From DMC to FMMOs, from price ‘movers’ to ‘make allowances’: House Ag hearing reviews farm bill dairy provisions

By Sherry Bunting, June 24, 2022

WASHINGTON — It was a lot to wade through, but after two panels and nearly four hours, many cards were on the table, even if the full deck was not counted. 

The U.S. House Agriculture Committee hearing Wednesday, June 22 was a 2022 review of the current farm bill’s dairy provisions. Chairman David Scott (D-Ga.) set the stage with his opening remarks, noting a significant part of the hearing would be devoted to the dairy safety net, namely the Dairy Margin Coverage (DMC), but also to talk about the Federal Milk Marketing Orders (FMMO) to learn if this system is “the best fit for today’s world.

“We want to continue to listen to farmers and navigate the issue for the best approaches to any changes,” he said, setting the next stage for listening sessions.

Those testifying talked about building consensus for FMMO changes, a charge handed down from Ag Secretary Tom Vilsack last December, and again more recently, when he said a consensus agreement by stakeholders on one plan was needed before a national hearing on milk pricing could be held.

On the Class I ‘mover’ change in the last farm bill, USDA AMS Deputy Administrator Dana Coale noted that the change was authorized by Congress after an agreement was reached between NMPF and IDFA to change the ‘higher of’ to a simple average plus 74 cents. This was designed to be revenue neutral, she said, but the pandemic showed how an unforeseen market shock can create price inversions that significantly change this neutrality. (testimony)

Coale noted that “market abnormalities” brought on a situation where Class I was below Class III, which doesn’t typically happen, and this created losses.

“In the 2018 farm bill Congress authorized a change to the Class I price mover. We implemented that in the department in May 2019. This change was a consensus agreement reached between NMPF and IDFA to benefit the entire industry. Implementation in the farm bill was designed to be revenue neutral. However, nobody foresaw a pandemic occurring, and no one could have projected the implications that pandemic would have on (prices), particularly within the dairy sector. What we saw occur from mid-2020 through mid-2021 was a significant change in that revenue neutrality. As you look at the Class I mover before the pandemic and moving out of the pandemic, it is maintaining pretty much a revenue neutral position compared to the prior mover. However, due to the (class) price inversions that occurred, we had some major losses incurred by the dairy sector.”

Dana Coale, Deputy Administrator, USDA AMS Dairy Programs

On the primary dairy safety net, Farm Service Agency Deputy Administrator Scott Marlow went over the Dairy Margin Coverage (DMC) and explained the beneficial changes that have been implemented since the 2018 farm bill. (testimony)

He noted that supplemental DMC would have to be made permanent in the next farm bill in order for that additional production history between the 2011-13 figure and the 5 million pound cap to be covered in future years.

“In 2021, DMC payments were triggered for 11 months totaling $1.2 billion paid to producers who enrolled for that year, with an average payment of $60,275 per operation. At 15 cents per cwt at the $9.50 level of coverage, DMC is a very cost-effective risk management tool for dairy producers. Ahead of the 2022 DMC signup, FSA made several improvements. The program was expanded to allow producers to enroll supplemental production (up to the 5 million pound cap). In addition FSA updated the feed cost formula to better reflect the actual cost dairy farmers pay for alfalfa hay. FSA now calculates payments using 100% premium alfalfa hay, rather than 50% of the premium alfalfa hay price and 50% of the conventional alfalfa hay price. This change is retroactive to January 2020 and provided additional payments of $42.8 million for 2020 and 2021. We are very concerned about the margins. It is very important the way DMC focuses on the margin. Farmers are facing inflation of costs beyond the feed that is part of this calculation. This margin based coverage has proven to a model and is something we need to look at for other costs and commodities.”

Scott Marlow, Deputy administrator usda fsa farm programs

Dr. Marin Bozic, Assistant Professor Applied Economics at the University of Minnesota gave some long range trends and observed the factors that are decreasing participation in Federal Milk Marketing Orders. (testimony)

He mentioned that a consideration not to be ignored is the status of vibrancy and competition as seen in transparency and price discovery. When asked about proposals to improve this, Bozic said the proposals need to come forward from the industry, the stakeholders, and that the role of academia is to provide numbers, trends, and analysis of proposals, not to decide and determine these marketing structures.

“Farm gate milk price discovery is challenged by this lack of competition,” he said. “If a corn producer wishes to know how different local elevators would pay for corn, all he needs to do is go online or tune in to his local radio station. Dairy producers used to be able to ‘shop around’ and ask various processors what they would pay for their milk.”

Bozic was quick to point out that, “We should not rush to generalize from such anecdotal evidence, but in my opinion, it would also be prudent not to ignore it.”

“FMMOs start from a set of farmer-friendly ideas… They have somewhat lost luster due to declining sales of beverage milk. In regions other than Northeast and Southeast, fluid milk sales no longer provide strong enough incentives for manufacturers to choose to stay consistently regulated under FMMOs. My estimates are that the share of U.S. milk production in beverage milk products is likely to fall from 18.3% in 2022 to 14.5% by 2032. Do Federal Orders suffice to deliver fair market prices to dairy producers? The critical missing ingredient is vibrant competition for farm milk. Whereas just six or seven years ago, many producers had a choice where to ship their milk, today it is difficult. When some dairy producers have asked for milk price benchmarking information from their educators or consultants, those service providers have in multiple instances faced tacit disapproval or even aggressive legal threats from some dairy processors. Further research and an honest debate on competition in dairy is merited.”

Marin bozic, ph.d., department of applied economics, university of minnesota

Where FMMO changes are concerned, Bozic noted some of the broader issues to come out of the Class I pricing change that was made legislatively in the last farm bill. For example in future reforms, when there is lack of wide public debate on proposals, he said: “It increases odds of a fragile or flawed policy design, and lack of grassroots support for the mechanism in changing markets. FMMOs have a comprehensive protocol for instituting changes through an industry hearing process. The Class I milk price formula can be modified through a hearing process.”

From Bernville, Pennsylvania, representing National Milk Producers Federation (NMPF) and DFA, Lolly Lesher of Way-Har Farms shared the benefits of the Dairy Margin Coverage (DMC) program through FSA and other risk management tools through RMA. She said they purchase the coverage at the highest level each year as a safety net for their 240-cow dairy farm. (testimony)

DMC is intended for smaller farms producing up to 5 million pounds of milk annually, but other farms can layer it in with other available tools at the tier one level on the first 5 million pounds or choose to pay the tier two premium to cover more of their milk through that program, but other tools like DRP are also available, Marlow explained.

Turning to the Class I pricing change in the last farm bill, Lesher said the change was an effort to “accommodate a request for improved price risk management for processors, while maintaining revenue neutrality for farmers… but the (pandemic) dramatically undercut the revenue neutrality that formed its foundation.”

“As valuable as the (DMC) program has been, many farmers have not been able to fully benefit because the underlying production history calculation is outdated. It is critical that the (supplemental DMC) production history adjustment be carried over into the 2023 farm bill… The events of the last two years have shined a spotlight on the need for an overall update to the FMMO system. Class I skim milk prices averaged $3.56/cwt lower than they would have under the previous ‘mover’. This undermined orderly marketing and represented net loss to producers of more than $750 million, including over $141 million in the Northeast Order. The current Class I mover saddles dairy farmers with asymmetric risk because it includes an upper limit on how much more Class I skim revenue it can generate… but no lower limit on how much less… those losses become effectively permanent.”

lolly lesher, way-har farm, bernville, pennsylvania, representing nmpf and dfa

According to Lesher’s testimony: “The dairy industry through the National Milk Producers Federation is treating this matter with urgency and is seeking consensus on not only the Class I mover, but also a range of improvements to the FMMO system that we can take to USDA for consideration via a national order hearing.”

Lesher serves on DFA’s policy resolutions committee and she noted that DFA, as a member of NMPF “is actively participating in its process (for FMMO improvements), which involves careful examination of key issues to the dairy sector nationwide… We look forward to working with the broader dairy industry and members of this committee as our efforts advance.”

Representing International Dairy Foods Association (IDFA), Mike Durkin, President and CEO of Leprino Foods Company stressed the “extreme urgency” of updating the “make allowances” in the FMMO pricing formulas. These are processor credits deducted from the wholesale value of the four base commodities (cheddar, butter, nonfat dry milk and dry whey) used in FMMO class and component pricing as well as within the advance pricing for fluid milk. (Leprino is the largest maker of mozzarella cheese in the U.S. and the world. Mozzarella cheese is not reported on the USDA AMS price survey used in the FMMO class and component pricing.) (testimony)

Durkin also noted the importance of making the Dairy Forward Pricing Program that expires September 2023 a permanent fixture in the next farm bill for milk. This program allows forward pricing of milk used to make products in Classes II, III and IV so that longer-duration contracts can be used by this milk when also pooled under FMMO regulation without fear of the authority expiring in terms of the FMMO minimum pricing. (Milk that is used to make products in Classes II, III and IV is already not obligated to participate in or be regulated by FMMOs.)

“The costs in the (make allowance) 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. Congress can improve the current situation by directing USDA to conduct regular cost of processing studies to enable regular make allowance updates. The need to address this lag is now extremely urgent. While our proposal to authorize USDA to conduct regular cost surveys will eventually provide data to address this in the longer term, steps must be taken now to ensure adequate processing capacity remains. Updating make allowances to reflect current costs will enable producer milk to have a home. Making the (Dairy Forward Pricing Program for Class II, III and IV) permanent could also facilitate additional industry use of this risk management tool for longer durations without concern about the program expiring.”

Mike Durkin, president and ceo, leprino foods, representing idfa

Lesher also thanked House Ag Ranking Member G.T. Thompson for his Whole Milk for Healthy Kids Act, seeking to bring the choice of whole and 2% milk back to schools. The bill currently has 94 additional cosponsors from 32 states, including the House Ag Chair David Scott and other members of the Agriculture Committee. The bill was referred to the House Committee on Education and Labor.

Other key dairy provisions were reported and questions answered, including a witness representing organic dairy farmers. There’s more to report, so stay tuned for additional rumination in Farmshine and here at Agmoos.com

Recorded hearing proceedings available at this link

Written testimony is available at this link


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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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Senate Ag subcommittee hearing on milk pricing: Agreement that Federal Orders need reform, but how? That’s the billion-dollar question

By Sherry Bunting

WASHINGTON, D.C. — Federal Milk Marketing Orders, their purpose, performance, problems and solutions — including a recent change in the Class I fluid milk pricing formula — were the focus of a Senate Ag subcommittee hearing on ‘Milk Pricing: Areas of Improvement and Reform” Wednesday, Sept. 15 in the Capitol.

“We are in the midst of a modern dairy crisis, magnified by a Class I pricing change in the 2018 Farm Bill. The pandemic and economic downturn are not the only causes of this problem, but they did exacerbate it. This system cannot adapt to market conditions and thus is not fairly compensating our dairy farmers. The formula change is a symptom of larger problems in a system that is confusing, convoluted and difficult to understand,” said Gillibrand Wednesday.

She recounted the more than $750 million in producer losses when looking at the previous Class I fluid milk ‘mover’ formula that used the higher of Class III or IV manufacturing milk prices and comparing it to the current formula that uses an averaging method plus 74 cents.

The hearing was a first step Sen. Gillibrand had previously indicated in a press conference last June, when the full extent of dairy farmer financial losses was becoming known.

As the hearing got underway, Gillibrand observed that from 2003 to 2020 there has been a 55% decrease in the number of dairy farms in the U.S.

“We are using an almost 100-year-old system with the last reform 20 years ago, where dairy farms are not operating as they were then. We need to put the power back in the farmers’ hands.” said Gillibrand.

The power to make the issues known was in the hands of three dairy farmers making up the first panel — Jim Davenport, Tollgate Farm, Ancramdale, New York; Christina Zuiderveen, Black Soil Dairy, Granville, Iowa, and Mike Ferguson of Ferguson Dairy Farm, Senatobia, Mississippi.

This was followed by a panel with Dr. Chris Wolf, ag economics professor at Cornell University, Dr. Robert Wills, president of Cedar Grove Cheese and Clock Shadow Creamery, Plain, Wisconsin, and Catherine de Ronde, vice president of economics and legislative affairs with Agri-Mark cooperative based in Massachusetts with members in New England and New York.

One thing everyone agreed on, in differing degrees, is that reforms are needed in the Federal Milk Marketing Order System.

Testifiers agreed that a key purpose of the FMMOs is to make blended payments more equitable between producers supplying different classes and uses of milk.

All three producers agreed the FMMO system should continue, although they shared differing ideas about how reforms could improve it.

There was also agreement that the new Class I ‘mover’ formula is not adequate for changing and uncertain markets. They agreed that using the USDA rulemaking process is the way to make such changes to be sure all parties are heard.

However, the current change in the Class I ‘mover’, implemented in May 2019, was made legislatively during the 2018 Farm Bill, not through the USDA hearing process.

Ferguson, a 150-cow dairy producer in Mississippi said he supported bringing back the previous ‘higher of’ method while a longer-term solution can be considered through the USDA hearing process. He noted periodic reviews of the adjuster could also be helpful, and that the situation should be addressed in the short term.

He explained that the Southeast producers across FMMOs 5, 6 and 7, produce about 45% of the annual fluid milk needs of their growing population, and when supplemental milk has to be brought in, those Southeast producers pay the price to get it there. That was very difficult and costly when class pricing inversions happened last year for a prolonged period of time.

Davenport, milking 64 cows in New York observed that the Class I price was aligning better in the past few months, but “we’re not out of the woods yet,” on Covid-19, he said.

“The FMMO system has served farmers well but needs adjusted to reflect current product mixes and market swings,” said Davenport, adding that the fluid market is very important for smaller sized dairies and regional supply systems. He proffered the hope that Class I, long-term, could be stabilized by basing it on something other than the volatility of cheese, butter and powder prices.

“The rulemaking process USDA uses will work, it just takes time,” he said, adding that the Class I price should reflect how hard it is to supply the fluid market.

Zuiderveen, whose family has dairies totaling 15,000 cows in Iowa and South Dakota, said FMMO pricing for milk of the same quality should align and foster innovation and competition instead of consolidation. It should also be transparent and promote a nimble industry that can respond to changes, she said.

“Distortions can cause the system to become unglued,” she said, noting that if producers can’t anticipate which classes will participate in the pool and don’t know how that will drive their milk price, then they can’t manage their price risk effectively, losses become compounded, and this discourages risk management.

Zuiderveen and others noted a variance as wide as $9 per hundredweight was experienced in mailbox milk prices from region to region and neighbor to neighbor at intervals last year.

“That creates a sense of helplessness among producers,” said Zuiderveen.

Dr. Wolf noted multiple reasons for the negative PPDs and milk check losses under the new formula, including declining Class I fluid milk sales and increased milk components, but said the two biggest reasons for milk check losses under the new formula compared with the old formula were the large volumes of de-pooled milk that reduced FMMO pool funds as well as the Class I change itself.

Wolf explained multiple factors in the wide divergence between Class III and IV. A primary one was government purchases being tilted to cheese during that time. “This large divergence in butter and cheese prices meant that the Class I milk prices were lower than they would have been under the former pricing rule,” he said.

Ferguson noted that the government cheese purchases were intended to support dairy producers as well as the public during the pandemic, but it ended up having a “devastating effect on our fluid market,” he said, noting that a more balanced approach may have helped.

Through difficult times in the past, price alignments were more stable in large part because of the ‘higher of’ method keeping the Class I price above the blended price so no matter what was purchased, all farmers, supplying all classes of products, benefited more equitably.

Under the current formula, the pandemic cheese purchases helped support dairy producers, but also led to distortions that contributed to large differences in milk prices at the farm level.

Dr. Wills was the only processor testifying. He said the survival of dairy depends on being able to evolve on these pricing issues. “Farmers are only better off if the premium (shared in the FMMO pools) exceeds the value of other classes, and that’s inefficient,” he said, adding his opinion that FMMOs have outlived their purpose.

“The redistribution makes it appear that all farmers are winners, when the evidence shows pricing equity is being lowered,” said Wills. “I fear for the future of the dairy industry. The federally administrated milk pricing now functions opposite of its intent, resulting in higher prices for consumers and lower prices for farmers. It responds slowly, encourages inefficient trucking and promotes consolidation.”

Wills also mentioned the wave of competition from an array of plant-based and blended products as well as cellular agriculture and bio-engineered analog proteins, none of which are included in the FMMO pricing structure.

Wills brought home the reality for rural communities when small and mid-sized farms are lost. Near the end of the hearing, he responded to a question from Senator Roger Marshall (R-Kansas) asking what are his farmers’ biggest concerns, what do they talk about when he sits down with them for coffee at a restaurant?

“My farmers tend to be smaller producers,” said Wills, president of two Wisconsin cheese companies supplied by 28 dairy farms. “They are concerned about having continued access to markets as the industry continues to consolidate. Even in Wisconsin, where we have more competition than most places, it is hard to find homes for those dairies that are cut loose from big plants.”

As consolidation accelerates, he said, there is a trend toward plants not wanting to make multiple stops. “The impact of losing all of those producers … that 10% per year loss (over time) just hollows out our communities. There’s not a restaurant in town anymore to have coffee at,” said Wills. “We lost our hardware store, our grocery store. A lot of it has to do with our rural communities being hollowed out. The ability to maintain those small farms is also important for our communities.”

On program safety nets and risk management tools, Dr. Wolf noted that the Dairy Margin Coverage program has a very positive impact on small producers vs. large producers, and that the Dairy Revenue Protection and Livestock Gross Margin are aimed at bigger farms. He said farms with those programs in place were “in a better place” last year.

However, elsewhere in his testimony and in that of others, the risk management difficulties during the unusual price inversions were also mentioned, when the Class I pricing change was exacerbated by pandemic disruptions creating those misaligned conditions.

As for simply nationalizing the FMMO pooling rules or making them more rigid, Zuiderveen said this would lead to more processors staying out of the pool, and Wills said de-pooling is the pressure relief valve processors need.

With a nod to pricing delays that affect the transparency in sending market signals through the FMMO system, Wills said he found out that week (Sept. 13) what he will be paying for the milk he bought on August 1, and his producers who sold that milk to him were also just finding out what they would be paid. That’s six weeks after shipping the milk.

Wills said this kind of inefficiency makes it difficult to plan and compete in business.

Another positive to come out of the hearing was when Davenport brought up legalizing whole milk in schools, to which Chairwoman Gillibrand, Senator Marshall, a doctor, and a few other members of the Senate Subcommittee gave hearty verbal support.  

Here is the link to the recorded Senate Ag subcommittee hearing https://www.agriculture.senate.gov/hearings/milk-pricing-areas-for-improvement-and-reform

Look for more in a future Farmshine.

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USDA moves forward with $350 mil. for dairy producers targeted to Jul-Dec 2020 FMMO Class I ‘mover’ losses

Eligible producers to be paid by agreements with milk handlers, co-ops

By Sherry Bunting, Farmshine, August 27, 2021

WASHINGTON, D.C. — According to USDA, milk handlers and cooperatives were contacted Aug. 23-27 about entering into signed agreements to distribute the approximately $350 million in Pandemic Dairy Market Volatility Assistance payments the agency announced on Aug. 19.

The agreements will be to disburse funds to their qualifying producers and provide them with education on a variety of dairy-related topics.

Handlers and cooperatives have until Sept. 10, 2021 to indicate to USDA their intention to participate. USDA will then distribute the payments to participating handlers within 60 days of entering into an agreement. Once payment is received, a handler will have 30 days to distribute monies to qualifying dairy farmers.

These funds will be disbursed to “eligible” dairy farmers through “eligible” Federal Milk Marketing Order (FMMO) independent milk handlers and cooperatives, not through FSA. There will be no signups for this program, and payment rates have not been published.

What is unique about the volatility payments is they will be producer-specific and targeted based on FMMO records and agreements with milk handlers to be the payment conduit.

USDA indicates this program is a “first step” and is aimed at compensating producers for volatility and federal pricing policy changes. The payments will cover 80% of the calculated lost value on Class I fluid milk pounds for July through December 2020.

This language suggests the payments will be limited to producers whose milk was pooled on FMMOs during those six months.

One point of contention with the “volatility assistance” is that the eligible producers will be limited to payments associated with up to 5 million pounds of annual production — even though farms of all sizes incurred these losses due to a combination of pandemic volatility and federal pricing policy changes. The Adjusted Gross Income verification will also be required, like for the prior administration’s CFAP payments.

A special webpage at the USDA AMS Dairy Programs website has been created where more details were provided this week. Officials responding to Farmshine questions said this webpage will be updated on an ongoing basis with more details as they become available. The webpage link is https://www.ams.usda.gov/services/pandemic-market-volatility-assistance-program

A brochure is also available at https://www.ams.usda.gov/sites/default/files/media/PandemicAssistanceMarketVolatilityBrochure.pdf

The actual cumulative net Class I value losses to dairy producers over a longer 27-month period (May 2019 through July 2021) were more than twice the amount of the program, pegged at over $750 million.

During the six months covered by the volatility assistance program – July through December 2020 – the difference between Class III and IV milk prices was $5 to $10 per hundredweight. Further amplifying the impact of this volatility on producer blend prices was the 2018 Farm Bill change (implemented May 2019) to use an averaging method instead of the previous ‘higher of’ Class III or IV skim prices to set the Class I ‘mover.’

This change also led to massive de-pooling and severely negative producer price differentials (PPDs) for most of the past 27 months. Even in some of the positive PPD months, the PPDs were smaller than normal, representing lost value to producers in excess of $3 billion.

In disbursing these volatility assistance payments, milk handlers and cooperatives will be reimbursed for limited administrative and educational costs, according to the USDA brochure.

The education piece stipulates that each participating handler or cooperative “will provide educational materials to all producers by March 1, 2022. The USDA brochure indicates that they may provide the education in the form of mailings, recorded online trainings, live virtual webinars, and/or in-person meetings.”

This education revolves around federal dairy programs, according to USDA. Example topics are Federal Milk Marketing Orders; Dairy Margin Coverage, Dairy Revenue Protection, Dairy Mandatory Price Reporting, Chicago Mercantile Exchange, and Forward Contracting.

USDA will make these education materials available, or the participating handlers and cooperatives may use their own educational materials or training.

Each participating handler will have to verify how many producers were provided with the information and the methods that were used for the education.

The Pandemic Dairy Market Volatility Assistance Program was announced during meetings with farmers and a tour of farms with Senator Patrick Leahy in Vermont last Thursday. Back in June, Agriculture Secretary Tom Vilsack had committed to provide additional pandemic assistance for dairy farmers in an exchange with Sen. Leahy during an Appropriations hearing.

“This (program) is another component of our ongoing effort to get aid to producers who have been left behind and build on our progress towards economic recovery,” said Vilsack. “This targeted assistance is the first step in USDA’s comprehensive approach that will total over $2 billion to help the dairy industry recover from the pandemic and be more resilient to future challenges for generations to come.”

In a press statement this week, NMPF president and CEO Jim Mulhern stated that the $350 million only compensates for some of the damage resulting from the pandemic.

“NMPF asked the department to reimburse dairy farmers for unanticipated losses created during the COVID-19 pandemic by a change to the Class I fluid milk price mover formula that was exacerbated by the government’s pandemic dairy purchases last year,” said Mulhern. “When Congress changed the previous Class I mover, it was never intended to hurt producers. In fact, the new mover was envisioned to be revenue-neutral when it was adopted in the 2018 Farm Bill. However, the government’s COVID-19 response created unprecedented price volatility in milk and dairy-product markets that produced disorderly fluid milk marketing conditions that so far have cost dairy farmers nationwide more than $750 million from what they would have been paid under the previous system.”

NMPF and IDFA suggested and agreed to the Class I pricing change during 2018 Farm Bill negotiations, and no hearings were held before the FMMO method for calculating the ‘mover’ was implemented in May 2019.

Mulhern went on to say that the arbitrary low limits on covered milk production volume mean many family dairy farms will only receive a portion of the losses they incurred on their production last year.

“Disaster aid should not include limits that prevent thousands of dairy farmers from being meaningfully compensated for unintended, extraordinary losses,” Mulhern said, adding that NMPF is “continuing discussions about the current Class I mover to prevent a repeat of this problem.”

For its part, the American Dairy Coalition has been facilitating nationwide discussions with other dairy groups on the dairy pricing, de-pooling, negative PPD losses and risk management impacts since last winter, including a letter signed by hundreds of dairy producers and organizations sent last spring to NMPF and IDFA seeking a seat at the table on solutions for the concerns about the Class I ‘mover’ change and supporting a temporary return to ‘the higher of’ until other methods can be appropriately vetted with a hearing process.

ADC’s nationwide discussions brought attention to this issue and contributed to Senator Kirsten Gillibrand and 20 other U.S. Senators sending a letter to Agriculture Secretary Tom Vilsack seeking financial assistance for dairy farmers for these milk price value losses. A dairy situation hearing is anticipated in the Senate Subcommittee on Dairy, Livestock and Poultry that is chaired by Sen. Gillibrand.

— The Aug. 19 Class I volatility program announcement also mentioned $400 million for the Dairy Donation Program. The DDP implementation process was announced Aug. 25.

— In addition, USDA announced on Aug. 19 an estimated $580 million in Supplemental Dairy Margin Coverage (DMC) to allow “modest increases” in the production history of enrolled dairy producers up to the 5 million pound annual production cap for Tier One coverage. Specific details for adjusting DMC production history have not yet been provided.

— Additionally, USDA announced the inclusion of premium alfalfa prices in the calculation of the feed cost portion of the DMC margin.

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Sen. Gillibrand calls for dairy farm payments, Senate hearings on pricing, investigation of corruption, antitrust concerns

Summertime is pastoral on this central New York dairy farm, but U.S. Senator Kirsten Gillibrand (D-NY) says she is concerned about the state’s diverse dairies.

By Sherry Bunting, Farmshine, June 4, 2021

WASHINGTON, D.C. — Senator Kirsten Gillibrand (D-NY), chair of the Senate Agriculture Subcommittee on Dairy, Livestock and Poultry, told reporters last week that she is working on milk pricing legislation and wants to have dairy pricing hearings before the August congressional break. 

She also said she believes a thorough review and recommendations are needed regarding her concerns about corruption and antitrust activity in milk pricing.

After sending a bipartisan letter with 21 Senate co-signers to Agriculture Secretary Tom Vilsack, Sen. Gillibrand called a press conference by zoom on May 26 to cite dairy farm losses and push for use of existing funds to provide direct payments to dairy farmers for the first half of 2021, retroactive to Jan. 1.

“I’m working on legislation right now to change how we do dairy pricing in America, but ultimately we need something like a 9/11 style commission to actually investigate the industry. You’ve seen it in New York. We’ve had dairy farmers that have committed suicide. We’ve seen the dairy industry steadily decline over the last 20 years,” said Gillibrand, calling food production an issue of national security.

“We cannot lose the ability to feed our own people. If you have a market that’s fundamentally flawed and constantly are leaving producers unable to survive in the industry, there’s a problem. So I think we need a very thorough investigation of my concerns of corruption and antitrust activity,” she said.

Gillibrand told reporters that her office has “already asked to hold hearings. on dairy pricing to start the ball rolling on an investigation and have not been given permission yet from the larger committee,” she said, noting the Senate subcommittee she chairs would be appropriate to hold the hearings.

“I want to hear from producers, I want to hear from the middlemen, I want to hear from retailers. I want to figure out where this corruption lies, and then perhaps, based on the information we get, set up the commission, and I want it ready for the next farm bill,” Gillibrand explained. 

Right from the outset of the press conference, the Senator raised concerns about the Class I milk pricing change in the last farm bill that has had devastating effects in dairy farm income losses when hundreds of millions of dollars in collective Class I price devaluation occurred, contributing to de-pooling of milk, negative Producer Price Differentials (PPDs) and failure of  risk management tools amid the volatility of pandemic market disruptions.

Referencing the bipartisan letter from senators to Secretary Vilsack, Gillibrand said USDA has the funds available through the existing CFAP and Pandemic Assistance for Producers initiative to move right now to make direct payments to dairy farmers she said are necessary to help them recover.

“One of the few things that has helped dairy farmers offset some of their losses was the CFAP dairy payments,” she said. “This assistance was critical to farmers, but these payments were put on pause in January, when the administration announced it was doing a 60-day regulatory review. When the review was concluded, no further payments to dairy farmers were announced.”

Gillibrand noted that USDA announcements cite funding for purchases through the Dairy Donation Program within the new Pandemic Assistance for Producers, but USDA has failed to announce direct dairy farm payments in 2021.

“That’s why we sent the letter to Secretary Vilsack,” the senator said. “My colleagues and I outline the need for USDA to continue issuing payments to dairy farmers for the first six months of 2021 retroactive to January 1st.”

Senate Majority Leader Chuck Schumer (D-NY) also weighed in on dairy farm relief last week in a joint press release with Gillibrand. The two New York senators cited the importance the Empire State’s dairy farms and noted that U.S. dairy farmers collectively received a smaller and inequitable share of pandemic ag assistance payments to-date.

“For an industry that had razor thin margins before the pandemic, for some of our dairy farmers, receiving additional federal assistance is the difference between keeping their farms and losing their livelihoods,” Schumer said in a statement.

Asked how much money should be allocated for direct payments to dairy farmers, Gillibrand said it needs to be responsive to individual producers and their market conditions, to be flexible like the Paycheck Protection Program in being tailored to businesses that lost money during the pandemic.

“I’d like it to assess losses in any given market and what would make these dairy farmers whole. I’d like it to be nimble and specific,” she said. “The money’s there. This is in USDA’s hands, so we need to have a response from Secretary Vilsack.”

On dairy pricing, Senator Gillibrand was emphatic.

“Even before the pandemic, dairy farmers were struggling to receive a fair price for their milk,” she said, noting the change in the method of calculating the Class I mover “compounded this issue. That one change caused dairy farmers to lose out on $725 million in income since 2019.”

The 2018 Farm Bill changed the Class I price at the request of International Dairy Foods Association (IDFA) and National Milk Producers Federation (NMPF) to an averaging method plus 74 cents. This was implemented in May 2019. 

Previously, the Class I base price ‘mover’ was calculated using the ‘higher of’ Class III or IV prices.

This Class I mover change not only resulted in net losses of now over $750 million from May 2019 through June 2021 but also contributed to negative PPDs across Federal Milk Marketing Orders for 17 of the past 24 months.

When government cheese purchases for food boxes and stop/start domestic and global economies during the pandemic created volatile shifts in demand, there were intervals of higher cheese and Class III milk prices that could have provided some much-needed milk-pricing relief for dairy farmers. 

However, as the averaging method devalued Class I in relation to Class III, milk handlers depooled massive volumes of milk — changing the blend price equation. While a few handlers may have passed some of that value on to their own producers, most did not.

As previously reported in Farmshine, American Dairy Coalition has been facilitating grassroots phone conference calls since early March on the Class I pricing, depooling and negative PPD issues to foster industry dialog on solutions. One idea that came from those grassroots discussions was to return, temporarily at least, to the higher-of method for calculating the Class I mover until a future path can be properly vetted by what is normally a lengthy USDA FMMO hearing process.

On April 12, after collecting signatures from hundreds of producers and state and national organizations, ADC sent a letter to NMPF and IDFA seeking a seat at the table for producers to seek solutions.

On April 23, NMPF floated its proposed solution to adjust the average-of ‘adjuster’ every two years and publicly announced its intentions to ask USDA for an expedited emergency FMMO hearing.

On April 27, four midwestern dairy groups — Edge Cooperative, Minnesota Milk Producers, Wisconsin Dairy Business Association and the Nebraska State Dairy Assiciation — put forward a Class III-plus proposal for calculating Class I and were joined by the South Dakota Dairy Producers in a May 19 request that USDA broaden the scope should there be an emergency FMMO hearing.

On April 26, Ag Secretary Tom Vilsack told reporters during a meeting of the North American Agriculture Journalists that the issue is “very complex,” and that “conversations need to mature before anybody makes a decision that there’s going to be a significant change.”

On May 5, Farm-First cooperative, based in Madison, Wisconsin, announced it would submit a proposal to revert to the higher-of method of Class I mover calculation if a USDA FMMO hearing is held.

On May 15, producers in the Southeast FMMOs began circulating a letter addressed to Secretary Vilsack seeking payments to dairy farmers that reflected inequitable losses in high Class I FMMOs.

On May 18, the letter from senators to Secretary Vilsack called for assistance in the form of direct payments to U.S. dairy farmers.

In the absence of action or response from USDA on relief or solutions at the time of the May 26 press conference, Sen. Gillibrand described a potential “two-part” Senate subcommittee hearing on dairy pricing, where experts could give testimony on all aspects of the problem.

The bipartisan letter from senators to Sec. Vilsack noted more than a decade of decline in dairy, multiple consecutive years of milk prices below cost of production and even mentioned competition from plant-based dairy alternatives labeled as ‘milk’.

“Our dairy farmers have really been hit hard for the last six years,” said Gillibrand, stressing the critical role dairy farmers play in the food supply chain, the economy, their communities and national security. 

“We really need answers now,” she said.

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Grassroots efforts continue seeking solution to Class I formula change losses

While the buck is being passed, dairy producers are talking with lawmakers about the unintended consequences from the Class I mover change Congress enacted in the 2018 Farm Bill.

This illustrates the Class I mover formula since May 2019. Prior to that, the ‘higher of’ Class III or Class IV advance skim pricing factors was plugged into the first item under step 1 without the +74-cent adjuster to automatically be used as the Base Class I Skim Milk Price in the rest of the formula. Image Source: USDA

By Sherry Bunting, Farmshine, May 2021

WASHINGTON, D.C. — The Class I ‘mover’ is the subject of much discussion — two years after the averaging method plus 74 cents replaced the ‘higher of’ method to determine the base producer price of Class I beverage milk in May 2019.

A letter drafted by Senator Kirsten Gillibrand of New York is gathering signatures from Senators and will be sent to Ag Secretary Tom Vilsack regarding financial assistance to cover direct and indirect losses borne by dairy farmers due to the formula change exacerbated by the pandemic.

“By allocating more direct payments through CFAP, USDA could take action to reduce the strain that dairy farmers are facing. Specifically, the agency should continue issuing payments to dairy farmers under CFAP, or through any further assistance programs that USDA conceives, including the Pandemic Assistance for Producers initiative, for the first six months of 2021 and make these payments retroactive to January 1st,” the Senator’s letter states.

The American Dairy Coalition is urging producers to contact their Senators about signing onto the letter by end of day Monday, May 17. Senators should contact Dominic Sanchez at Senator Gillibrand’s office by email at Dominic_Sanchez@gillibrand.senate.gov

A transparent USDA hearing process was used 20 years ago to originally set the ‘higher of’ as the method when USDA rejected proposals for averaging Class III and IV due to depooling and negative differentials. However, in the 2018 Farm Bill, the Class I mover was changed from ‘higher of’ to an averaging method legislatively without hearings, without comment, without the producer referendum — without vetting.

Dairy groups are working to raise awareness among key lawmakers and USDA about the 24-month net loss of over $750 million in the Class I mover price from May 2019 through April 2021. In addition, these losses impacted orderly marketing and other factors, contributing to net losses exceeding $3 billion nationwide from inverted class price relationships that produced negative PPDs and led to depooling. In addition, dairy farmers had risk management losses when their milk was devalued, but they paid for risk management that failed because it was aligned with a “market value” they did not receive.

Sen. Gillibrand’s letter highlights the concern about the unintended consequences of the Class I formula change to averaging and away from ‘higher of’.

In the Northeast FMMO 1, for example, the Class I change, alone, accounted for a net loss of over $160 million in Class I devaluation over 24 months, and there were broader impacts of basis losses from reduced and negative producer price differentials (PPD) and depooling.

Northeast producer blend price losses are estimated to be $1.10/cwt, net, from May 2019 through April 2021. (Calculations are being done for other FMMO regions so stay tuned.)

Similar loss estimations can be made for broader impacts across the U.S., depending upon how cheese plants determined pay prices for farmers when the FMMO uniform blend prices were suppressed by $1 to $10 across 7 of the 11 FMMOs that report producer price differentials. These PPDs were severely negative from October through December 2019 and from June 2020 through April 2021.

These formula-related losses are expected to continue through most of 2021 due to current market factors affecting how the class pricing formulas, with the change to Class I, relate to each other and how this impacts depooling.

Producers from the Southeast U.S. also began circulating a letter to Secretary Vilsack this week highlighting the steep losses in the three Southeast FMMOs and seeking direct payments through Coronavirus stimulus funds.

The Southeast letter asserts that milk producers in FMMO 5, 6, and 7 (Appalachian, Florida and Southeast) disproportionately bore 21% ($155 million) of the lost revenue directly attributable to the Class I mover change, because the 21% of Class I value loss fell on dairy farmers shipping just 5.5% of total milk pooled across all orders in the U.S.

Southeast producer blend price losses are pegged at $1.25/cwt.

The Southeast letter states that the loss was not shared equitably among all dairy farmers, due to depooling, which the letter indicates made it possible for dairy farmers marketing milk to cheese plants (Class III) to receive the shortfall.

However, many producers whose milk was depooled from FMMOs did not receive that shortfall from milk buyers, unless they had milk contracts based directly on cheese prices. Many manufacturing class handlers use the FMMO blend price as the benchmark for paying producers outside of pooling.

Several industry sources observe that this change turned out to be a big benefit to processors at great expense to producers. The problem surfaced under market conditions before the pandemic and was made worse by market conditions since the pandemic.

Even National Milk Producers Federation (NMPF) has admitted as much, stating that the International Dairy Foods Association (IDFA) wanted this change in the first place. NMPF indicates they went along with it after studying some historical trends thinking the 74-cent adjuster to the average would produce a result that was “revenue-neutral” for dairy farmers.

It was anything but ‘revenue-neutral’ for dairy farmers, even before the pandemic. The pandemic impact simply magnified the severity of loss.

Proposals continue surfacing since NMPF announced its intention to seek a USDA emergency hearing with a proposal to tweak the adjuster to the average every two years.

Minnesota Milk Producers, Wisconsin Dairy Business Association, Edge Cooperative and the Nebraska State Dairy Association joined together with a concept to change the Class I mover to a Class III-Plus that would be based on Class III announced prices instead of advance prices.

FarmFirst Cooperative based in Madison, Wisconsin, announced it would put forward a proposal to return to the ‘higher of’ calculation — if USDA holds a hearing. However, to-date, no official FMMO hearing requests have been received by USDA.

The first few months of the new Class I mover formula in 2019 were net-positive to the Class I price, but this dissolved by July, almost a year before the pandemic, when the gap between the rising Class III price and the averaging method for the Class I mover narrowed because the spread between Class III and IV widened.

Government food box dairy purchases through the pandemic included more Class III products (cheese) than Class IV (butter/powder) or Class II (soft products that are priced by Class IV).

But food boxes included plenty of Class I (fluid milk). Trouble is, fluid milk is not ‘market valued’ except for the value of its components in manufacturing. Fluid milk is discounted as a ‘loss-leader’ by large supermarkets, especially those that process milk.

Another factor that contributed to the wide spread between Class III and IV pricing has been the difference in product inventory as a factor of production, exports and imports.

In 2020, butter inventory reached a 20-year high, while cheese inventory declined. Butter production increased, especially in the first half of 2020, to exceed the record-breaking production of 2018, making less cream available for cheese production. Meanwhile, cheese exports rose 16% while butter exports declined 5%.

On the flip side, cheese imports declined 10% while butter imports were the second largest on record, up 15% over the previous year for the first 7 months of 2020. The U.S. ended 2020 with butter imports 6% above 2019.

The Class I formula change made FMMOs even more vulnerable to massive depooling against this volatile and divergent backdrop of Class III vs. IV. As averaging reduced Class I pricing, and the Class III milk was depooled, the net result was blend prices that reflected a larger portion of the much lower Class IV (and II). Dairy farmers have been educated to produce milk with higher component levels of fat and protein as a method to improve profitability, but negative PPDs snub this value at the farm level.

Looking through USDA Federal Milk Marketing Order statistical bulletins, this reporter calculates over 70 billion pounds of milk were depooled across all FMMOs from July 2019 through March 2021 due to inverted class pricing.

PPDs reflect the difference between the Class III market value of components minus the blend price of all classes in the pool. When PPDs are negative, it reflects insufficient pool funds to pay that value).

The depooling of Class III milk and the negative PPDs (above) began on the West Coast in July 2019. By September through December 2019, all multiple component FMMOs had negative PPDs, that became more negative as volumes of depooled milk were noted in the central part of the country, moving east.

The four skim/fat pricing FMMOs in the Southeast and Arizona were quite negatively affected by lower Class I minimums in the fall of 2019 and for many of the months thereafter. Topsy-turvy All-Milk and Mailbox Milk prices reported by USDA are further proof of shrinking basis in producer milk checks affecting the performance of purchased risk management tools. Even those USDA-reported All-Milk and Mailbox prices do not tell the whole story because USDA states that “the value is in the marketplace” even if it is not equitably shared with producers.

In essence, the Class I mover change was made to give large global companies buying large volumes of milk a means of ‘hedging’ their risk through forward-contracting on the futures markets. But this ‘benefit’ has resulted in taking real money out of dairy farm milk checks and has made it difficult, in some cases impossible, for producers to manage their risk with tools they purchase in the marketplace and through USDA.

Interestingly, the nation’s largest Class I fluid milk company — Dean Foods — filed for bankruptcy sale and reorganization in November 2019 in the midst of the first appearance of negative PPDs and depooling pre-pandemic.

By January 2020, PPDs turned positive but narrow in comparison to prior history, so that’s still a loss. Then, in February, a month before the Coronavirus shutdown, negative PPDs and depooling again showed up in the Central, Pacific and California FMMOs.

By June 2020 — in the midst of the Covid-19 pandemic and one month after the bankruptcy sale of most of the Dean Foods Class I fluid milk plants to DFA — severely negative PPDs of -$1 to -$10, exacerbated by depooling, were prevalent across all FMMOs, most every month from June 2020 through the present.

Even in the Northeast FMMO, where statistics show positive PPDs in some months when other FMMOs were negative, the basis loss to Northeast producers is real because even the positive PPDs in FMMO 1 over the past 24 months are $1 or more below where they were just two years earlier.

As reported in Farmshine last week, Secretary Vilsack says it’s “complicated” and the industry is “divided” so no “significant” changes can be made “quickly.”

NMPF says it intends to request an FMMO hearing of its proposal to adjust the adjuster to improve equitable treatment of producers.

IDFA is publicly silent.

Other groups are floating a proposal that, if officially proposed in an emergency hearing, would turn the deal into a full and lengthy FMMO hearing.

During a Hoards Dairy Livestream session May 5 with Erin Taylor from USDA AMS Dairy Division, a little more was learned about how USDA handles ‘emergency’ FMMO hearings. Taylor said proposals can be put forward with arguments as part of the package, explaining the emergency to make a case for why the USDA should move quickly. USDA then typically responds and gives the industry a 30 day notice if a hearing is granted, but the statute only requires 15 days, and 3 days at a minimum — depending on the emergency conditions.

Like other FMMO hearings, testimony is taken, and if USDA agrees with the proposal based on the evidence, the department could do a recommended decision, receive public comment and then publish a final decision and conduct the producer vote. Or, the Secretary can do a tentative final decision for immediate producer vote while taking testimony concurrently. In such a scenario, USDA would come back and consider that testimony, and if a change to the tentative final decision is made — based on testimony and comment — then a second producer vote would be conducted.

Generally speaking, according to Taylor, a move to use a tentative final decision cuts about 4 to 5 months out of the hearing process, but this is not done without proponents showing good cause and when there is no opposition to the proposal.

And the Congress? They made the change from ‘higher of’ to ‘average-plus’ at the request of IDFA with agreement by NMPF in the last Farm Bill.

Many members of Congress don’t know what they did. Others are “blowing it off” as “pandemic-related,” when in reality the issues began in 2019.

Lawmakers are also being told the 2018 ‘average-plus’ deal was an historic agreement between “producers” (NMPF) and “processors” (IDFA), when in reality the grassroots in either of those categories had no opportunity to be heard, to testify, to comment, and producers were denied a referendum on the change. In addition, there was little industrywide discussion.

National and state dairy organizations have been collaborating on weekly calls facilitated by American Dairy Coalition to thoughtfully approach a solution from both the short- and long-term perspectives.

While most would agree hearings on long-term FMMO reforms are needed, the short-term fix for the unvetted Class I formula change by Congress could be undone with legislation reverting to the previous formula, or through an expedited FMMO hearing as the flaws of the new formula have been revealed in both the pre- and post-pandemic markets by this average-plus change that was not vetted.

Grassroots efforts seek to raise awareness in Congress to move something forward legislatively.

While the Congress has always said it does not want to set precedent for making milk price formula changes outside of the vetting process of an FMMO hearing, and while the Congress rebuffed numerous requests for a national FMMO hearing in every Farm Bill since 2008, the Congress did go ahead and set that formula-changing precedent in 2018 by passing language in the Farm Bill to change the method for determining the Class I mover from the ‘higher of’ Class III or IV to ‘average-plus’… and here we are.

Producers can point this out when talking with lawmakers, to let them know that the current situation is unsustainable. Producers can explain to their legislators how this impacted them, to help them understand there is more to this story than “it’s the pandemic and you’ll be fine.”

If nothing is done, several industry observers see dairy farm exits rising at a faster rate in the coming year.

In short, the Class I mover change in the 2018 Farm Bill:

— was not vetted through a transparent hearing process,

— disrupted orderly marketing,

— undermined Federal Order purpose,

— created NET losses for producers of $751 million in Class I value (May 2019 through April 2021), and contributed to a net loss of over $3 billion in negative PPDs and depooling,

— created additional losses for producers in the failure of risk management tools not designed for inverted pricing, and

— undermined performance of the DMC safety net due to basis loss.

While the American Dairy Coalition continues to facilitate grassroots producer discussion and seeks a seat at the table for producers with NMPF and IDFA, ADC has also sent an email to dairy producers and organizations with a letter they can provide to lawmakers.

The most important thing is for lawmakers to understand how the pricing change, and the domino effect of negative PPDs and depooling have affected their already struggling dairy farm constituents over the past two years.

To locate the Senators and Representatives for your state, visit https://www.govtrack.us/congress/members

Proposals, hearing requests, grassroots outreach to lawmakers as Class I ‘mover’ debate heats up

By Sherry Bunting, Farmshine, April 30, 2021

WASHINGTON, D.C. — National Milk Producers Federation (NMPF) announced Friday, Apr. 23 a Class I mover reform proposal and intention to request a USDA Federal Milk Marketing Order (FMMO) hearing that would be limited to proposed changes to the Class I mover, after which USDA would have 30 days to issue an action plan that would determine whether the department would act on an emergency basis.

According to NMPF, their proposal would “modify the current Class I mover, which adds $0.74/cwt to the monthly average of Classes III and IV, by adjusting this amount every two years based on conditions over the prior 24 months, with the current mover remaining the floor.”

This adjuster change, if done today for the next two years, would pencil out above the current 74 cents (estimated $1.63).

The NMPF action comes after eight weeks of discussion by grassroots dairy producers and state and national dairy organizations seeking a seat at the table to address lost income and risk management disruptions influenced in part by the Class I mover change that was passed by Congress in the 2018 Farm Bill and implemented by USDA in May 2019.

While NMPF and IDFA have reportedly had conversations on the issue, IDFA has not yet publicly-announced a position.

On Tuesday (April 27), another proposal — called Class III Plus – was announced by a collaboration of state dairy groups in the Midwest. This proposal would also end Class I advance pricing factors.

Seasoned dairy policy analysts and economists suggest more proposals may be forthcoming.

USDA “will do the things it knows it can do to impact the (milk income) concern by providing better market opportunities, new market opportunities,” said U.S. Agriculture Secretary Tom Vilsack answer questions from North American Ag Journalists Monday, calling FMMO reform a “tough issue.”

On the specifics, though, the Secretary said simply that USDA would look to the industry “to work with them on the changes that need to take place.

“It’s a very very complicated issue, and not one that should be easily characterized. Anyone that tries to do that doesn’t understand the complexity of that particular topic. It’s very complex,” Vilsack explained. 

He acknowledged that conversations are occurring within the dairy industry, but said: “Those conversations need to mature a bit more before anybody makes a decision that there’s going to be a significant change.”

However, in contrast to the Secretary’s observations, a “significant change” has already been made across all FMMO’s, legislatively, and it was done without hearings, without comment, without a producer referendum, without much conversation and without the knowledge of many dairy producers.

So here we are. The buck is being passed as the ball is being volleyed between industry, legislative and administrative. The volley started when NMPF and IDFA proposed the mover change in 2017-18. Congress then passed it, thereby replacing the mover that had been set by administrative hearing process 20 years ago, when USDA chose the higher of instead of an averaging method and documented disorderly marketing, negative differentials and depooling, back then.

Now, the volley is open again for what looks to be a toss from legislative to industry to administrative hearing requests.

For its part, NMPF states that the current mover was “intended to be revenue neutral while facilitating increased price risk management by fluid milk bottlers. The new Class I mover contributed to disorderly marketing conditions last year during the height of the pandemic and cost dairy farmers over $725 million in lost income.” 

Analysis by various industry experts, including Farm Bureau’s Market Intel, peg the broader net farm losses at $3 billion when the change influenced a domino-effect of negative producer price differentials (PPDs) and massive depooling.

In the three fat/skim pricing FMMOs of the Southeast U.S. where PPDs are not shown, Calvin Covington calculates dairy farmers in FMMO 5, 6 and 7 collectively had net loss of $1/cwt off the blend price for 23 months due to the mover change from higher of to average-plus.

NMPF’s proposal is described as helping “recoup the lost revenue and ensure that neither farmers nor processors are disproportionately harmed by future significant price disruptions.”

A Penn State Ag Law Center webinar already planned on FMMOs this week, turned into a hot topic. Brook Duer, staff attorney for the center and moderator asked webinar guest Dr. Andrew Novakovic, Cornell professor emeritus about the specifics of the NMPF proposal.

“This proposal would recalculate the adjuster every two years, except the adjuster can never be less than 74 cents,” Novakovic said. “They are not talking about changing the ‘average of’ back to the ‘higher of.’”

In weekly producer conference calls facilitated by American Dairy Coalition after a letter was sent to NMPF and IDFA signed by hundreds of dairy farmers and organizations, a return to the higher of was identified as a short-term option while long-term proposals are vetted. American Dairy Coalition, and the grassroots groups who have been part of the conversation since February, sent emails with talking points, urging producers to contact key lawmakers and talk to them about the situation.

Proponents of a return to the higher of point out it was already vetted by USDA hearings, whereas the current average plus 74 cents was not.

“As the COVID-19 experience has shown, market stresses can shift the mover in ways that affect dairy farmers much more than processors. This was not the intent of the Class I mover formula negotiated within the industry,” noted Randy Mooney, chairman of NMPF’s Board of Directors in a press release. “The current mover was explicitly developed to be a revenue-neutral solution to the concerns of fluid milk processors about hedging their price risk.

“Dairy farmers were pleased with the previous method of determining Class I prices and had no need to change it, but we tried to accommodate the concerns of fluid processors for better risk management,” Mooney stated further. 

“Unfortunately, the severe imbalances we’ve seen in the past year plainly show that a modified approach is necessary. We will urge USDA to adopt our plan to restore equity and create more orderly marketing conditions.”

Modifying the adjuster every two years is backward-looking for forward-adjustments. 

The current mover is already challenged by timing between Class I advance-pricing and Class II, III, IV announced prices as well as the higher protein production on farms in a system that prices protein in manufacturing classes but prices fat and skim solids in the fluid class.

In the Class III Plus proposal jointly announced by Wisconsin Dairy Business Association, Edge Dairy Farmer Cooperative, Minnesota Milk Producers Association and Nebraska State Dairy Association, advance pricing of Class I would also be ended.

The mover would be linked to the Class III announced skim price, not the advance skim pricing factor. The proposal includes an adjuster that would be revised annually in September by USDA for the forthcoming calendar year. It would equal the average of the monthly differences between the higher of Class III and IV skim milk prices, and the Class III skim milk price during the prior 26 months. 

This adjuster would be floored at 36 cents just for the 2021-25 period “to facilitate faster convergence toward revenue-neutrality after COVID-19,” according to the announcement.

For its part, NMPF states that, “The significant gaps between Class III and IV prices that developed during the pandemic exposed dairy farmers to losses that were not experienced by processors, showing the need for a formula that better accounts for disorderly market conditions.”

To be sure, all FMMOs also saw gaps and inversion for three to six months in the pre-pandemic summer and fall of 2019.

When asked about the FMMO purpose and the ‘mover’ being set at the higher of to move milk to Class I use, Novakovic said USDA would have to look at the actual effect of the ‘average of’ on that purpose.

“Do we see any problem getting milk into Class I markets? Are they complaining there is not enough milk going to Class I?” he asks. “Probably the opposite direction is more true.”

Moving milk to Class I may be more of a discussion for the high fluid utilization areas of the Southeast, where producers end up indirectly ‘paying’ to bring milk in during deficient times of the year. This can be costly when there are price gaps and inversions as documented in the fall months of both 2019 and 2020.

When asked what recourse dairy producers may have in this, Novakovic indicated that lobbying the legislature is “theoretically possible” but that a legislative change is not likely apart from the next Farm Bill, which is three years away.

He also speculated that if someone put forward a proposal to return to the higher of for the next two years — and referred to the reasons given by USDA in its 2000 hearing decision – it’s “not inconceivable” that USDA could say they like what they had better than what Congress made them do, and perhaps like it better than changing adjusters or other ‘new’ proposals that would require a more lengthy hearing process if the industry is divided.

Novakovic was also asked how the Class III Plus proposal from the Midwest would affect Pennsylvania, given the state’s mostly Class I and IV utilization.

He responded to say Pennsylvania is part of FMMOs that include Class III (Northeast Order 1 and Mideast Order 33). He did not see any particular effect for the Northeast markets.

“Class IV would still be Class IV and II will be driven by IV values, and III would be unaffected, so the only question is what you would see happening with Class I,” said Novakovic. “The only way I see this proposal being viewed as a surprise is on the occasions when IV is higher than III, and that has occurred with some frequency in the past.”

The Northeast FMMO has seen a decline in Class III percentage relative to increase in Class IV and II over time. Class I sales also declined precipitously over the past decade but stabilized in 2019 and 2020 with rising sales of whole and 2% milk.

Novakovic confirmed that part of the problem in pricing Class I is the lack of beverage milk market indicators to do so.

As mentioned previously in Farmshine, Class I is required to participate in FMMO pooling, other classes are voluntary. Class I also has regulation at some state levels. On the other hand, in most states, beverage milk is used as a loss-leader in supermarkets, especially as large processing retailers dramatically cut the gallon price to compete for shoppers.

Under these factors, there is no way to gauge a ‘market value’ for Class I beverage milk apart from piggy-backing the other classes that value milk’s components in the manufacture of cheddar, butter, nonfat dry milk and dry whey.

The issue at hand is how to do that, now, in hindsight, after a significant surgical change was quietly made, and failed, and in the future within the context of FMMO reform.

-30-

Covington: Class I change cost producers ‘real money’

Lack of vetting cited as impacts of negative PPDs continue

By Sherry Bunting, republished from Farmshine, April 16, 2021

EAST EARL, Pa. — Federal Milk Marketing Orders have been the subject of discussion at many intervals in Farm Bill history. The last time a major reform occurred was in the 1996 Farm Bill, which became effective in 2000 after going through a four-year period of administrative hearings, widespread opportunity for industry and public comment, a thorough vetting.

Back then, the USDA AMS Dairy Division cited concerns about negative differentials (today we call them PPDs) and massive depooling in 1995-98.

Using the ‘higher of’ Class III or IV advance pricing factors for the skim portion of the Class I ‘mover’ formula was decided to be the way to help mitigate this negative situation and fulfill the purpose of the Federal Orders.

Fast forward to the 2018 Farm Bill: A new Class I pricing method was implemented in May 2019 using the average of Class III and IV advance pricing factors (plus 74 cents) — instead of the ‘higher of’ — as the starting point for the Class I ‘mover’ calculation. This was inserted into the 2018 Farm Bill without hearings, without public comment, with very little industry discussion, and no vetting process

The change was not stress-tested, and producers did not have a seat at the table when National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) agreed to ask Congress to legislatively make this change.

During 23 months of implementation, the result has been disastrous for dairy farmers, and the Farm Bill language calls for the opportunity to amend after the first two years of implementation. We are at that two-year mark right now, and discussions are rippling forward.

For example, a letter to NMPF and IDFA, organized by American Dairy Coalition (ADC) and signed by hundreds of producers and associations, points out the concerns and seeks a seat at the table for an immediate solution. It also identifies the hearing process as allowing inclusive participation.

In a phone conference call Monday (April 12), after months of discussion, the broad coalition of producers involved in the letter from coast to coast agreed. They are looking for an immediate temporary fix by going back to the vetted method — the ‘higher of’ — at least until a vetted decision can be made for the long-term. On Tuesday (April 13), the ADC board reportedly also took a formal position after listening to farmers from different regions across the U.S. to support an immediate temporary return to the ‘higher of’ while continuing to listen and participate in efforts to reach a vetted, viable solution for the dairy industry.

While the Class I change in the 2018 Farm Bill is one aspect contributing to the severely negative PPDs and massive depooling of milk leaving shorfalls in Federal Order revenue sharing in three months of 2019, seven months of 2020 and continuing in 2021, it is an important factor and the only factor that is the result of a change made legislatively without hearings.

Add to this the predominance of cheese in the government purchase programs throughout the pandemic, and the result has been a huge range in all-milk prices across the country and neighbor to neighbor of $8 to $10 from top to bottom.

Add to this the negative PPDs and depooling creating poor performance of risk management tools and the DMC safety net that dairy farmers pay premiums for. These tools were not designed to function in the inverted pricing situation over 13 of the last 23 months that has led to a NET loss of nearly $750 million in Class I value and over $3 billion in FMMO losses to producers via negative PPDs and depooling.

Calvin Covington has a unique combination of experience and insight into the problem. He was CEO of American Jersey Cattle Association when component pricing was developed and used in the last major reform of Federal Orders. He also spent many years after that as the CEO of a milk cooperative in the fluid milk markets of the Southeast. Retired today, he continues writing dairy market columns and consulting.

In a Farmshine interview last Friday, Covington shed some light on the Class I pricing change, negative PPDs (Table 2) and depooling.

“What I tell producers in the Southeast: If you took last year, for example, take the three Southeast Federal Orders (5, 6 and 7), this lowered the blend price about $1.00 per hundredweight. That’s real money,” said Covington. “That’s a dollar right out of producers’ pockets.”

That $1 blend price loss he is referring to is the NET loss across all pounds of milk in the Florida, Southeast and Appalachian FMMOs across the 23-month history of the new Class I pricing change.

In fact, similar losses were sustained in other Federal Orders as well. Table 1 shows how the Class I change, alone, affected Class I price over the past 23 months, for a net loss of 86 cents per hundredweight on all Class I milk pounds nationwide.

Difference in Class I ‘mover’ under old vetted and new unvetted Class I pricing method, gain/loss per hundredweight and total x volume of Class I milk (before PPDs, depooling impact added).

In fact, similar losses were sustained in other Federal Orders as well. Table 1 shows how the Class I change, alone, affected Class I price May 2019 through April 2021, for a net loss of 86 cents per hundredweight on all Class I milk pounds nationwide.

At 28% utilization, this translates to 23 cents per hundredweight across all milk pounds before depooling is factored in. Results vary between FMMOs depending on utilization and depooling. Either way, this net loss means the months where the new method provided any positive impact on the blend price were weighed against the many months where the impact was negative.

Covington and others point to the government cheese purchases as a primary reason for the “big divergence” between Class III and IV. He figures the government purchases during the pandemic represented the equivalent of 1.65% of all milk production in the U.S., and 70% of it, he says, was cheese.

When the divergence in Class III and IV advance pricing factors is larger than $1.48, the impact becomes progressively more negative on the Class I base price, or ‘mover,’ which then impacts the blend price. In the seven multiple component pricing Orders, this contributes to negative PPDs (producer price differentials) by lowering the blend price relative to Class III. If Class IV is already that much lower than Class III, and now the new Class I method averages-in that lower Class IV value, the Uniform Price (blend) minus Class III price becomes a negative number.

Table 2 shows the producer price differentials (PPD) for all 7 multiple component pricing Federal Orders during the 2-year implementation of the new “averaging” Class I pricing method from May 2019 to March 2021. PPD values are normally positive. According to the Northeast Market Administrator: “When the total
value of producer components exceeds the pool’s classified value, the result is a negative PPD since money out of the pool at producer component values plus the PPD must equal money in the pool’s classified value (pool revenue).

When we have basically 10 months of consecutive negative relationships, then Class III handlers have an easy decision: depool the milk to keep that higher price. Class III handlers are accustomed to receiving a check from the FMMO pool. They voluntarily participate in FMMOs to share in the Class I differential. But writing a check to the pool when Class III is higher? That’s a different story.

So, if Class IV represents largely exported, or clearing, product of nonfat dry milk on the skim side of the Class I averaging equation under this new averaging method, why not just make the Class III advance pricing factor the base skim price for the ‘mover’ formula?
“We’ve got to remember that we have had it the other way around, though not this extreme,” says Covington. (continued)

“In the last half of 2013 and into 2014, we had Class IV higher than Class III.”

Covington makes this observation: “With the kind of volatility we are in now… Exports can be going up or down, who knows. There is the possibility this could happen again (IV over III), and also the possibility if the bottom falls out on the powder exports while cheese is strong (III over IV).”

Either way you flip the what-ifs and wherefores, the point is clear: The USDA AMS Dairy Division vetted the ‘higher of’ to be the way to help assure the Federal Orders function for their primary intended purpose: 1) assuring an adequate supply of milk for Class I fluid use, and 2) orderly marketing.

“I am stubborn on the issue. I admit that right up front,” says Covington. “There is a reason we have the higher of. The Dairy Division did a real good job of explaining this (in 2000). The purpose of the Federal Orders is to get milk to fluid use to make sure consumers have an adequate supply. The ‘higher of’ accomplishes that. Now we are getting away from the purpose.”

So, things have changed, right? People are drinking less milk and eating more cheese than in 2000 when major FMMO reform last took place. That matters if all we are looking at is the revenue sharing function of the Federal Orders — the pouring of revenue from the Class I glass into the receipts of Class II, III and IV handlers.

Covington takes a deeper view into the more basic purpose of the Federal Orders that vets these things in hearings, usually, to play out the scenarios.

“Any time there’s less incentive to move milk to fluid use — and that happens when Class III price gets closer to the blend or Class I price, or like last year Class III was higher than the blend or Class I price — why should the milk move if it is going to receive less money?” he explains. “Likewise, if processors need that milk and go into an area of Class III, they pay a larger give-up number to get that milk (to Class I).”

In short, says Covington, the new ‘average + 74 cents’ method for determining the advance base skim price for the Class I mover “presents the opportunity for this to happen.” In other words, it presents the opportunity for the Federal Orders to become dysfunctional and not fulfill their identified purpose.

Going back to the 2000 decision during Federal Order Reform, the USDA AMS Dairy Division, in their own words, explained why the ‘higher of’ would be used.

Citing this about the situation in 1995-98, the AMS decision stated: “Recent increased volatility in the manufactured product markets has resulted in more instances in which the effective Class I differential has been negative, especially in markets with low minimum Class I differentials. In the past when price inversions have occurred, the industry has contended with them by taking a loss on the milk that had to be pooled because of commitments to the Class I market, and by choosing not to pool large volumes of milk that normally would have been associated with Federal milk order pools. When the effective Class I differential is negative, it places fluid milk processors and dairy farmers or cooperatives who service the Class I market at a competitive disadvantage relative to those who service the manufacturing milk market. Milk used in Class I in Federal order markets must be pooled, but milk for manufacturing is pooled voluntarily and will not be pooled if the returns from manufacturing exceed the blend price of the marketwide pool.”

The USDA AMS vetted decision in 2000 goes on to explain how the situation then was “inequitable … where milk for manufacturing is pooled only when associating it with a marketwide pool increases returns.”

AMS Dairy Division also wrote in the 2000 decision about how the class price inversions were made worse (1995-98) by depooling and cited the tens of billions of pounds of milk involved. The 2000 decision to use the ‘higher of’ was explained in a way that holds relevance for the 2019-21 situation.

USDA AMS stated in 2000: “Because handlers compete for the same milk for different uses, Class I prices should exceed Class III and Class IV prices to assure an adequate supply of milk for fluid use. Federal milk orders traditionally have viewed fluid use as having a higher value than manufacturing use. (This) Class I price mover reflects this philosophy by using the higher of the Class III or Class IV price for computing the Class I price. In some markets the use of a simple or even weighted average of the various manufacturing values may inhibit the ability of Class I handlers to procure milk supplies in competition with those plants that make the higher-valued of the manufactured products. Use of the higher of the Class III or Class IV price will make it more difficult to draw milk away from Class I uses for manufacturing.”

In essence, the new Class I pricing method has shown over the past 23 months that not only is the potential there for FMMOs to be in disarray, there is proof that it is happening.

Covington and others point to the hearing process — the normal vetting process for proposed FMMO changes. In this current situation, Congress made the decision to do what NMPF and IDFA asked, without hearings. Dairy farmers did not have a seat at the table. There was little industry discussion, and other organizations were assured that producers would be “held harmless” because the history showed the new method would be “revenue neutral.”

It became law without vetting, hearing, or comment, and has not been revenue neutral.

Covington is among those who strongly favor the hearing process and was concerned in 2018 that it was not being used to vet this Class I pricing method change.

“IThe administrative hearing avenue lets everyone have a seat at the table, to hear every side, put forth every possibility,” he says. “But this wasn’t done. It went through Congress. It was done quick. A hearing process gives time to study the outcome of a proposal. The things we are talking about now would have come out, and people would have said, ‘oh, we better think twice.’”

Not getting as much attention is what this change has done to risk management tools purchased by dairy farmers, which extension educators, consultants, government, everyone, have been urging producers to adopt.

The irony is that the change from ‘higher of’ to ‘average + 74 cents’ was done because NMPF and IDFA convinced Congress it was necessary so that milk buyers could manage their risk through forward contracting and hedging on the futures markets. But the result for dairy farmers — milk producers — is that their risk management has had a huge monkey wrench thrown into it and no good tools to address a new kind of risk in their blend price equation.

“Look what it did to risk management for dairy farmers,” Covington observes. “There is basically 25% of the milk sold in Class I. That’s 47 billion pounds last year. How much of that even participates in risk management? Is it 1%, 5%, 10%? My guess is a small amount. We need to look at the cost vs. benefit. Maybe some used it, but look at what it has done to dairy farmers and the incentive to move milk to Class I. What’s the trade-off?

“How many things are done to look at one small segment at risk of everyone else?” he asks. “It lowered the Class I price. That’s obvious. How much of that was passed on through at retail? When we look at retail, we get the highest retail milk price in Kansas City and the lowest in Wichita, and they are both in the same Federal Order. So, you can’t make rhyme or reason to it.”

Talking through some of the elements of how Class I sales to retail work, with most milk being sold private label, Covington’s involvement and experience is valued.

“It seems like the industry loses focus. We look at the newest thing out there, or the newest group, and forget about the majority. Most of the milk sold in this country is white milk in gallon jugs sold private label,” he observes.

Covington suggests that future Federal Order reform will come, and that even though the methodology of end-product pricing is sound, some of the factors going into it are at a point where evaluation is beneficial.

He weighs the difference between whether changes in Federal Orders are made through an administrative hearing process or through Congress, or a combination of the two, and suggests that the hearing process be included because it is how proposals are vetted.

“A good example is what is happening right now where the issue was not thoroughly heard and analyzed, and it happened so fast,” Covington relates. “How many people in Congress really knew what they did? If it can happen with something like this, what else can it happen to?” -30-

As depooling, negative PPDs and Cl. I formula change continue stealing value from milk checks, here’s what you can do

This table originally published in Farmshine last year, has been updated through March. It shows what the Class I formula change, alone, has collectively removed from all FMMO producer settlement funds and farmer milk checks in terms of Class I milk payment (NET loss of 91 cents / cwt net over Class I milk shipped from all FMMOs for all 23 months since the Class I formula change and 28 cents / cwt NET loss for ALL FMMO pounds of milk May 2019 through March 2021). The massive depooling that resulted has cost dairy producers more than three times this amount in negative PPDs.

Dairy producers and organizations are encouraging more to add names by March 12 to letter seeking equal seat at table for producers in regard to milk pricing policy

By Sherry Bunting, Farmshine, Friday, March 5, 2021

EAST EARL, Pa. — Dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, have come together to compose a letter to the National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA). The letter addresses the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S during the last three months in 2019, eight months in 2020, and is estimated to continue through at least the first four to seven months of 2021. 

Dairy producers and dairy advocacy trade associations are invited to add their names as signatories to this letter to the presidents of both NMPF and IDFA. Hundreds of producers and dairy trade associations have done so electronically within the first few days. 

The deadline to sign is March 12, 2021.

Farmshine has learned that allied industry persons can also sign and mention how they are affiliated — due to the many jobs, economic activity and livelihoods supported by dairy beyond the farmgate having a vested interest in seeing a price formula that is fairer to producers. Those signing who are not producers, but are affiliated with dairy production, will be listed separately as ‘allied industry’ when the letter is officially presented.

Multiple family members involved in a dairy farm operation may individually sign.

Click here or scroll to the end of the article to view the letter and sign electronically through the automated short form.

Or, read the letter as published in Farmshine. Then, email your name, phone number, city, state, and farm name or allied industry affiliation (veterinarian, nutritionist, lender, accountant, feed sales, custom harvester, heifer grower, etc.) to info@americandairycoalitioninc.com or text this information to 920-366-1880.

A photo example of the electronic form appears below.

Click here to open to add your name or organization name.

In the letter, dairy producers ask NMPF and IDFA to work with them to find a solution that can result in a fairer distribution of dairy dollars.

“Dairy farmers all across the U.S. were stunned to see the huge negative PPD deductions on their milk checks,” states the American Dairy Coalition (ADC) in an email about the letter. “We understand the need to better ensure that processors are able to utilize risk management. However, this came at a huge expense to dairy producers and eliminated their ability to utilize the risk management tools like DRP and DMC if they had already purchased them — leaving many producers with no way to shield themselves from significant financial loss.”

The new formula (average Class III and Class IV advance pricing factors + 74 cents), passed by Congress in the 2018 Farm Bill at the request of NMPF and IDFA, is not acceptable, says the ADC.

The goal of the letter to NMPF and IDFA is to ensure that dairy producers have the opportunity to truly be at the table to find workable solutions for milk pricing. 

Remember, NMPF and IDFA advocated the change in the Class I base price that is a key part of the problem — without any hearings. NMPF indicates in various press releases that they are working on this and have a plan to “fix it”, but their plan, as indicated so far, falls short according to available economic analysis. 

A recent Farm Bureau preliminary analysis of four Class I pricing scenarios (2019-2021), using USDA AMS data, shows this. Fig. 1 (above) compares the previous higher-of, the current average + 74 cents, the current average + $1.68 and Class III + $1.25. Dairy producers are looking to be part of evaluating the best solution using past and future pricing indicators, and it appears that Class III + $1.25 offers a fairer distribution of dairy dollars than the averaging method.

The central point of the letter, however, is to give dairy producers an equal seat at the table. While NMPF represents dairy cooperatives and IDFA represents dairy processors, there is inadequate representation of dairy farmers at the policy-making level on this issue.

The domino effect of the Class I formula change, negative PPDs and depooling, as well as impact on risk management tools, have been hardest on dairy producers in so-called “fringe” areas, and those supplying regional Class I markets. This tends to accelerate the consolidation trend toward ‘cow islands’.

In fact, dairy farm exits in 2020 represent a 7.5% loss in the average number of licensed dairies in the U.S. compared with a more typical attrition rate of 5% annually over the past decade. This, according to USDA’s annual milk production report released last Tuesday (Feb. 23).

Producers interviewed in multiple states recently indicated that while the USDA CFAP payments were helpful, they did not come close to covering losses incurred from negative PPDs and the cost of risk protection tools they chose to purchase but which did not protect against this depooling-negative PPD risk. In many cases, those producers using risk protection through futures markets, actually had additional costs in margin calls that were not recouped in the real milk check when the market went against the hedge.

In short, not only are milk checks not transferring equitable value, the risk management tools offered by USDA and privately, do not work as intended or expected.

Across all 11 FMMOs, the NET loss on Class I milk pounds, alone, due to the new Class I formula, amount to over $726 million. (Table 1). This translates to a 91-cent per hundredweight NET loss over 23 months (May 2019 through March 2021) on Class I utilized milk and a 28-cent per hundredweight NET loss over 23 months on all milk pooled across 11 FMMOs.

Normand St-Pierre, Ph.D., PAS, shows the losses in his 20-month chart May 2019 through December 2020. As director of research and technical services for Perdue Agribusiness, he broke down the amounts for each FMMO in his “Tiny change with unforeseen consequences” Perdue weekly dairy outlook recently.

“Cumulatively, since the new formula was implemented (May 2019), producers have suffered a (20-month net) loss of $714 million. If from here on the new formula would always produce a gain equal to the average gains that have occurred in the 10 winning months since May 2019 (i.e.,~ $0.40/cwt), it would take producers 50 months to recover the $714 million in lost income.”

In fact, with current futures markets projecting a continued divergence of Class III and IV advance pricing factors by more than the ‘magic’ $1.48 per hundredweight, this situation of negative PPDs, depooling and milk check value extraction will continue for at least another four months, digging the milk check hole even deeper for dairy producers.

Producers are often told that negative PPDs are ‘good’ because it means milk prices are going up. This used to be the case back when the ‘advanced pricing’ aspect of the Class I formula was the main reason for small negative PPDs occurring once in a while. 

The situation today is far different – largely due to the change in the Class I base price from ‘higher of’ to averaging Class III and IV pricing factors. The net losses over the past 23 months will not be ‘caught up’, and as St-Pierre points out, the situation is now at the point that it could take years to catch up or recoup even with a tweak.

St-Pierre also observed that producers in the Northeast FMMO suffered losses from the formula change that were the largest in total across all FMMOs, but nearly equal to the average loss per hundredweight across all FMMOs. The losses per hundredweight are largest in Florida’s high Class I milk marketing order, of course.

Now consider that the Class I shortfalls created by the lopsided Class III vs. Class I relationship prompted massive depooling. As previously reported in multiple Farmshine articles and Market Moos columns, only the milk directly associated with the Class I plants is truly regulated to be pooled. Handlers of Class III milk are accustomed to getting a check from the pool, not writing one to the pool.

This Class III over I situation creates collective shortfalls in Federal Milk Marketing Order producer settlement funds when massive depooling occurs. This has resulted in a collective net loss of well over $3 billion ($2.7 billion as of the end of November), as represented by negative PPDs across the 7 multiple component-priced FMMOs and the aforementioned Class I skim losses in the 4 fat/skim-priced FMMOs. 

Fig. 2 and 4, from American Farm Bureau based on USDA AMS data, shows the depooling / negative PPD losses just for June through November 2020, but the losses continue in the months since then for which data are available, and the futures markets suggest this will continue into at least July 2021.

In December, Farm Bureau economist John Newton wrote about the most severe negative PPD depooling losses as of the end of November — shown here for June-November 2020.

USDA AMS answered Farmshine’s question last year about these losses in relation to calculating the “All-Milk” price on which Dairy Margin Coverage is based. Their response indicated that some of this depooling / negative PPD loss is included as value in the All-Milk price. It is seen as value received by producers because the dollars are “in the marketplace” due to the FMMO end-product pricing formulas – even if these dollars are not passed on to producers after producer settlement funds are depleted by depooling.

Farm Bureau chief economist John Newton wrote in his December 2020 Market Intel analysis of the negative PPD impact June through November 2020: “To put this into a farm-level perspective, assuming a national average milk yield per cow of nearly 12,000 pounds of milk produced from June to November, a 200-cow dairy in western Pennsylvania would have experienced PPD milk check “deductions” of nearly $130,000. Similarly, for a 3,000-cow dairy operation in California, the negative PPDs would represent milk check deductions of more than $2.5 million.”

Newton goes on to explain in the article published in the December 25, 2020 edition of Farmshine: “What makes the situation even worse is public and private risk management tools such as Chicago Mercantile Exchange futures contracts, Dairy Margin Coverage and Dairy Revenue Protection were unable to protect against PPD price risk. Margin calls on Class III milk likely made the negative PPDs sting even more as milk prices rapidly rose.”

So back to what dairy producers can do! Read the letter and consider signing it. Share it with others. Talk to your local, state and regional dairy organizations and farm organizations. Ask them to sign as organizations. Both individuals and organizations can sign on.

The bottom line is that dairy producers need an equitable seat at the table where decisions are made that affect how dairy value is shared. NMPF and IDFA — as processors — wear multiple hats and do not wholly represent the on-farm producer interests. 

To view the letter (below) click here and look for instructions to electronically add your name, or the name of your organization. Or read the letter below and click here for the direct link to electronically add your name — or the name of your organization — to the letter.

Farmers send June milk check data and preliminary review is revealing

MilkCheckSurvey072920

UPDATED! By Sherry Bunting, Updated from the article in July 24 Farmshine print edition

BROWNSTOWN, Pa. — June milk check reports are pouring in after Farmshine’s previous article about negative Producer Price Differentials (PPD) included a request for milk check data from readers. Along with the data, we are receiving many comments.

One producer notes the PPD had typically averaged a positive $1.50 in his area of the Northeast, but for June, it was a negative $5.38, a loss he pegged at $15,000 for the month for his farm.

Another producer in the Mideast area noted a loss of over $60,000 in component value, which would not be covered in the way expected by the Dairy Revenue Protection (DRP) policy he had purchased. The negative PPD loss represents “basis risk”, whereas tools like DRP, forward contracting, even DMC, mitigate “market and margin risk.”

The “markets” did their thing. Demand went up, cheese prices went up, Class III milk contracts gained, but the de-pooling in most Federal Milk Marketing Orders (FMMOs) ate up most of the doubled protein value and other component value gains for farms across most of the country, as reflected in a steeply negative “basis”. There’s really no risk management tool for that, and we’ve received correspondence indicating that producers who opted to manage risk, had losses where they thought they would have coverage.

It’s difficult to make sense of it all, especially when FMMO Market Administrators explain all the workings of PPDs in terms of advance pricing, sudden commodity increases that are complicated by advance pricing of Class I, pooling and de-pooling of milk when Class I milk value is lower than the blend price. But these explanations leave out the fact that Congress changed the way the Class I Mover is calculated at the request of NMPF and IDFA in the 2018 Farm Bill, without holding a milk pricing hearing that so many have requested.

This is a big concern going forward. The spreads between the higher Class III price over the Class I Mover are $9.62 for June and $7.75 (estimated) for July.

From July, forward, the lagtime is less of a factor. However, the new way vs. the old way of calculating Class I is a much bigger factor in predicted negative PPDs because as Class III has been rising, Class IV has been falling, widening the divergence.

The final math equation for the Class I Mover is the same as it was: Class I Mover = (Base Skim Milk Price x 0.965) + Butterfat Price x 3.5). What changed in May 2019 is the way the Base Skim Milk Price is determined before it is placed in that calculation. It used to be simply the higher of the two Advance Pricing Factors — Class III or Class IV — that was plugged into that equation as the “Base Skim Milk Price. Now the two Advance Pricing Factors are added together, divided by 2, and 74 cents is added to that to produce the Base Skim Milk Price for the final equation above.

Under the previous way, using the “higher of,” the August Class I Mover would have been $24.36 — $4.58 higher than the $19.78 Class I Mover announced on July 22 for August. Also, under the previous method, July’s Class I Mover would have been $19.13 — $2.57 higher than the announced July Class I Mover at $16.56.

These new concerns in FMMO pricing bring new variables into how producers manage risk, so the market value that did not make it into milk checks or risk management tools cannot be blamed completely on Covid-19 pandemic disruptions. A convergence of factors have created a situation where the mechanics of risk management like Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP) — as well as forward contracting — may not work as intended for all producers in all regions in a time of disrupted markets and extreme risk, with fairly recent changes to certain milk pricing formulas.

This market disruption, and the fallout in negative PPDs, should signal to USDA and the Congress that a National Hearing on Milk Pricing is overdue. Piecemeal changes have consequences. The de-pooling exacerbates the situation. In June, de-pooling contributed to removing hundreds of millions of dollars of value from milk checks across all Federal Orders. As one producer asked, who gets that money? The answer: It depends.

First, if the end-product “market” value found was paid to the plant or cooperative or handler, and if the handler consequently de-pooled the milk and didn’t pass that value back to the farms voluntarily or contractually, then we know who has the money. If the “market” did not pay what we see in the USDA end-product pricing or on the CME spot market and futures markets, then it’s not real money.

Given the wide range in milk check data with most of the nation coming in around $5 to $7 lower than the Upper Midwest — and a $4 range in FMMO uniform prices to begin with — it’s obvious the “market” is paying. But the calculations are not passing through to milk checks, except in the Upper Midwest Order 30 where 50% of pooled milk receipts were utilized as Class III milk, even though Class III volume reductions suggest significant de-pooling occurred.

Let’s look at preliminary data from Farmshine readers around the country (Table 2 above).

So far, over 150 Farmshine readers from six of the 11 FMMOs have provided milk check data. Since only a couple responses were received from California, we did not do any math for FMMO 51 yet, until we receive more data. At this writing, we have not received any milk check data from Orders 6 (Florida), 126 (Texas and New Mexico), 124 (Arizona) and 131 (Oregon and Washington).

What is evident in the preliminary review is the significant gap between the highest and lowest gross and net prices paid.

For each of the six FMMOs — where we had enough data to do some math — we see the difference of $7 between the FMMO with the highest average gross price paid (before deductions) of $20.81 in the Upper Midwest (FMMO 30) and the lowest average gross price paid of $13.77 in the Central Order (FMMO 32). When looking at the range of price data, the spread is $8 between some check data as low as $13.02 gross pay price in Pennsylvania to $21.05 in Minnesota.

The other FMMO average data fall into place $4 to $6 below the Upper Midwest with gross pay price averaging between $14.97 and $16.15 before deductions.

On the net mailbox price (after deductions), the difference is almost $7 between the highest mailbox average of $19.74 for FMMO 30 and the lowest average of $12.97 for FMMO 32. Average net mailbox price for FMMOs 1, 33, 5, and 7 trail FMMO 30 by a difference of $5 to $6. (See Table 2.)

Respondents for each of the FMMOs so far are a mix of mostly co-op members, but also some independent shippers, and a range of cooperatives — national and regional — are represented in the data.

In the Upper Midwest FMMO 30 for June, where PPD was least negative and Class III milk utilization was the highest (50%), the Uniform price already reflected the smallest negative PPD in the $3s compared to negative $5s and $7s everywhere else. At the same time, reports indicate the cheese plants and co-ops in that region even shared some of that smaller loss, knocking it back into the negative $2’s.

While large penalties for overbase milk still remain part of the pricing equation, it was not a major factor for most producers in June, perhaps because producers are reducing production as well as dumping, donating or utilizing overbase milk differently to avoid these penalties. This process is continuing into July. In the Northeast and Midatlantic region, reports of milk dumping were confirmed in July. Mostly this was due to producers wanting to avoid overbase penalties, but at least one report involved temporary “plant equipment issues”.

Of the milk check data shared with Farmshine, most showed producers were shipping 93 to 99% of their base for June. But some data includes producers seeing significant assessments on small amounts of overbase milk by both smaller regional cooperatives and larger national footprint cooperatives — except in the Upper Midwest. Also, in pockets of the Southeast, check data show some penalties were waived as a base / overbase blend was shown on checks, but then in another spot, the stub reported “revenues available to pay” a better price. In those instances, it appears the overbase penalty was eliminated and market adjustments reduced, which added 30 to 50 cents to what the location blend would have been.

Elsewhere, producers overbase deductions ranged $1.50 to $6.40.

Another variable was “market adjustments”. No “covid” deductions were seen in June check data, however, many had “market adjustments” deducted to the tune of 13 to 24 cents. In a few cases, the “market adjustment” was described in an earlier letter stating that the “covid” deduction for co-op costs incurred in April and May was being spread out evenly over several months forward.

The averages for the Northeast and Mideast FMMOs belie the wide range in prices. For Pennsylvania, alone, the range in gross pay prices before deductions was more than $4.00/cwt.  Even after adjusting for butterfat, the range was $3.50. The lowest net mailbox prices submitted by anyone in any FMMO came from Pennsylvania producers, with instances as low as $11.20/cwt mailbox for June. Overbase penalties and market adjustment deductions contributed to these lower nets.

In Pennsylvania, the Pa. Milk Marketing Board (PMMB) over-order premium (OOP) was set large for June, but was a small factor on most milk checks. It does appear that the western half of the state in Order 33 received at least some OOP benefit to make up for taking a more significant beating from negative PPDs.

Very few producer milk checks showed numbers other than zero in the PMMB OOP line item. However for Pennsylvania producers shipping directly to some Pennsylvania bottlers in the Mideast order, the benefit was $1.25 to $2.00/cwt listed as a line item and serving to simply pull them up closer to where the Northeast blend price sat. Remember, negative PPDs in the Mideast Order, which includes western Pa., were in the $7s. Negative PPDs in the Northeast Order, which includes eastern Pa., were in the $5s.

Meanwhile, out-of-state bottlers buying Pennsylvania milk and selling into the Pennsylvania minimum retail price market passed on about 10% of this floor-setting OOP in June at about 30 to 50 cents.

June’s PMMB OOP was over $4 per cwt because $3.68 was added to the normal $1 to make the difference between the USDA Class I Mover and a temporary $15 Class I floor. The PMMB used the OOP to temporarily accomplish this, but then became an island as USDA did not follow suit. The USDA had canceled a hearing requested by cooperatives petitioning it do the same nationally.

Looking at the milk check data we have received, it is obvious that USDA would have done well to have followed PMMB’s lead — as they were petitioned to do in April — to set a temporary Class I Mover floor at $15 through August.

At the time that the PMMB took its action, USDA AMS Dairy Programs had indicated in correspondence shared with Farmshine that a date was set to meet with petitioners to hear evidence for a national temporary Class I floor.

But, when word got out, certain dairy economists, such as at the University of Minnesota, along with Minnesota Milk Producers and other entities, including Walmart, protested that this idea of a temporary Class I Mover floor would “decouple” Class I milk and be unfair to the Upper Midwest where Class I utilization is low. Mainly, they complained that a move to stabilize Class I would “disrupt” milk markets and affect the Dairy Margin Coverage.

Well, folks, that disruption happened anyway — in reverse.

What we have seen, in the absence of a Class I floor, is total disruption and instability due to the inherent lagtime in Class I pricing reflecting market trends, and additional severity because of how the Class I Mover calculation was changed by Congress, with no hearing at all, just placed in the 2018 Farm Bill at the direction of National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA).

The so-called “markets” have not worked for any of the FMMO’s dairy producers except for the Upper Midwest where the complaints over flooring the Class I Mover arose.

The change in the calculation of the Class I Mover in the 2018 Farm Bill was implemented one year ago in May 2019. By using an average instead of the “higher of” to determine a base value for components or fat/skim, the Class I Mover no longer moves in concert with the highest value of components or fat/skim.

This is a problem because there is no way to assess market value on Class I in an of itself. Class I beverage milk is a designated loss-leader by the 800-lb retailer-processor gorillas like Walmart and Kroger. Also, in a couple states, the retail milk price is regulated to some degree.

Class I’s new “averaging” method is contributing to the removal of hundreds of millions of dollars from Federal Order pools through de-pooling.

It’s hard to predict what “reality” or “alternate reality” the USDA NASS All Milk price and Dairy Margin Coverage milk margin will reflect when they are announced on July 31.

This is a serious problem, given the widening divergence between Classes III and IV on the futures markets. This divergence is a warning that the current four-class system should be re-evaluated. When two manufacturing classes for stored products can be averaged to produce the basis of value for fresh products and beverages, it’s easy to see how large entities in the marketplace can make decisions that affect imports, storage, supply and demand to move one side of an “averaging” equation and create lopsided returns outside of FMMO pools. If milk moved to its highest value use and components were valued on multiple cross-class markets, a stable Class I base could be established as one piece of an overall value mix with less incentive to de-pool lopsided value.

For example, the July Class III contract stood at $24.41 on the futures markets as of July 27 — now $10.76 higher than the Class IV contract at $13.65. August Class III stands at $22.11, $8.39 higher than the Class IV contract at $13.72. September Class III, at $20.49, is $6.34 higher than the $14.15 Class IV contract. October Class III, at $18.90, is $4.51 higher than Class IV at $14.39. November Class III, at $17.53, is $2.95 higher than Class IV at $14.58. The gap narrows for December, but as of July 27, the difference between the two classes is still more than the $1.48 ‘magic number’ with December Class III at $16.60, $1.81 higher than Class IV at $14.79.

Creating even more value loss in every FMMO in June — whether priced by multiple components or fat/skim — is the amount of Class III milk that was de-pooled. Total volume pooled across all Federal Orders was 9.5 billion pounds in June, down 36% from a year ago and down 28% from May (May 2020 was down 13% from year ago).

While June milk production was reported on July 21 at 0.5% above year ago, milk dumpage in June was down considerably in terms of what showed up on FMMO pools. We know farms are dumping and diverting to avoid overbase penalties, but the pooled “other use” milk, including dumpage and animal feed, was down by 44% compared with a year ago in June. The only Federal Order to have more “other use” milk in June than in May was the Appalachian Order 5, and Central Order 32.

Table1_YTD_MilkDumped(Bunting)rTable 1 (above) shows the “other use / milk dumpage” pooling data. What is mind-boggling is that year-to-date milk dumped totals at 566.7 million pounds for just the first 6 months of 2020, is 125 to 150 million pounds greater than the 12-month annual totals for each of the past five years.

Dairy producers wishing to submit June milk check data as well as next month’s milk check data for July to broaden this survey geographically, please send: Gross price, net mailbox price, PPD, butterfat and protein, other deductions (especially ‘market adjustment’ deductions), overbase penalties if applicable, along with your location or the FMMO in which your milk is marketed and information stating whether you market with a cooperative or as an independent. There is no need to provide your name or your specific co-op or plant affiliation unless you choose to include that.

Please consider emailing me at agrite2011@gmail.com or text/call 717.587.3706. All information is aggregated anonymously by state, region and FMMO.

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