Mideast region — Michigan, Indiana and Ohio.

“The Senator’s concern about revitalizing rural economies extends beyond the Southeast to other parts of the country as well,” said Newton. His map illustrated similar concerns in the Northeast and MidAtlantic region, and anyone drilling down into data for communities throughout the rest of the country can see consolidation is reaching a tipping point.

Pricing formulas and inequitable distribution of revenue could be playing a role and will be part of Farm Bill discussions that have already begun, said Newton. He encouraged Southeast producers to be thinking about a better way to price milk and bring it to the broader industry discussions because the outcome has to work for dairy producers in all regions.

The swath of states in the Central U.S. and West is where milk production has grown substantially — in many cases this occurred because state initiatives were set in motion a decade ago to specifically attract dairies and bring processing plant construction and jobs to the rural economies in those states.

The trend in the Southwest has hit some speed bumps in New Mexico and Arizona, but Texas, Kansas, and Colorado are still big gainers. The Upper Midwest and Central Plains are the areas of strong growth too in the past two to three years, followed by the Mideast region – all having seen the building or expansion of significant Class III or IV milk processing capacity owned jointly by cooperatives and global corporations.

Like the Southeast, the Northeast and MidAtlantic region held its own overall in 2020, but milk production fell across the region in 2021, except for New York.

New York’s production grew 1.6% in 2021 with 1000 more cows and 220 fewer dairies. 

However, Empire State was surpassed by the Lone Star State in total milk production. Rapidly growing Texas is now number four in the nation for milk production. New York is number five.

Among the other major reporting states in the Northeast and MidAtlantic milkshed, Pennsylvania’s production for 2021 was barely above 10 billion pounds and 1.6% lower than in 2020.

The number of dairy herds in the Keystone State in 2021 fell by 230 to 5200, and cow numbers fell by 8000 head to 472,000 for the year. In January, the monthly reporting shows the number of milk cows on Pennsylvania farms fell below 470,000 for the first time. 

Pennsylvania remains 8th, having been surpassed by Minnesota for 7th in 2020.

In Vermont, the number of licensed dairy herds in 2021 fell by 60 to 580, and 2000 fewer cows were milked — pushing production 1.4% below year ago.

Of the other states in the Northeast / MidAtlantic milkshed, New Jersey took an almost 11% hit on milk production while Rhode Island declined 7.3%, Delaware 4.3% and Maryland was more stable, down 0.7%, losing 20 dairies. The remaining New England states ranged 1.5 to 4.5% lower in milk production for 2021.

Moving west to the Mideast states of Indiana, Ohio and Michigan — where a huge new processing plant in Michigan became operational a little over a year ago — production grew 4.6% in Indiana, 2.3% in Michigan and 0.4% in Ohio with 24,000 more cows milked collectively in the tristate region on 220 fewer farms in 2021.

Wisconsin had a story of its own, where the 2021 milk production increase on a pounds basis set records after being lower for the year in 2020. The No. 2 dairy state lost more dairy herds than any other state, but the 340 exits were half the number seen a year earlier. 

The number of dairy herds in the Dairyland State fell to 6,770; however, those dairies milked 15,000 more cows, and milk production grew by 3.1% in 2021.

Just south in Iowa and Illinois, production split trends, down fractionally (0.7%) in Illinois, with 1000 fewer cows and 30 fewer dairies, but growing 3.1% in Iowa, with 8000 more cows and 85 fewer dairies.

Throughout the rest of the growing Central region, South Dakota produced 15.5% more milk with 21,000 more cows and 15 fewer dairies. Just east, Minnesota continued to grow milk production 3.7% over year ago in 2021, milking 13,000 more cows on 135 fewer dairies. To the west, Wyoming’s herd numbers were cut in half at 5, but those 5 dairies milked 1000 more cows and grew the state’s production by almost 16.6%. Colorado lost 10 dairies but gained 6000 cows and a 2.3% increase in milk production.

Rounding the bend in Kansas and Nebraska, the trends were split. Kansas saw production growth of 1.9% in 2021, milking 2000 more cows on 10 less farms. Nebraska’s production fell 2.5% on 1000 fewer cows.

In the Southwest, Texas continued its multi-year rapid growth pattern as production increased 5% with 27,000 more cows milked on 20 fewer dairies.

New Mexico was a different story. After holding somewhat steady in 2020, production fell by 4.5% in 2021. The big reason was the exodus of 12,000 cows from the state and the loss of 20 dairies. Arizona also lost cows and production, down 1.5% from a year ago.

The No. 1 dairy state for milk production, California grew milk output by 1.3% in 2021, with 3000 fewer cows and 20 fewer dairies.

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Future of Federal Milk Pricing Forum got ‘wheels turning’

‘We need to figure out a way to get farmers’ voices incorporated into this discussion’

Table I reflects a decade of change in FMMO participation as total U.S. milk production grew 13.3% from 2011 to 2021, and the percentage of milk pooled on FMMOs fell from 82% in 2011 to 60.5% in 2021. California became an FMMO in 2018 after previously being a state order, so California’s production is not included in the 2011 pooling comparison so the pooling percentages are relative to production in FMMO and unregulated regions. Class I pounds as a percent of total production fell from 28.7% in 2011 to 18.6% in 2021. Figures for 2021 are shown both ways, including and excluding California to compare to 10 years ago when the number one dairy state had its own state order with different pooling and classification rules and incomplete data, but the percent of change is nonetheless eye-opening. Chart compiled by S. Bunting 

By Sherry Bunting, published in Farmshine, Feb. 18 and 25, 2022

GREEN BAY, Wis. — Do dairy farmers want to save the baby, save the bathwater, change the flow of the bathwater, or tighten the plug on the drain before the bathwater drains to the point of taking baby with it?

That’s a brutal take after 90 minutes and a lot of information, starting with the basics and hearing perspectives and questions during the American Dairy Coalition’s Future of Federal Milk Pricing Forum on Feb. 15.

It was a first step in what ADC sees as a continuing conversation and effort to engage dairy farmers to lead the process. They said the next forum will be in March.

Geared specifically for dairy farmers, the forum attracted 160 participants from across the country, representing every element of the dairy industry — including dairy farmers.

The virtual format was moderated by Dave Natzke, markets and policy editor with Progressive Dairy magazine. Featured presenters were Calvin Covington, retired co-op COO with 45 years of experience in federal and state marketing orders; Frank Doll, a third generation Illinois dairy farmer involved in American Farm Bureau’s dairy policy committee, and Mike McCully, industry consultant on the IDFA dairy ingredients board and economic policy committee.

Included were comments presented by attendees, who pre-registered for three-minute slots. Others typed into the queue.

“This is complicated, and many people say it can’t be fixed, but we have a great amount of expertise and value here. We covered a lot,” said Laurie Fischer, CEO of ADC at the end of the forum. “We can’t just let this drop. We need to continue to move forward.”

“We heard a lot of good information that has everyone’s wheels turning,” added ADC president Walt Moore of Walmoore Holsteins, Chester County, Pa. He encouraged producers to reach out and engage to tackle the hard topics.

The goal of this initial forum was to inform dairy producers on the Federal Milk Marketing Orders (FMMO) and pricing process to become engaged and have a greater voice in guiding future policies.

For its part, American Farm Bureau Federation spent the past couple years going through a similar working group with policy recommendations coming from states to national and back to states. 

Several commenters concurred with the position of ADC, Farm Bureau and other organizations that Class I pricing should return to the ‘higher of’ method until future policies can go through what could be a long hearing process of potential revision for the future.

In fact, one eye opener during the Forum was Doll’s confirmation that Farm Bureau policy now includes support for going back to the ‘higher of’ — plus adding 74 cents — in the calculation of the Class I mover price, while remaining open to other ideas.

Doll said consensus was hard to find in the Farm Bureau working group of 13 members from across the country due to regional differences in the makeup of processing. But general recommendations found agreement, including the reference to Class I as well as modified bloc voting where co-ops can vote for their members on Federal Orders, but farmers can cast their own votes and be encouraged to do so.

Several attendees cited the need for a vehicle for producers to have real input without fear of retribution, that farmers should collectively ask questions of their cooperatives, seek better representation and together, hold their cooperatives accountable to represent their interests. 

“We need to figure out a way to get farmers’ voices incorporated into this discussion. I hear from producers all the time, but there is fear of retribution, the threat that your milk is not going to get picked up. If you are on a board and speak up, you’re not there very long,” said Kim Bremmer, representing Venture Co-op in Wisconsin, a third-party ‘testing co-op’ qualified by USDA.

She addressed bloc voting, saying: “What’s the point of having a hearing if producers can’t vote? We don’t have great representation from some of the groups that say they represent us.”

Bottomline, said Bremmer: “We have to address how to get more of the producer voice and not just the processor voice — because they’re not the same.”

She asked: “Is it a conflict of interest if you’re a processor and you’re marketing milk and you’re also advocating for producers? I think that’s an important question that needs to be answered. We need to stay engaged in this and be able to ask the tough questions and demand some answers.”

ADC’s Fischer said the organization wants to work with farmers and their state and national organizations to provide a vehicle to bring farmers together and compose a list of pricing policy items to explore further with experts.

One clear change in the dairy industry formed the crux of the discussion: The growth of milk production in the U.S. — in concert with growing export sales and declining fluid milk sales — put export sales volume above Class I volume as a percentage of total milk solids in 2021.

McCully described this as “a seismic change.”

Covington confirmed that Class I sales — as a percentage of total milk production — fell below 20% in 2021. The percentage of Class I milk within the 137 billion pounds pooled on 11 FMMOs in 2021 was about 30%.

Contrary to the widely held belief that FMMOs regulate a majority of the milk, they simply do not. Covington confirmed that the 137 billion pounds of milk pooled on 11 FMMOs in 2021 represents only about 60% of U.S. milk production.

The FMMOs aren’t designed for this direction that the dairy industry is going toward global markets, according to McCully.

He said the world will look to the U.S. as the “go-to market,” claiming New Zealand and the EU are maxed out. He described the “white gallon jug” as being the most prime example of a low-margin commodity and predicted ‘value-added’ products will return more dollars to farmers in the future. These are recurrent themes heard from speakers at winter meetings this year.

(Author’s note: In contrast, current industry-wide discussion on the ‘sustainability’ side is for a ‘stable’ U.S. cattle herd to be an indicator of dairy’s climate neutrality. If exports grow, and the U.S. herd remains ‘stable’, then export milk will have to come from growth in output per cow and displacement of Class I production. One can see how geographic camps can set up, since fresh fluid milk sales are vital to the viability of dairy farms in areas outside of the earmarked growth areas for dairy manufacturing in the Central U.S. — the question is how to bridge it.)

At the same time, dragging feet doesn’t seem to be much of an option.

If dairy policy remains ‘status quo,’ leaving the FMMOs ‘as-is,’ they could eventually cover less and less milk and potentially collapse, according to McCully.

Covington also addressed this, noting that FMMOs “were designed for fluid milk, but today, fluid milk is a minority use. People used to drink their milk, now they are eating their milk.”

McCully noted the need for dairy innovation. He said make allowances have facilitated large-scale commodity plant construction supplied by large-scale farms, suggesting it is these built-in make allowance ‘margins’ that favor commodity production and deter innovation. 

“If end-product pricing continues, the make allowances will have to be raised,” he said, citing a new make allowance study “fresh off the press.”

In 2019, USDA commissioned Dr. Mark Stephenson, dairy economist at University of Wisconsin-Madison, to do the study. Stephenson recently announced it is complete and will soon be released by USDA. McCully’s glimpse at the report shows make allowance calculations to be “significantly higher” than the amounts embedded currently in end-product pricing formulas.

Western Pennsylvania dairy nutritionist Harry Stugart offered his concise, data-driven argument that the make allowances be removed from the formula for the ‘advance’ Class I mover price because these make allowances do not pertain to fluid milk. In January 2022, he said they amounted to $2.67 per hundredweight.

Another crucial part of the discussion was how FMMOs actually work and what they do, besides pricing.

Covington gave attendees a primer of key points to think about as discussions move forward. What he shared may be old news to some, but it’s surprising how many people do not know these facts:

— FMMOs are not required by law, they are simply “enabled” to exist by law. This means producers vote to have them (California in 2018) or to terminate them (Idaho 2004).

— Only Class I fluid milk plants are required to be regulated under FMMOs.

— Class II, III and IV plants participate voluntarily, and they tend to do so “when it’s economically feasible.” Rules of participation vary from Order to Order.

— FMMOs establish other things besides minimum pricing for regulated plants. This includes setting payment terms, providing market information and market services such as testing and auditing.

— The last FMMO reform (2000) was complicated and took four years. It was a combination of legislation (1995 Farm Bill) and an administrative rulemaking process.

— Today, there are four classes of milk, but that was not always the case.

— Today, the Class I mover (base price), as well as the Class II, III and IV prices are established to be the same in all FMMOs, but in the past different FMMOs had different mechanisms.

— Cooperatives are not required to pay FMMO minimum prices even if they own regulated Class I plants because cooperatives are viewed by the FMMOs as one big producer and can make their own decisions about distributing the revenue received to their farmer-members.

— Today, over half of the Class I fluid milk plants in the U.S. are either owned by cooperatives or by large retail supermarkets. Over the past 60 years of consolidation, FMMOs have gone from regulating 2250 fluid milk plants in 1960 to just 225 in 2021.

— Cooperatives balance the Class I market at a cost. Excess milk can go to unregulated buyers at a price that is several dollars below the minimum price. Some co-ops run their own balancing plants. These costs can result in paying farmers below minimum price.

“Milk pricing should return a fair cost to producers, processors and retailers. A chain is only as strong as its weakest link,” said Sherry Bunting, speaking on behalf of the Grassroots PA Dairy Advisory Committee. She also highlighted the Whole Milk for Healthy Kids Act, H.R. 1861, explaining how support for this legislation is essential — no matter how milk is priced.

“In the process of working on this legislation, our (Grassroots PA) committee has identified other concerns. It is hard for producers to advocate when even such a simple and good thing as whole milk in schools is rebuked,” said Bunting. “Farmers hear from leaders and inspectors: ‘If we sell whole milk in schools, do you think we can just stop making cheese and other products?’ Or ‘All you are doing is disrupting markets and creating a butterfat shortage.’ Or ‘Be careful what you wish for.’ These are veiled threats.”

Bunting highlighted the need for greater competition, accountability, transparency and timeliness of price reporting. 

“Dairy farmers have farms to run, cows to care for, and they become paralyzed by the complexity and lack of transparency in the system and their milk checks. They become overwhelmed and unconfident, even fearing retribution,” she said.

Bremmer specifically addressed milk check transparency.

“We have members with attorneys that cannot interpret their milk checks. That has to stop,” said Bremmer. “Why wouldn’t processors want to show farmers what they are paying them? What is the reason? To have attorneys and others looking at it and they can’t figure it out, that’s a real problem. We think they’re probably re-blending some things to make another ‘make allowance’. We know these things are happening all across the United States.”

Payment terms are critical in this conversation. Even the best-made plans for risk management mean nothing if farmers don’t receive timely and consistent payments for their milk due to the high capital costs and cash flow needs of running a dairy farm. 

One commenter said farmers want their income to come from consumers, not from the federal government. He wondered why Federal Milk Marketing Orders (FMMOs) are even needed to guarantee payment.

“Why? So you get paid,” replied panelist Covington. “The FMMOs all establish dates when advance and final payments are made. Having been a co-op manager working with fluid milk plants, I can’t emphasize enough how important this is.”

He also pointed out the important auditing, weights and measures, and market information the FMMOs provide.

McCully said these other services provided by FMMOs are “something we need more of going forward. We need less (price) regulation and more (market) information,” he added. “What’s not working is the milk pricing.”

Here’s where the crux comes into play: The FMMOs are not set up to regulate a global product market, and the industry has set its sights on exporting even more. This is leading the dairy industry to look at how other countries price milk as it relates to the U.S. pricing system and its ability to “be globally competitive.”

As the percentage of Class I sales have declined in relation to growth of U.S. milk production over the past decade, the percentage of milk pooled on FMMOs has also declined from 82% in 2011 to 60% in 2021 (See Table I).

Covington explained how pooling plays out within the FMMO system: “A regulated plant is required to pay its direct shippers and any co-op supplying milk a minimum blend or uniform price. Each Order takes the revenue from each class at the minimum price and pulls it together into one pool to come up with the uniform price.”

He said Class I differentials “have two purposes, to move milk to fluid use and to gain additional revenue for dairy farmers.” They range from $1.60/cwt in the extreme northern U.S. to $6.00/cwt in Miami, Florida and are added to the base Class I mover price. 

The regulated Class I plants pay the difference between the uniform price and the Class I minimum price into the FMMO. Other class plants voluntarily participate to take a draw from the FMMO to add to what they pay their producers. That’s how it has worked most of the time – until now.

Diminished Class I sales as a percentage of total milk flip this switch, and the 2018 Farm Bill change to averaging Class III and IV skim plus 74 cents — instead of the ‘higher of’ — along with the advance pricing element, have increased the de-pooling pressure on this system, especially during times of volatility.

When asked about wide price inversions that occurred in some months over the past two years, both Covington and McCully observed the impact on bottlers paying above minimum prices to attract milk away from then higher-value Class III.

In thinking about the future, Covington reminded attendees of the past. He said at one time some Orders had individual handler pools — not marketwide pools — a nod to the idea of how FMMOs could continue to regulate Class I, if handlers in the other classes lose interest in participation.

Back when California was a state order, virtually all milk was pooled. Plants had to make decisions about pooling annually by January 1. 

McCully contended that this scenario led to dumping of milk and inefficient transport to other areas. According to his analysis, the idea of making the pooling rules more restrictive and uniform across all FMMOs would lead processors to completely leave the system, and they can do that because their participation is voluntary, except for Class I.

Risk management was on the mind of several commenters, including Doll. He pointed out how the ‘holes’ in the Class I pricing change were exposed by the pandemic volatility. (Significant losses to Class I value are occurring again in the February and March 2022 Class I price.)

Joining Doll as a fellow Illinois dairy farmer was Bryan Henrichs. He said the class price inversions during the pandemic left many farmers on the losing end of what they thought were ‘safe’ $18 Class III forward contracts. The up to $9 negative PPDs kept them from achieving that price when the Class III price exceeded the contract level, but the farmer didn’t receive that price in the milk check — a double whammy.

Henrichs and others noted that milk should be priced competitively and simplified. Henrichs mentioned the idea of pricing milk at one price — no matter what it is used for — allowing market participants, including farmers, to manage risk and trade location basis, like for corn.

Arden Tewksbury’s comments from Progressive Agriculture Organization based in Meshoppen, Pennsylvania were presented by Carol Sullivan — highlighting the need for cost of production in the pricing equation, along with a realistic supply management program. 

Annual FMMO pooling decisions (instead of in and out), and his longtime support for whole milk in schools were other key points offered by Tewksbury.

One attendee stated that if processors are looking to raise their ‘make allowances,’ why not add a ‘make allowance’ for producers?

On cost of production, McCully pointed out that the range is wide between a 50,000-cow dairy in western Kansas and a 40-cow dairy in northern Vermont, for example. He said interstate movement of milk and the fact that FMMO participation is voluntary for over 80% of the milk outside of Class I creates issues for using a blanket national average cost of production.

McCully said ‘cost-plus’ contracts are being used today by some processors and producers, but this is only for milk sold outside of the FMMO system.

As confirmed by Covington, 40% of the U.S. milk supply was priced outside of the FMMOs in 2021. He said this could increase as Class I becomes a smaller slice of the growing pie, especially in areas of the country where Class I is already quite small.

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MILK MARKET MOOS: Jan. 2022 milk down 1.6%, licensed herd average falls below 30,000 in 2021, futures higher, spot commodities lower

Milk Market Moos, by Sherry Bunting, is a weekly feature in Farmshine. Portions are republished below with the prices updated to Fri., Feb. 25 after the print edition went to press Wed. evening, Feb. 23.

Milk production in all U.S. states collectively during January fell by 1.6% vs. year ago. In the 24 major reporting states, the decline was 1.4%. December’s production was also revised lower than the estimate last month.

January’s production decline came from a combination of reduced output per cow and 63,000 fewer cows compared with a year ago. Cow numbers in January are 5000 fewer than December.

This trend could go on for some time, as we noted recently in this column, that the Jan. 1 semi-annual All Cattle and Calf Inventory Report recently showed a 1% decline in milk cow numbers compared with Jan. 1 2021 and a whopping 3% decline in replacement dairy heifer numbers vs. year ago.

The 2021 production total for the U.S. was also released in the Feb. 23 USDA Milk Production Report showing last year’s U.S. milk production total was 1.3% above 2020.

At the same time, the average number of licensed herds in the U.S. during 2021 (not an end-of-year number) was reported at 29,858 — down 1,794 compared with the average number of licensed herds in 2020 and the first time the number fell below 30,000. This is a 5.7% decline in the average number of licensed dairy herds nationwide. In 2020, there was a 7.5% decline as the nation lost 2550 dairy herds that year.

In the Northeast and Midatlantic milkshed, among the major reporting states, Pennsylvania’s production was 2.9% below year ago in January with 6000 fewer milk cows on farms; 2021 production in the Keystone state was 1.6% below 2020 and the average number of cows on PA farms last year was 8000 fewer than in 2020.

January’s production in New York was down 0.6% with 5000 fewer cows; 2021 production in the Empire State was up 1.6% with the average number of cows on NY farms in 2021 numbering 1000 more than in 2020.

Vermont’s cow numbers fell by 1000 head in January 2022 vs. Jan. 2021 and milk production was off by 1.8%; 2021 production in the Green Mountain State was down 1.4% vs. 2020 with 2000 fewer cows as an average for the year.

The average number of licensed herds in Pennsylvania in 2021 was 5200, down 230 from 2020 (4.3% drop); New York 3430, down 220 (6% drop); and Vermont 580, down 60 (a 9.4% drop); Virginia 421, down 54 (11% drop).

In the Southeast milkshed among major milk producing states, Florida’s average number of herds was 75 in 2021, down 10 from 2020 (11.8% drop); Georgia 110, down 20 (15.4% drop). Production and cow numbers were mixed with Georgia growing output by 1.4% in 2021 vs. 2020 with 1000 additional cows; Florida’s production declined 5.1% with 5000 fewer cows, and Virginia’s production was down 3.4% with 2000 fewer cows.

Georgia’s production last month was up a whopping 5.1% as one of only 5 states to show a year over year production increase in January 2022 with 3000 more cows than a year ago even though the number of farms fell by over 15%.

By contrast, January’s production totals in Florida and Virginia were down 3.5% and 3.8% with 4000 and 3000 fewer milk cows, respectively.

Four other states gained production in January vs. year ago, (in addition to Georgia). They were: Iowa, up 1.7% with 3000 more cows vs. year ago; Idaho up 0.6% with 4000 more cows, Texas up 3.5% with 12,000 more cows, and South Dakota up a whopping 18.3% with 28,000 more cows.

The two largest milk production states saw a pullback in January: Wisconsin’s production was off fractionally while California, the largest producing state, saw a 1.9% decline in year over year production in January.

New Mexico’s trend deepened. 2021 production was 4.5% lower than 2020 with 12,000 fewer cows. In January 2022, production was below previous year by 12.1% with 42,000 fewer milk cows. New Mexico’s average number of licensed herds in 2021 came in at 120, down 20 (down 14.3%).

Texas also saw 20 fewer licensed herds last year, at 340 (down 5.6%). However cow numbers grew 27,000 in in the Lone Star State during 2021 with production beating 2020 by 5%.

Texas officially surpassed New York as the 4th largest milk producing state with 15.6 billion pounds of milk vs. New York’s 15.5 billion pounds in 2021. The January 2022 figures show 12,000 more cows and 3.5% more production vs. year ago in Texas.

South Dakota lost 15 herds at an average 165 for 2021 (down 8.4%). However, South Dakota gained 21,000 cows and 15.5% in milk production for 2021 vs. 2020. Neighboring Minnesota, the 7th largest milk producing state gained 13,000 cows and 3.7% in production in 2021 at 10.5 billion pounds — putting more daylight ahead of Pennsylvania, the 8th highest producing state at 10.1 billion pounds in 2021.

Look for more analysis of the yearend report in the next print edition of Farmshine and here at agmoos this week.

Cl. III and IV milk futures mixed,12-mo. Cl. III avg. $21.51, IV $23.25

Class III and IV milk futures were mixed when Farmshine went to press at midweek, Feb. 23 — before global reports showed a shrinking milk supply and before the Russian invasion of Ukraine commenced. Figures in the Farmshine print edition of Milk Market Moos have been updated using milk futures quotes at the close of Friday, Feb. 25 trade below.

Class IV split the trend with first half 2022 steady to lower, second half firm to higher, while Class III was mostly higher, except March and April contracts under downward pressure. In the Class III trading, new contract highs were set for August through December 2022.

The bullish USDA milk production report came out at the close of CME trade on Feb. 23 — prompting after hours trade to tick higher Feb. through Aug. by 25 to 65 cents on Class III, strengthening further at the end of the week on news of global supply deficits tempered by the uncertain impacts of war in Eastern Europe.

Class III milk futures recouped twice as much as was lost last week, averaging $21.63 for the next 12 months on the close of trade Wed., Feb. 25. This is 29 cents higher than the average a week ago,

Class IV futures averaged $23.46 for the next 12 months, generally steady at midweek compared with the previous week’s average, but gaining 22 cents Thursday and Friday on the average.

The average spread between the Class III and IV milk futures contracts for the next 12 months Feb. 2022 through Jan. 2023 stood at $1.83/cwt on Feb. 25 — 10 cents narrower than a week ago with Feb. through August contracts $1.80 to $2 apart and narrowing to right around the $1.48 threshold by September.

CME spot dairy commodities lose ground

CME spot dairy prices moved higher on Class III products (cheese and whey) before turning lower at the end of the week. For Class IV products (butter/NFDM) the trend started lower and continued lower through week’s end.

By Fri., Feb. 25, butter lost two-thirds of last week’s huge gain, pegged at $2.5785/lb with 2 loads trading. This was 20 cents lower than the previous Wednesday, with 8 cents of the loss occurring in a single session Friday.

Grade A nonfat dry milk (NFDM) lost 5 pennies this week then gained one back on Wed., Feb. 23 when the spot price was pegged at $1.86/lb — down 4 cents from a week ago with 12 loads trading. Thursday’s trade saw a penny and a half increase, which was lost Friday, to end the week at $1.86/lb.

On the Class III side of the ledger Wed., Feb. 23, 40-lb Cheddar blocks were firm at $1.99/lb, gained 3 cents Thursday, but lost 7 cents Friday, Feb. 25, when 40-lb blocks were pegged at $1.9450/lb, down 4 1/2 cents from a week ago with a single load changing hands; 500-lb barrels at $1.90/lb were 1 1/2 cents lower than a week ago with 2 loads trading Friday.

The spot market for dry whey gained a penny, at 81-cents on Wed., Feb. 23, with no loads trading, but then lost 3 cents in end of week trading, pegged Fri., Feb. 25 at 78 cents, no loads traded.

Grain market rallied

Corn rallied 10 to mostly 30 cents per bushel higher last Wed., Feb. 23 on the eve of the Russian invasion of Ukraine, most strength near term; soybean meal $10 to $30/ton higher with far off contracts $5 to $10/T higher than a week ago. Those levels followed wheat higher on the news in the wee hours of Thursday morning of the Russian invasion of Ukraine, a global exporter of wheat, corn and other grains and oilseeds, number one crop being sunflowers.

By Friday, Feb. 25, the run-up had tamped down, but with near-term contracts still much higher than a week ago — May corn closed at $6.55 down from highs over $7 the previous day; May soybean meal closed at $442.70 Friday.

Auction prices for market cows, calves, dairy fats backoff a bit after big gains two weeks ago

Market cows, fat dairy steers, and return to farm Holstein bull calves, especially beef crosses, jumped significantly higher two weeks ago and edged off a bit in the Feb. 17 to 22 auction market trade in Lancaster County. Choice and Prime Dairy steers averaged $115.00, Breaking Utility cows $81.10, Boning Utility $74.50, Lean cows $65.75. Holstein bulls 90 to 125 lbs averaged $143.00 with beef crosses bringing more than double, averaging $340.00; 80-100 lb $130.00, beef crosses $280.00.

Rep. Lawrence to introduce bill for Whole Milk in PA Schools

Rep. John Lawrence (right) talked about the Whole Milk in Pennsylvania Schools Act, which will soon be formally introduced in the State House. He was joined by (l-r) Bernie Morrissey, chairman of the Grassroots PA Dairy Advisory Committee, Nelson Troutman, 97 Milk Baleboard originator, Kelly Bliss, Huntingdon Co. Dairy Princess, and Crystal Bomgardner, Pa. Alternate Dairy Princess from Lebanon Co. Photo credit: Linda Gilbert

Dairy farmers hear ‘whole’ story: The 97 Milk effort and Pa. State Rep. Lawrence’s new bill

By Sherry Bunting, published in Farmshine, Feb. 25, 2022

BERRYSBURG, Pa. — A bill will soon be introduced in the Pennsylvania State House that would allow Pennsylvania schools to offer the choice of whole milk. The author of the Whole Milk in Pennsylvania Schools Act is Rep. John Lawrence. He circulated a cosponsors letter a few weeks ago.

On Monday, Feb. 21, Lawrence talked about House Bill 2397 at an annual dairy day here at the Berrysburg Community Center in Dauphin County, Pa. The event, attended by over 100 producers and 30 vendors, was hosted by Great Creatures Veterinary Service as a customer appreciation luncheon and workshop.

Berks County dairy farmer Nelson Troutman — initiator of the ‘Drink Whole Milk 97% Fat Free Baleboards’ — was invited by veterinarian Dr. Joy Lenker to talk about the bale art and the progress of the whole milk education movement.

Bernie Morrissey, chairman of the Grassroots PA Dairy Advisory Committee, joined Troutman during his presentation, and they introduced Rep. Lawrence to share the good news about the Pennsylvania whole milk bill.

Lawrence, who represents parts of Lancaster and Chester counties, said he expects to officially introduce the bill with prime cosponsor Clint Owlett, representing Tioga County, when the Pennsylvania General Assembly returns to session in Harrisburg in a few weeks.

During a recent Farmshine phone interview, Lawrence confirmed that his cosponsor memo generated “good support” among colleagues and supportive responses from Pennsylvania Farm Bureau, several other farm organizations, some schools, and most importantly, from dairy farmers, who tell him they are “very grateful.”

Lawrence is concerned about dairy farmers across the state. He has been advocating for them for many years in the General Assembly. He has proposed several bills in the past on other issues related to the PMMB, over order premium distribution, and milk check transparency. Some that passed the House, did not get considered by the Senate before expiring.

“We have had some wins and some setbacks over the years,” said Lawrence. “But this whole milk bill is something I believe will get done. I think there is a lot of support for it and a lot of truth to what the farmers say — that they are losing a whole generation of milk drinkers. There are schools in Pennsylvania that want to provide this choice of whole milk for the kids.”

Lawrence said the bill is structured to deal with this as a state-level issue.

“We want the federal government to address this, to end their prohibition of whole milk in schools, but it has been quite a while now, and they are not addressing it… So we are going to see if we can address it for Pennsylvania,” he affirmed, adding that more details about the bill will be forthcoming when it is formally introduced.

In his cosponsor letter, Lawrence wrote that “due to federal regulations enacted under the Obama Administration, whole (3.25 %) and reduced fat (2%) milk are not served in schools today. Speak with any school cafeteria worker, and they will tell you students are not fans of skim milk. Speak with any dairy farmer in Pennsylvania, and they will tell you that this ill-fated federal directive of removing whole milk from schools is a top concern.”

He also cited studies about the amount of milk wasted at school.

In fact, the federal government did a before-and-after study comparing plate waste in 2011 vs. 2013 to gauge their 2012 ‘nutrition standards’ that reduced the allowable fat content in milk to fat-free or 1%, even for a la carte competing beverage options. This early USDA study showed an immediate 24% reduction in students selecting milk at school and a 22% increase in discarded milk among students who were served the required skimmed milks. 

Subsequent studies show the situation has only worsened over the past decade.

Lawrence’s cosponsor letter explains the mechanics of the state’s interest under the tenth amendment of the U.S. Constitution. 

The memo states: “In the near future, we will introduce the Whole Milk in Pennsylvania Schools Act. This legislation will ensure Pennsylvania students, at Pennsylvania schools, have the option to consume Pennsylvania whole and two percent reduced fat milk paid for with Pennsylvania tax dollars.”

Morrissey said this is welcome news for dairy farmers and the state’s dairy industry, not to mention for the schoolchildren.

He and Troutman were glad to be able to share the good news at the dairy day in Berrysburg.

Troutman showed the Channel 39 public television news video that aired two years ago featuring Troutman and Jackie Behr, marketing manager for the 97 Milk effort, as they explained how the movement got started and what was being accomplished at the start.

He updated attendees to where things are today as 97 Milk celebrated the start of its fourth year this month.

“There is so much to say, but we kept it light,” said Troutman in a phone interview. “I told them about the Pennsylvania Senate hearing back in June, how our committee testified about bringing back the choice of whole milk in schools. Senator Scavello (representing Monroe and Northampton counties) really liked the information on the 6 x 6 card Jackie Behr put together, telling what whole milk provides. I gave him one before the hearing, and he read it two times to be sure it was in the record.”

Troutman confessed he had no idea his painted round bale would lead to a milk education effort with a website, 97milk.com bringing increasing numbers of daily traffic, and social media platforms with monthly average reach of over 300,000 people, as well as some individual posts showing data reaching one million people. He thanks Behr and the 97 Milk board for that, and he thanks Farmshine for telling the story, so other farmers could get involved and bring their ideas.

“It is a team effort,” Troutman confirmed. This teamwork is helping get more cosponsors for the Whole Milk for Healthy Kids Act in Washington. The bipartisan bill was introduced in March 2021 by Rep. G.T. Thompson (R-PA) and Rep. Antonio Delgado (D-NY). It currently stands at 88 cosponsors from 31 states.

The teamwork also led to a 30,000-signature petition, multiple comment drives in USDA rulemaking, speaking engagements with ag and non-ag service groups, and a Pennsylvania school trial demonstrating a 52% increase in students selecting milk and a 95% reduction in discarded milk when students had the option of whole milk, with post-trial surveys showing whole milk was preferred 3 to 1 over low-fat 1% milk.

“I am a positive person, but after that Pa. Milk Marketing Board listening session in Lebanon three years ago, seeing we didn’t get anywhere on some things, I went home feeling like I lost my best cow. That’s the best I can describe it. I thought that listening session was going to break things open, but it didn’t,” Troutman told fellow farmers Monday. “I thought I had to do something, anything, so I painted a bale, and yes, well, this is what happened.”

He observed that one of the biggest things is how this movement is energizing dairy farmers, and agribusiness partners are joining in. There’s a renewed purpose.

“This opened people’s eyes. We finally have a way to promote whole milk, and that is spreading to other states, and we even hear from people in other countries,” Troutman said.

“It’s positive news. We need positive news, and the consumers, they want positive news too. They want to know about milk. We didn’t have a way to promote whole milk… until now. We lost a generation of milk drinkers, and we have to make up for that,” said Troutman. “I saw ADANE just did a webinar on whole fat dairy and mentioned the New Jersey Academy of Pediatrics and Nutrition. I didn’t get to watch it, but this is icing on the cake. We have to keep this going because we are finally starting to get somewhere, in the right direction.”

Nelson Troutman talks about the whole milk education effort and  97milk.com   Photo submitted

March Class I mover higher, but marks second straight month of value loss under current formula

Weekly MARKET MOOS, by Sherry Bunting, Farmshine, Feb. 18, 2022

March Class I ‘mover’ $22.88 instead of $23.67

The March Class I base price, or ‘mover’, was announced Wed., Feb. 16 at $22.88. This is $1.24 higher than the Feb. Class I ‘mover’ and $7.60 higher than a year ago. This marks the 6th consecutive month of Class I mover gains.

However, for the second consecutive month, the Class I mover is at a level lower than it would have been under the previous ‘higher of’ formula. Announced at $22.88 for March 2022 using the average-plus method, this is 79 cents lower than the $23.67 it would have been under the previous ‘higher of’ formula.

As shown above, the net loss in Class I value since the new formula was implemented in May 2019 is over $738 million. This could continue for the foreseeable future if this week’s futures markets are an indication.

Near term futures diverge by $2 to $3; 12-mo. Cl. III avg. $21.34, IV $23.28

Class III milk contracts came under pressure at midweek while Class IV surged solidly higher. This created more divergence between the two this week — to spreads beyond the $1.48 ‘magic number’ for all but three of the next 12 month contracts. ($1.48 is the point when the Class I price set by the current average-plus method becomes a loss compared to the previous ‘higher of’ method.)

We already saw this occur for the February and March 2022 Class I mover (above).
But the good news is the overall price levels are the highest in 8 years for most of these months — just not as much higher as they would have been using the ‘higher of’ method.

The average spread between the two milk contracts for the next 12 months Feb. 2022 through Jan. 2023 stands at $1.94/cwt this week.

Class III milk futures averaged $21.34 for the next 12 months, 8 cents lower than the average a week ago.

Class IV futures averaged $23.28 for the next 12 months, gaining 47 cents on top of last week’s 67-cent gain, now up fully $2.00 compared with a month ago.

CME spot dairy products all higher, except whey slips a penny

CME spot dairy prices moved higher on all products this week, except whey slipped another penny. Butter made the biggest gains, followed by block cheddar.

On Wed., Feb. 16, butter was pegged at $2.80/lb with 7 loads trading. This is up a whopping 27 cents compared with a week ago but 7 cents below the high for the week at 2.87/lb on the previous day.

Grade A nonfat dry milk (NFDM) hit $1.90 this week, then lost a penny Wed., Feb. 16, pegged at $1.89/lb — still a 2 1/2 cent gain over a week ago with a single load changing hands.

On the Class III side of the ledger Wed., Feb. 16, 40-lb Cheddar blocks were pegged at $1.9825/lb, up 8 cents from the previous Wednesday with 3 loads trading; 500-lb barrels at $1.92 are up 6 cents from a week ago with 3 loads trading.

The spot market for dry whey lost another penny this week, but remains above the 80-cent mark. On Wed., Feb. 16, a single load traded and the price was pegged at 81 cents/lb.

Jan. blend up $1.50-$2.00: Class IV tops Class I in all 7 MCP Orders

January’s uniform prices announced in each of the 11 Federal Milk Marketing Orders (FMMO) over the past several days were $1.50 to $2.00 higher across the board for the third consecutive month. In the 7 multiple component pricing (MCP) FMMOs, the Class IV price topped the Class I minimums (including differentials) and in some FMMOs, the Class I minimums were the lowest class price.

Statistical reports show the spreads incentivized some de-pooling of Class II and IV milk. In the Northeast FMMO for January, Class IV and Class II, combined, accounted for 40% of utilization and Class I accounted for 31%, contributing to a blend price that was $2.36 above the Class III price. PPDs were positive throughout all MCP Orders because Class III was the lowest price. (PPD = blend price minus Class III.)

January’s uniform prices moved higher for the third straight month — across the board — as follows:

FMMO 1 (Northeast) SUP $22.74 PPD +$2.36
FMMO 33 (Mideast) SUP $20.38 PPD +$0.96
FMMO 32 (Central) SUP $21.09 PPD +$0.71
FMMO 30 (UpperMW) SUP $20.59 PPD +$0.21
FMMO 126 (So. West) SUP $21.63 PPD +$1.25
FMMO 124 (Pacific NW) SUP $21.49 PPD +$1.11
FMMO 51 (California) SUP $21.25 PPD +$0.87
FMMO 5 (Appalachian) uniform price $23.72
FMMO 7 (Southeast) uniform price $22.28
FMMO 6 (Florida) uniform price $25.49
FMMO 131 (Arizona) uniform price $24.17

Comments due March 24: Ask USDA to end its prohibition of whole milk in schools, give students milkfat choice

Photo credit (Top) USDA FNS website screen capture from https://www.fns.usda.gov/building-back-better-school-meals and (bottom) fat-free flavored milk and fat-free yogurt on a local school lunch tray.
Screen capture and lunch tray photo S.Bunting

By Sherry Bunting, published Farmshine, Feb. 18, 2022

WASHINGTON — As reported in the Feb. 11 Farmshine, USDA announced a ‘transitional standards’ rule on Feb. 4 for milk, whole grains, and sodium for school years 2022-2023 and 2023-2024. 

The transitional standards are only in place while USDA works with stakeholders on long-term meal standards through a new rulemaking. 

The proposed rule for the longer-term is expected to come from USDA in fall 2022 and will become effective in school year 2024-25. It will be based on the Dietary Guidelines for Americans 2020-2025, but USDA says it is conducting a public comment and review process related to the standards and to the “gradual implementation” plan it will develop based in part on stakeholder input. 

In the official transitional standards rule, USDA notes that full implementation of its 2012 meal pattern requirements for milk, grains and sodium have been delayed at intervals due to legislative and administrative actions. “Through multiple annual appropriations bills, Congress directed USDA to provide flexibility for these specific requirements.” 

Read the transitional standards rule here at https://www.regulations.gov/document/FNS-2020-0038-2936 where a comment button can be clicked to provide a public comment to USDA by March 24, 2022.

Now is the time to comment before March 24, 2022 and to call for an end to the prohibition of whole milk in schools. Request that USDA restore the choice of whole milk in schools by commenting at the online rulemaking portal https://www.regulations.gov/commenton/FNS-2020-0038-2936

Comments and questions can also be sent to: Tina Namian, Chief, School Programs Branch, Policy and Program Development Division—4th Floor, Food and Nutrition Service, 1320 Braddock Place, Alexandria, VA 22314; telephone: 703-305-2590. 
Include FNS-2020-0038-2936 in your correspondence. 

In a rare move Feb. 7, the American Association of School Superintendents (AASA) made a public media statement on the transitional standards — pointing out their concern that the long-term standards will be ‘more stringent’ due to the restrictive Dietary Guidelines that were approved by USDA and HHS in 2020. 

The Association of School Superintendents stated: “It is important to acknowledge that healthy meals are only healthy if students eat them.” 

Agreed! This applies to the milk also. Students miss out on 21 minerals, 13 vitamins, complete high quality protein, a healthy matrix of fat and several nutrients of concern when they don’t actually consume the milk offered or served at school. Those nutrients ‘on paper’ are then not realized. Many key nutrients of concern are also fat-soluble. A study at St. Michael’s Children Hospital, Toronto, showed children consuming whole milk had 2.5 to 3x the Vit. D absorption compared with those consuming low-fat milk, and they were at 40% less risk of becoming overweight! Details were presented in a June 2021 hearing in the Pennsylvania Senate, listen here

Milk consumption plummeted and waste skyrocketed since USDA’s 2012 fat-free/low-fat milk rules were set for both ‘served’ milk and competing a la carte offerings. Studies by USDA and others show milk is now one of the most discarded items at school. In fact, USDA did a plate waste study comparing 2011 to 2013 (pre-/ and post-change) They focused on fruits and vegetables, but saw milk decrease significantly, waiving it off as though it were due to an “unrelated policy change.” Technically, it was the smart snacks rules for beverages and it WAS related to the 2012 standards as both were implemented together.

See the losses in Tables 2 through 4 below in ‘selection’ and ‘consumption’ of milk from the USDA study reflecting a 24% reduction in student selection of milk (offer vs. serve) after the 2012 fat-free/low-fat implementation and 10 to 12% reduction in consumption among those students being ‘served’ or selecting the restricted fat-free/low-fat white milk option or fat-free flavored milk option. That’s a double whammy for childhood nutrition and for dairy farm viability. Since 2012, at least one generation of future milk drinkers has been lost.

Charts above are from a USDA study published in 2015 to assess school meal selection, consumption, and waste before and after implementation of the new school meal standards in 2012. Those standards impacted a la carte offerings as well as beverages, not just served meals. The method for the USDA study was: Plate waste data were collected in four schools in an urban, low-income school district. Logistic regression and mixed-model ANOVA were used to estimate the differences in selection and consumption of school meals before (fall 2011) and after implementation (fall 2012) of the new standards among 1030 elementary and middle school children. Analyses were conducted in 2013. The authors note that prior to the full implementation of new nutrition standards in 2012, a variety of fat levels of milk were offered to students and no restriction upon flavored milks. See the report here —– Additionally, a PA school trial offering all fat percentages, including whole milk, revealed a 52% increase in selection of milk and 95% reduction in discarded milk, netting a 65% increase in consumption of milk in 2019.

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Your milk check and fairness in contracts: Dr. Bozic urges transparency

Dr. Marin Bozic of Bozic LLC talked about his Milk Check Transparency Report at Pennsylvania Dairy Summit in Lancaster on Feb. 2. S.Bunting photo

By Sherry Bunting, published in Farmshine, Feb. 18, 2022

LANCASTER, Pa. — Aside from Federal Milk Marketing Order modifications, Dr. Marin Bozic talked about two other key pillars of reform during his keynote presentation at the Pennsylvania Dairy Summit February 2: Milk check transparency and fairness in milk contracts.

“Everyone prices milk differently depending on what they want you to do,” he said, showing a scattergram of milk check data from various coops and buyers. 

“It’s impossible to compare it,” Bozic declared, noting that in Australia, all milk pricing data are public so anyone can see how everyone compares in payment by region. In Ireland something similar is also done, where each buyer’s protein and butterfat price is published as well as a price for the liquid portion.

“They see what different processors pay. They don’t have Federal Orders. This transparency keeps everyone honest,” said Bozic. 

He knows about pricing around the world because — in addition to being an associate professor of applied economics at the University of Minnesota — Bozic is founder and CEO of Bozic LLC, a global provider of technology for commodity markets analytics and risk management, with around 100 clients on four continents. He is also an advisor to several dairy trade associations.

“While it’s not easy to switch (milk markets) today, milk check transparency would allow producers to hold boards accountable and hold management accountable,” said Bozic. “Having this information, seeing the patterns, a producer can ask the question: Are you doing everything you can to make sure I am successful?”

Bozic announced his new Milk Check Transparency Report, which he said will be a monthly report generated from producers submitting their milk checks to him. The purpose is to make milk checks easier to understand and to benchmark across processors to improve price discovery.

He has been working on this project with 12 processors, mainly in Wisconsin, so far. The first report is due out in the next few weeks, and the goal is to gain more input covering more buyers in more regions.

He said he hopes to have 90 to 95% of the processors included within the next six months to be able to generate a national Milk Check Transparency Report every month.

Specifically, all data is collected from producers’ milk check statements. The collaboration is confidential and a non-disclosure agreement is signed protecting the producer. Bozic and an assistant input the data. No one else sees the individual milk check submissions.

Once enough data are collected to have a high degree of confidence in the estimates, processors are contacted to offer them the opportunity to validate or comment before publishing.

Bozic has a multi-step process for standardizing the information at national average component levels (4.0F and 3.3P). He appreciates having a document describing how premiums are set by the milk buyer. Representative hauling is also incorporated and other formulas so price discovery comparisons can be made.

“Then we can work with any milk check,” said Bozic.

He said a large number of farms from Washington to Florida and from California to New York are or will be participating in this project, and he urged producers to get involved by writing to him at marin@bozic.io

Bozic was quick to point out there are other considerations and benefits a cooperative or private milk market may provide that go outside the scope of the report. He said the Milk Check Transparency Report is not meant for ranking. Instead, it is a way to look comparatively, so producers can have better market price discovery, input and accountability.

Another goal of the report is to eventually have a calculator option, where a producer can slide the pounds of volume or components, even milk quality, and see how it changes the pricing outcome.

“We are then better able to design risk management,” said Bozic, whose proprietary company owns the intellectual property he developed as the infrastructure behind risk management programs like Dairy Revenue Protection (DRP).

He believes with better information, even the Dairy Margin Coverage can be improved, and the calculators and sliders could allow producers to see how they are paid against a national index allowing them to make changes that would improve profitability and better inform how to manage the price risk they have.

Negative PPDs (producer price differentials) made headlines the past two years, Bozic acknowledged. 

“There’s an impression that all this milk was de-pooled and a feeling that processors could have their cake and eat it too,” he said. “The Milk Check Transparency Report puts everyone on notice that whether differentials are positive or negative, they are in there.”

In this way, he said, the report can “promote good behavior in an unregulated way.”

On the variation in how producers are paid, Bozic said a big problem is lack of clarity on how farmers can achieve a better price.

“It’s astonishing to me that processors do not have brochures detailing how their incentives are based so farmers know how to meet them,” said Bozic.

The Milk Check Transparency Report is something Bozic is doing, for free, on his own time. He is not relying on the University of Minnesota. He said he knows he’ll get some ‘hate mail’ but believes it is important. 

When asked why he is doing this, Bozic brought his reply to a personal level. He mentioned his mother, who is ailing, saying that she inspired him all his life to help people. He said it is hard for anyone to do this, but that he is fortunate to have built a technology company over the years and believes he is in a position to do something good.

On contract fairness, Bozic noted that Australia has required structures in their milk contracts, but they do not have regulated pricing.

“It’s their contracts that put them on an even keel,” he said. 

For example, no cooperative or milk buyer should be able to prohibit their producers from doing third-party milk weight and test samples. Contracts should protect farmers from being ‘failed’ in inspections simply because they are ‘prickly’ or ‘vocal’ producers.

He also noted that in countries, like Australia, milk buyers or cooperatives are not allowed to require exclusivity while also doing two-tiered pricing for base and over-base milk at the same time. 

“It’s one or the other,” said Bozic. “When those two lanes cross at the same time, we have a traffic accident.”

“Organizations like ADC and Edge are fighting for some of these interests of farmers, but they need more voices,” said Bozic.

He pointed out that the combination of exclusivity and base programs in the East may be insulating against production growth and surplus.

“That ‘insulation’ may be fine right now,” said Bozic. “But what about 10 years from now?”

What happens to dairy in the Northeast, for example, when processing has been built up everywhere else where production is being allowed, even encouraged, to grow?

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Covington: Southeast blend price forecast $3.50 higher for 2022

Industry trends explored at Georgia Dairy Conference

Calvin Covington gives Southeast Dairy Outlook at Georgia Dairy Conference in January. S.Bunting photo

By Sherry Bunting, published in Farmshine, Feb. 11, 2022

SAVANNAH, Ga. – “Everything is going up, and quickly. Class IV is driving milk prices, with good demand for both butter and powder, especially for exporting,” said Calvin Covington as he presented the Southeast dairy outlook during the 2022 Georgia Dairy Conference, attended by around 300 dairy producers and industry members in Savannah in January.

He forecast the 2022 Federal Order blend price average (not mailbox price) for the Southeast region will be up $3.50, with most of that increase on higher butterfat, predicted to average $2.54/lb.

Covington’s 2022 blend price projections range from $23.01 in the Appalachian Order 5 and $23.05 in the Southeast Order 7 to $24.81 in Florida Order 6.

He noted that the market beat his conservative 2021 projections by 50 cents to the good. 

“I’m still on the conservative side this year because prices can decrease as quickly as they increase,” Covinton said. “A small change in supply or demand makes a larger change – up or down – in your milk price.”

Covington went through the numbers for 2021, noting reduced milk production, reduced product inventories, reduced Class I sales, a narrowing of the Southeast milk deficit, expanded exports, and expanded domestic demand as trends that are expected to persist into 2022 – especially on the milk production side as supply programs, production cost increases and limits on available labor keep a lid on milk growth nationwide, even worldwide.

Come 2023-24, Covington sees production “jumping up” because of new cheese capacity coming on line in the next two to three years. 

“Texas and the I-29 corridor (Central Plains) are bringing cows to where the plants are growing. We can see this in the production numbers,” he said.

As the milk supply in 2022 is likely to be restrained, Covington looks to the signs that domestic and export demand will continue strong, but questioned how inflation will affect consumer buying power.

The availability and consistency of labor also continues to challenge the dairy supply chain and its customers on the foodservice side.

Be prepared for the unexpected, he cautioned, reminding producers that 2020 was forecast to be a good year, and then the unexpected happened – Coronavirus – so all bets were off.

Exports play bigger role in milk price

“Export demand has become very important to your milk price,” said Covington. “We are seeing the strongest demand yet… and look how dependent the industry is on the export market, sending a record 17.1% of supply overseas — up from 15.8% in 2020.”

Using the available figures for the first 11 months of 2021 to gauge it, Covington said overall export demand is up 11.5% for 2021. Over the past decade, the year over year export demand gains averaged 4.3% by comparison.

Add to this the increase in domestic demand, up 1.4% in 2021, and the net gain in dairy demand for 2021 is more than 3% — almost double the 10-year average year over year demand increase of 1.7%.

Unfortunately, on the fluid milk side, USDA reports sales are down over 4% in 2021 vs. 2020, according to Covington.

“Exports are having a bigger part in your milk price,” he said, noting that global milk production in major dairy exporting countries is flat to lower, pushing global dairy prices higher. “Our prices are well below the world prices, making us very competitive. We’re exporting twice as much butter, and 75% of our nonfat dry milk is being exported.”

That’s positive for the skim price, and the doubling of butterfat exports along with domestic demand push the other side of the fat/skim equation higher.

Milk production trends

Even though 2021 milk production will clock in at around 1% over 2020, Covington honed into the production and cow losses on the back half of the year, using July through November data.

Cow losses at 124,000 head in those five months “are the biggest drop since 2009,” he said.

At the same time, milk per cow had been increasing the first part of the year but flattened in the second half as cost of production caught up to milk prices.

“Production is lower now because of less milk per cow and fewer cows,” said Covington.

Looking at just the back half of 2021, Covington broke the 24 monthly milk reporting states into thirds and showed the geographic shifts (Table 1, above): 8 states were up more than 1% in production, 8 states had reduced production and 8 states were in between.

Significant in the gaining top-third is Georgia, with July through November 2021 production up 3.2% over the same period in 2020.

“Georgia added more cows and increased milk per cow,” said Covington. He said as Florida is losing production, Georgia is gaining and getting closer to Florida.

On the bottom third, the back half 2021 milk production decreases were 4.6% in Florida and 3% in Virginia.

“Florida lost 6000 head and Virginia 3000,” said Covington. “This tells me people are going out of business.”

Looking at the three major milk states of the Southeast region for the year, Covington noted that Florida is down 4.8%, Virginia down 3.3% and Georgia up 1.1%. The other seven states of the Southeast are collectively down about a billion pounds over the past few years.

In the Northeast, Covington’s chart showed New York’s production for those months was up 1.1%, barely putting it in the gaining third, while Pennsylvania’s production was 2.3% lower and Ohio of 1.1%.

In the West, the chart showed Texas up 3.9%, but New Mexico down 9.9%; Wisconsin and Minnesota up 3.2 and 2.7% and Illinois down 1.4%; South Dakota continues as the largest percentage gainer, up 16.7% on the back half of 2021.

“South Dakota tops the list with expansion in cheese capacity,” said Covington. “Cheese expansion is also underway in Texas, and milk production is growing there too.”

Dairy inventories and commodity production are down

Dairy inventories are down. “One of the best barometers for milk prices is looking at inventories, to see if they are building or declining,” said Covington. They are declining with butter inventory down 16%, powder down 21%, whey down almost 9%.

Cheese inventories are up 9.6%, which isn’t bad, according to Covington.

“We’re going into 2022 with really no challenge of inventory,” he said.

On the commodity production side, Covington observed that, “We do not have excess cream. Butter production is lower and powder production is lower. Fluid milk consumption is lower, but the fat percentage is higher, decreasing the cream supply. Demand for other cream products has also been good.”

With cheese production up 1.3% overall, Covington said the real positive here is Italian cheese production up 5.6% is the bulk of the increase. 

“This tells you the product is moving,” he said, “because it’s the fresh cheese production that is higher. They don’t usually make Italian cheese without a sale for it.”

Southeast fluid milk changes

Together, all three southeastern FMMOs had 4.2% less milk going into Class I in 2021. (Table 2, above)

“2021 was a poor year for Class I in the Southeast, but we are comparing to when the food box program was in effect, and that program gave quite a lift to fluid milk in 2020,” said Covington. This loss translates to about one million pounds per day.

Utilization percentage has remained about the same at a little over 72% across the three FMMOs. As Class I sales have declined (4.2%), Southeast production has also declined (3%), so there is little change in utilization percent.

The structure of Class I pool distributing plant ownership has also changed in the Southeast, post-Dean, with 9 of the 44 plants supermarket owned and 19 cooperative owned.

The Southeast region is producing 103 pounds of milk per capita annually, down 20 pounds while fluid milk sales per capita, at 134 pounds, are off by 7 pounds – putting Southeast per capita production 31 pounds below fluid milk per capita consumption.

“The size of the deficit gap is smaller than it was in 2010 due to sales declining more than the production declines over the past decade,” said Covington.

Looking ahead to questions asked about FMMO reform and the Class I mover calculation, Covington said he “would hope we can get back to the ‘higher of’ – realizing what it costs to serve a fluid milk market.”

He shared concern about what happens to orderly marketing when Class I is underpriced vs. the other milk classes.

“Fuel cost estimates are a big concern, and there are other costs,” said Covington. “The cost to serve Class I markets keeps going up. The biggest issue is the FMMO system started when fluid milk was king, and now it is becoming a minority, especially in some areas of the country where processors will wonder, why be in the Federal Order?”

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What does USDA’s ‘transitional’ standard on school milk REALLY mean?

USDA announced a ‘transitional standards’ rule on Feb. 4 for milk, whole grains, and sodium for school years 2022-2023 and 2023-2024. In short, the transitional standards are only in place while USDA works with stakeholders to strengthen meal standards through a new rulemaking for the longer term. The proposed rule for the longer-term is expected in fall 2022 and will be based on the Dietary Guidelines for Americans 2020-2025 — effective school year 2024-2025. A “gradual implementation” plan for the long-term standards will be developed by USDA based on ‘stakeholder input.’ Read the transitional standards rule and comment here. Stay tuned for proposed long-term standards rule and comment period this fall. Even the American Association of School Superintendents (AASA) made a statement this week, believing the long-term standards will be ‘more stringent’ due to the Dietary Guidelines, and that “it is important to acknowledge that healthy meals are only healthy if students eat them.” That goes for the milk also. Milk consumption plummeted and waste skyrocketed since USDA’s 2012 fat-free/low-fat milk rules were set for both ‘served’ milk and competing a la carte offerings.

By Sherry Bunting, Updated (above) since published in Farmshine, Feb. 11, 2022

WASHINGTON — USDA announced ‘transitional’ nutrition standards on Friday, Feb. 4 that put low-fat 1% flavored milk back on the menu next school year, without the cumbersome waiver process. The announcement also delays the planned sodium reductions, helping the cheese side of school lunches. 

National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) came out with hearty applause for the news, thanking Congressmen G.T. Thompson (R-Pa.), author of the Whole Milk for Healthy Kids Act, and Joe Courtney (D-Conn.), author of the School Milk Nutrition Act, for their leadership on this issue through the years, using words that treat this USDA announcement as though it’s a done-deal, and all is good to go. 

But let’s hold our horses and examine the USDA announcement — described clearly as “transitional” based on schools “needing more time to adjust” post-pandemic. 

USDA stated that future nutrition standards will be proposed in the fall of 2022 as part of the administration’s “Build Back Better with School Meals, input will be gathered, and those will be the standards that go into place beginning with the 2024-25 school year. 

USDA also made it clear that these future long-term standards “will line up with the Dietary Guidelines” and input from schools and industry will be sought in “how to gradually implement them.”

In 2010, the Healthy Hunger Free Kids Act of Congress tied government food and nutrition programs, like school lunch, to the Dietary Guidelines. By 2012, under President Obama’s USDA — with Tom Vilsack at the helm then as now — had banned whole milk as an a la carte offering in the ‘Smart Snacks’ rules. At the same time, the Department required flavored milk to only be offered if it was fat-free and required unflavored milk to be either fat-free or low-fat 1%.

Milk sales plummeted and waste increased.

Then, the Trump-USDA in 2018, under Ag Secretary Sonny Perdue, “rolled back” some of the 2012 USDA standards, delaying the sodium rules and allowing low-fat 1% flavored milk to be offered through a waiver system at the state level. Some states, like Pennsylvania, made blanket waivers available, and many schools began offering low-fat 1% flavored milk over the next few years.

Then, a lawsuit took the Trump-era USDA to court for the rollbacks. The court ruled that the Trump-USDA did not use a proper public comment process before doing the rollbacks. So, beginning with the 2021-22 school year, the low-fat 1% flavored milk was again bumped out of school menus — except where waivers were sometimes granted for pandemic-related supply disruptions as justification for serving a higher fat milk.

Over the past year, USDA Food Nutrition Services has received comments about how to gradually implement nutrition standards to line up with the Dietary Guidelines on sodium, whole grains, and milkfat. Friday’s announcement on ‘transitional standards’ was accompanied by a detailed and lengthy rule that will be implemented July 1, 2022.

“USDA is giving schools time to transition from current, pandemic operations, toward more nutritious meals. In 2022, USDA will continue to prioritize supporting schools as they navigate the challenges of the pandemic and related operational issues,” the announcement said, adding that USDA “is also planning for the future by engaging with school meal stakeholders to establish long-term nutrition standards beginning in school year 2024-2025 that will be achievable.”

Ag Secretary Tom Vilsack was quoted in the announcement blaming the pandemic disruptions of the past two years for making schools “unprepared to fully meet those standards at this time” for milk, whole grains and sodium.

“These transitional standards are step one of a longer-term strategy to lean into the school meal programs as a crucial part of improving child health,” said Vilsack.

“Over the coming months and years, USDA will work closely with its school meal partners to develop the next iteration of nutrition requirements. We’ve got to find the right balance between standards that give our kids the best chance at a healthy future based on the latest nutrition science, and ensuring those standards are practical, built to last, and work for everyone,” Vilsack added.

The purpose of the “transitional” standards, according to the USDA announcement, is to “give schools clarity for the coming school years, allowing them to gradually transition from the extraordinary circumstances caused by the pandemic to normal program operations and meal standards that are consistent with the latest nutrition science, as required by law.”

Specifically, the transitional standards beginning with the 2022-23 school year are as follows:

1) Milk: Schools and childcare providers serving participants ages six and older may offer flavored low-fat (1%) milk in addition to nonfat flavored milk and nonfat or low-fat unflavored milk;

2) Whole Grains: At least 80% of the grains served in school lunch and breakfast each week must be whole grain-rich; and

3) Sodium: The weekly sodium limit for school lunch and breakfast will remain at the current level in SY 2022-2023. For school lunch only, there will be a 10% decrease in the limit in SY 2023-2024. (This affects school cheese).

The expressed linkage of long-term USDA nutrition standards to the anti-fat 2020-25 Dietary Guidelines was mentioned throughout the USDA announcement, giving an indication of where the school milk standards are headed, long-term.

That is, unless Congress acts to remove all doubt and make fuller fat milk — whole milk — a legal option for schools in the future.

For a true solution for the long-term, Congressional leadership is needed on the school milk issue.

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