Covering Ag since 1981. The faces, places, markets and issues of dairy and livestock production. Hard-hitting topics, market updates and inspirational stories from the notebook of a veteran ag journalist. Contributing reporter for Farmshine since 1987; Editor of former Livestock Reporter 1981-1998; Before that I milked cows. @Agmoos on Twitter, @AgmoosInsight on FB #MilkMarketMoos
In that same June 2019 hearing, animal scientist and greenhouse gas emissions expert Dr. Frank Mitloehner of University of California-Davis explained the methane / CO2 ‘biogenic’ cycle of cows.
He said that no new methane is produced when cow numbers are “constant” in an area because methane is short-lived and converts to CO2 in 10 years time, which is then used by plants, cows eat the plants, and the cycle repeats.
Dr. Mitloehner also said that this cycle changes when cattle concentrations move from one area to another.
The milk produced and bottled in the Northeast and Southeast milksheds is not just carbon neutral, it’s already carbon negative, producing not just no new methane, but less than prior-decades’ methane.
Bear in mind, these new dairy-‘based’ — blended — beverages are NOT Class I products. I have been informed that the 50/50 blends, for example, do not meet the standard of identity for milk, nor do they meet the milk solids profile that requires Class I pricing. This means that even though milk is part of a fluid dairy-‘based’ beverage, it is not priced as Class I.
The milk used in these emerging products that combine ultrafiltered solids with water, additives and maybe an almond or two, fall into Class IV, some are Class III if whey protein is used. Examples include products like DFA’s Live Real Farms ‘Purely Perfect Blend‘ that arrived recently in Pennsylvania and the greater Northeast after its first test-market in Minnesota.
Think about it. Unity is great on many levels, and is to be encouraged in an industry such as dairy, but when it comes to marketing, who is calling the shots for future viability within the DMI integration strategy, otherwise known as unity?
Pre-competitive alliances and ‘proprietary partnerships’ working on food safety are wonderful because all companies should work together on food safety. But animal care? Environment? Climate? Why not just offer quality assurance resources and pay farmers certain premiums for investing as companies would like to see and pay them for providing the consumer trust commodity — instead of implementing one-size-fits-all branches in programs like F.A.R.M.?
These so-called voluntary programs have the power to negate contracts between milk producers and their milk buyers even though consumer trust is a marketable commodity that producers already own and are in fact giving to milk buyers, and their brands, without being compensated.
Instead, producers are controlled by arbitrary definitions of the consumer trust commodity that the producers themselves originate. This goes for Animal Care, Worker Care, Environment, and Climate.
The pre-competitive model used in food safety is applied to all four of the above areas today. This is exactly the supply-chain model World Wildlife Fund (WWF) — DMI’s ‘sustainability partner’ — set in 2010 to “move the choices of consumers and producers” where they want them to go.
In the 2019 Senate hearing referenced at the beginning of the above op-ed, Dr. Mitloehner stated that the mere fact there are 9 million dairy cattle today compared with 24 million in 1960 and producing three times more milk shows that dairy producers are collectively not only emitting zero new methane, they are reducing total methane as old methane and carbon are eradicated by the carbon cycle and less new replacement methane is emitted.
The problem may be this: Year-over-year cow numbers for the U.S. are creeping higher. While still much lower than four to five decades ago, the issue emerging for DMI’s Innovation Center for U.S. Dairy is how to accommodate growth of the new and consolidating dairy structures to attain the checkoff’s expanded global export goal and to accommodate massive new dual-purpose plants if dairy farms in other areas remain virtually constant in size, grow modestly, or decline at a rate slower than the ‘designated’ growth areas are growing.
DMI is at the core of this, you see, to reach it’s new collective net-zero goal, cow numbers would have to decline in one area in order to be added in another area, or they will all have to have their methane buttons turned off or the methane captured because now the emissions are being tracked in order to meet one collective “U.S. Dairy” unit goal under the DMI Innovation Center and F.A.R.M.
At that 2019 Senate hearing,Dr. Frank Mitloehner testified that dairies already create zero new methane but this can be tricky when cattle move from one area to another (as we see in the industry’s consolidation).Then we have DMI’s Dairy Scale 4 Good claiming the dairies over 3000 cows can be net-zero in 5 years and ‘spread their achievement’ over the entire milk footprint. Do we see where this is going?
Will all dairy farms have to meet criteria — set by organizations under the very umbrella of the checkoff program they must fund — to get to a ‘collective’ net-zero using the GHG calculator developed by the checkoff-funded Innovation Center in conjunction with its partner WWF (12 year MOU)? This GHG calculator has been added to the FARM program. These are the big questions.
By Sherry Bunting, both parts of a two-part series in Farmshine, July 2021
The dairy industry continues to wait for USDA to provide details on three areas of dairy assistance already approved by Congress or mentioned as “on the way” by Ag Secretary Tom Vilsack.
The fly in the ointment, however, is the record-high 2021 milk production (Table 1) and accelerated growth in cow numbers (Table 2) at a pace the recent USDA World Agriculture Supply and Demand Estimates (WASDE) expect to continue into 2022.
USDA is reportedly looking at production reports — up vs. year ago by 1.9% in March, 3.5% in April, 4.6% in May — to determine how to assist without adding fuel to expansion that could threaten late 2021 milk prices in the face of rising feed costs and a worsening western drought. (The latter two challenges could temper those forecasts in future WASDEs.)
May milk production a stunner
U.S. milk production totaled 19.9 billion pounds in May. This is a whopping 4.6% increase above 2020 and 2018 and a 4.1% increase over May 2019.
Let’s look at year-to-date. For the first five months of 2021, milk totaled 96 billion pounds, up 2.3% vs. the 93.8 billion pounds for Jan-May of 2020, and it is 4.4% greater than the 91.9 billion pounds of Jan-May milk produced in pre-pandemic 2018 and 2019. Of the four years, only 2020 had the extra production day as a Leap Year.
Milk per cow was up 3% over year ago in May. Compared with 2019, output per cow is up 2.2%, according to USDA.
Cow numbers vs. 2018 tell the story
Milk cows on U.S. dairies in May 2021 totaled 9.5 million head, up 145,000 from May 2020’s 9.36 million, up 172,000 from 2019’s 9.33 million, and up 83,000 head from 2018’s 9.42 million.
Counter to the national trend, Pennsylvania had 48,000 fewer milk cows than May 2018 — dropping 30,000 into 2019; 10,000 into 2020, and 8,000 into 2021.
Elsewhere in the Northeast and Southeast milksheds, among the 24 major monthly-reported states, New York had 4000 more milk cows in May 2021 than 2018, Vermont 8000 fewer. Georgia dropped 1000, Florida 12,000, and Virginia 11,000. In the Central states, Illinois was down 10,000 head.
The total decline in cow numbers for the 24 lesser quarterly-reported states, the collective loss in cow numbers is 59,000 head from May 2018 to May 2021
Accelerated growth is coming from three key areas where major new processing assets have been built or expanded.
In the Mideast, where the new Glanbia-DFA-Select plant became fully operational in Michigan this spring, there is a net gain of 32,000 cows for 2021 vs. 2018, Ohio’s cow numbers that had been declining 2018-19, began recovering in 2020-21. Indiana had 18 months of substantial growth, and Michigan returned to its growth pattern in 2020. Taken together, the Indiana-Ohio-Michigan region had a loss of 8,000 cows heading into 2020, but gained a whopping 40,000 cows over the past year.
In the Central Plains, where new plant capacity is starting up this spring and summer — Minnesota, South Dakota and Iowa, combined, added 40,000 cows May 2018 to May 2021.
In the Southern Plains, where joint-venture processing capacity continues to grow, Texas has continued full-steam-ahead, gaining 87,000 cows from 2018 to 2021, along with 29,000 added in Colorado and 17,000 in Kansas. New Mexico regained earlier losses to be 2000-head shy of 2018.
The growth patterns in these regions somewhat mirrored dairy exits from other areas — until Jan. 2020 (Table 2). The past 17 consecutive months of year-over-year increases in cow numbers leave the U.S. herd at its largest number in 26 years (1995).
However, the assumption that ‘dairy producers are okay because the industry is expanding’ ignores several essential factors. The playing field has become more complicated and inequitable. There are four main factors at play. We’ll look at them one at a time.
Factor #1 — Milk dumping and base programs
A year ago in April and May 2020 — at the height of the Coronavirus pandemic disruptions — the dairy industry saw dumping of milk, stricter base programs and bigger milk check deductions. Producers culled cows, dried cows off early, changed their feeding programs, even fed milk in dairy rations.
But milk production still grew, according to the USDA data.
Some cooperatives and milk buyers, like Land O’Lakes, had base programs already in place and triggered them. Others made changes to prior programs or implemented new ones.
Dairy Farmers of America — the nation’s largest milk cooperative, largest North American dairy processor and third-ranked globally by Rabobank — quickly implemented a new base program in May 2020, seeking 10 to 15% in production cuts from members, varying by region, with overage priced on ‘market conditions.’
It is difficult to assess the ‘equity’ in these base programs and the cross-layers among producers between and within regions, or to know how these ‘bases’ are being handled presently. When questioned, spokespersons say base decisions are set by regional boards.
Meanwhile, product inventory and pricing schemes affect all regions, and milk rides between FMMOs in tankers and packages — with ease.
According to USDA, the 11 FMMOs dumped and diverted 541 million pounds of milk pooled as ‘other use’, priced at Class IV, during the first five months of 2020, of which 350 million pounds were in April alone. This is more than three times the ‘other use’ milk reported by FMMOs during the first five months of pre-pandemic 2019 (171.4 million pounds). By June, the amounts were double previous years.
Of this, the largest amount, by far, was the 181 million pounds of ‘other use’ milk in the Northeast FMMO 1 during Jan-May 2020, comprising one-third of all the dumped and diverted milk pooled across all 11 FMMOs in that 5-month period.
In the Southeast milkshed, the Appalachian, Florida and Southeast FMMOs 5, 6 and 7, together pooled 88 million pounds of ‘other use’ milk in the first five months of 2020. The Southwest FMMO 126 had 106.2 million pounds of ‘other use’ milk; Upper Midwest FMMO 30 had 46.1 million pounds; Central FMMO 32 had 36.7 million pounds; Mideast FMMO 33 had 30.7 million pounds; California FMMO 51 had 28.9 million pounds; Arizona FMMO 131 had 21.7 million pounds; and Pacific Northwest FMMO 124 had 1.3 million pounds.
The dumping had begun the last week of March 2020 and was heaviest in the month of April. Producers also saw deductions as high as $2/cwt. for balancing costs, lost quality premiums, and increased milk hauling costs. Unaccounted for, were the pounds of milk that had reportedly been dumped on farms without being pooled on FMMOs.
All of this against a backdrop of pandemic bottlenecks and record-high March-through-August imports of butter, butteroil, milkfat powder, and blends — adding to record-high U.S. butter inventories and contributing to the plunging Class IV, II and I prices vs. Class III (PPD).
Meanwhile, not only did production growth in key areas move ahead, so did strategic global partnerships. Just one puzzling example in October 2020, after eight months of deflated producer milk checks, depressed butterfat value, burdensome butter inventory, record butterfat imports, and a plunging Class IV milk price that contributed to negative producer price differential (PPD) losses, Land O’Lakes inked a deal to market and distribute cooking creams and cream cheeses — Class II and IV products that use butterfat — from New Zealand’s Fonterra into United States foodservice accounts.
The New Zealand press reports were gleeful, citing this as a big breakthrough that could be followed by other of their cheeses entering the “huge” U.S. foodservice market through the Land O’Lakes distribution.
Factor #2 — Class price wars and de-pooling
As reported in Farmshine last summer, dairy farmers found themselves in uncharted waters. As Class IV prices tumbled from the get-go with all of the ‘other use’ dumping and diverting, butter inventory building as butter/powder plants tried to keep up with diverted loads at a disruptive time, the USDA Food Box program started drawing products in the second half of May, and really got going by July 2020.
Cheese, a Class III product, was a big Food Box winner. The cheese-driven Class III milk price rallied $7 to $10 above Class IV, and massive volumes of milk were de-pooled by Class III handlers, which has continued through May 2021.
Reviewing the class utilization reports, an estimated 80 billion pounds of Class III milk normally associated with FMMOs has been de-pooled over the past 26 months.
At the start of this ‘inequitable’ situation, academic webinars sought to explain it.
“We’re seeing milk class wars,” said economist Dan Basse of AgResource Company, a domestic and international ag research firm in Chicago, during a PDPW Dairy Signal webinar a year ago.
He noted that under the current four-class pricing system, and the new way of calculating the Class I Mover, dairy farmers found themselves “living on the edge, not knowing what the PPD (Producer Price Differential) will be” (and wondering where that market revenue goes).
“A $7.00 per hundredweight discount is a lot of capital, a lot of income and a lot of margin to lose with no way to hedge for it, no way to protect it, when the losses are not being made up at home as reflected in the PPD,” Basse said in that summer 2020 webinar.
What does this have to do with year-over-year milk production comparisons?
Two words: Winners. Losers.
Some handlers, and producers won, others lost — between and within regions.
Here’s why all of this matters from a production comparison standpoint: Dairy economists — Dr. Mark Stephenson, University of Wisconsin, and Dr. Marin Bozic, University of Minnesota — are both on record acknowledging that USDA NASS uses FMMO settlement data, along with producer surveys, to benchmark monthly milk production.
So, on the one hand: How accurate are these data for comparison over the past 26 months, given the inconsistent FMMO data from dumping, diverting and de-pooling?
On the other hand: Did the negative PPDs and de-pooling, resulting in part from the 2018 Farm Bill change in the Class I Mover, allow Class III handlers to capture all of that additional market value and use it to fuel the 2020-21 accelerated milk growth for regions and entities connected to the new Class III processing assets?
Factor #3 — New dual-processing concentrates growth
Accelerated growth in cow numbers is fueling record production in 2021. It is patterned around ‘waves’ of major new processing investments in some areas, while other areas — largely fluid milk regions — are withering on the vine or growing by smaller margins with fewer cows.
In the 24 major milk states, production growth was even greater than the All-U.S. total — up 4.9% vs. year ago. In part one, the breakdown was shown vs. 2018.
Here’s the breakdown for just the 12 months from May 2020 to May 2021 — a time in which the industry dealt divergences that created steep losses for some and big gains for others, while FMMOs became dysfunctional.
In just one year, over 40,000 cows were added in Indiana, Ohio, and Michigan, combined, and milk production was up in May 2021 by 12.6, 3.2 and 5.1%, respectively. The draw is the massive new Glanbia-DFA-Select joint-venture cheese and ingredient plant that began operations late last year in St. Johns, Michigan. Sources indicate it reached full capacity this spring. Add to this the 2018 Walmart fluid milk plant in Fort Wayne, Indiana and other expansions in Ohio and Michigan.
Ditto for the Central Plains, where new cheese and ingredient line capacity became operational this spring and summer. Supplying these investments, Minnesota grew production 6%, South Dakota 14.6%, and Iowa 6.2% over year ago.
Number two Wisconsin grew by 5.6% in May 2021 vs. year ago.
Milk production was up 5% in number one California, even though cow numbers were down by 1000 head, and dairy farmers in a referendum voted recently by a slim margin to keep their quota system. They are also dealing with a devastating drought that news reports indicate is now impacting both the dairies and the almond growers.
Then there’s Texas, where growth continues to be a double-digit steamroller, up 10.8% in May 2021 vs. 2020 — pushing New York (up 4.2%) to fifth rank.
The Southern Plains has had several strategic investments, starting in Texas and New Mexico (up 6% vs. year ago).
In Colorado, where production was up 5.3% in May, DFA’s joint ventures and strategic partnerships with Leprino, Kroger and others have fueled growth.
Kansas grew milk production 7.3% vs. year ago. In 2018, a state-of-the-art whole milk powder and ingredient plant became fully operational in Garden City, Kansas. The plant was to be a joint-venture between DFA and the Chinese company Yili but ended up as a joint-venture between DFA and 12 of its member farms that are among the 21 Kansas dairies shipping milk to it.
DFA’s Ed Gallagher gave some insights on this during a May 2021 Hoards webinar. He said, “We went through a period of investing in powder plants in the U.S. It seems like there is a follow-the-leader approach when deciding on investments, and it goes in waves. The industry just completed a wave of a lot of investment in Class IV manufacturing plants, and now… it’s flipping to Class III.”
Looking back on the Class IV ‘wave’ 2013 through 2018, there were several times in those years that Class IV beat Class III, leading to FMMO de-pooling, but not to the extreme extent seen in the past 12 months as Class III now beats all other classes, including Class I, leading to negative producer price differentials (PPDs).
Gallagher sees Class III and IV prices “coming together” in the “next period of years” because the ‘wave’ of capacity investment has flipped from Class IV to III. He predicted more Class III capacity will be added.
Are these past 26 months of PPD net losses for producers the industry’s answer to, in effect, increasing processor ‘make allowances’ without a hearing?
The average PPD value loss (see chart) across the seven multiple component pricing FMMOs was $2.57 per hundredweight for 26 months, which began with implementation of the new Class I pricing method May 2019 through the most recent uniform price announcements for June 2021 milk.
Applying a conservative 5-year average PPD (prior to Class I change) for each FMMO, only the few gray blocks on the chart represent ‘normal.’
This means even positive-PPDs show margin loss for farm milk pooled on FMMOs. In fact, the CME futures markets as of July 14 show August through December divergence between Class III and IV above the $1.48 mark, indicating Class I value loss and negative PPDs or smaller positive PPDs could return after barely a two-month reprieve.
Many handlers that don’t pool on FMMOs also use the uniform prices as a benchmark.
This $2.57 net loss for seven MCP FMMOs across 26 months represents almost a doubling of the current make allowance levels.
Current USDA make allowances and yield factors add up to a processor credit of $3.17 per hundredweight on Class III and $2.17 on Class IV. This already represents 11 to 25% of farm milk value, according to 2018 analysis by John Newton, when he was Farm Bureau’s chief economist.
Why is this important? Because we are already seeing additional margin transfer from Class I to Class IV as the industry moves to blended beverages that mostly use ultrafiltered (UF) milk solids. Blends using whey would fall under Class III.
Looking ahead, DFA now owns most of the former Dean Foods’ Class I fluid milk plants since May 2020. New manufacturing synergies are undeniable, considering the direction of dairy checkoff’s fluid milk revitalization plan emphasizing these dairy-based-and-blended beverages and ‘dual-purpose’ processing facilities.
As low-fat UF milk solids are blended with other ingredients in a manufacturing process to make new combined beverages, the result is a competing beverage, and the milk in the beverage drops from Class I to Class IV.
Meanwhile, these beverages cost more at the grocery store, and the ingredients are not part of the USDA end-product pricing ‘circle’. Therefore, no new make allowances should be requested because processors are already getting a reduced class value, and a higher margin.
DMI’ vice president of global innovation partnerships, Paul Ziemnisky, gave some insights into this “future of dairy beverages” — and how it ties into new processing plants investments during the virtual Pennsylvania Dairy Summit in February.
Ziemnisky went so far as to say new processing facilities will “need to be built as beverage plants able to handle all kinds of ingredients” for the blended products of the future. In essence, he said, the future of fluid milk is “dual purpose” processing plants.
While 11 of the top 24 states had milk production increases of 5% or more in May, the 13 states with increases below 5%, or negative, are mainly located within traditional Class I fluid milk marketing areas: Florida, up 0.5%, Georgia up 2%, Virginia down 2.3%, Illinois up 1.9%, Arizona, down 0.5%, Washington, down 0.9%, Pennsylvania and Vermont both up 1.8%, and New York up 4.2%.
Idaho and Utah, up 2% and unchanged, are outliers and largely unregulated by FMMOs. Some beverage assets are coming to that region in the form of ultra-filtration and aseptic packaging, including a plant renovation to make Darigold’s FIT beverage. Additionally, a new Fairlife filtration membrane plant was opened near Phoenix, Arizona in March, and Kroger is doing filtration and aseptic packaging in Colorado.
Meanwhile, Pennsylvania is often described as a ‘fluid milk state’ with a Milk Marketing Board setting minimum prices for fluid milk, and a string of independent milk bottlers that figure prominently in their communities.
Ranked fourth in milk production in 2006, Pennsylvania was passed by Idaho in 2007. By 2016, Michigan had pushed Pennsylvania to sixth. The very next year, in 2017, Texas leapfrogged both Pennsylvania and Michigan. Now, Minnesota has pushed the Keystone State to eighth.
How does the future of dairy affect traditionally ‘fluid milk’ states like Pennsylvania, or the Southeast for that matter?
New dairy-‘based’ beverage innovations can be made anywhere and delivered anywhere, often as shelf-stable products. Most are not Class I products unless they meet the strict FMMO definition which was last spelled out in the USDA AMS 2010 final rule.
For now, this also includes the Pa. Milk Marketing Board. Executive secretary Carol Hardbarger confirms that the 50/50 drinks are not regulated under PMMB, which generally uses federal classification, but that a legal interpretation of the Milk Marketing Law with regard to blends may be in order.
The 50/50 blends are already in some Pennsylvania stores and elsewhere in the Northeast, which is the second phase of the ‘undeniably, purely perfect’ marketing plan for fluid milk revitalization.
Factor #4 — USDA, industry coalesce around climate
Ag Secretary Tom Vilsack has been outspoken from the outset about using and aiming every available USDA program dollar in a way that also addresses the Biden administration’s strategies for equity, supply chain resiliency, and climate action.
Speculating a bit as to why USDA is taking so long to announce details about already funded dairy assistance, it could be that Sec. Vilsack is looking at the fit for ‘climate impact.’
Paid around a million a year in dairy checkoff funds to serve 4 four years as CEO of the U.S. Dairy Export Council — between prior and current Ag Secretary posts — Vilsack understands the future plans of the dairy industry’s checkoff-funded proprietary precompetitive alliances on a global scale.
Vilsack has been privy to the DMI Innovation Center’s discussions of fluid milk revitalization through ‘dual purpose’ plants and blended beverages. He is no doubt looking at the accelerating growth in milk production that is occurring right now for ways to tie dairy assistance to measured climate impacts in the net-zero file.
Producers on the coasts and fringes of identified growth areas have a target — fresh fluid milk and other dairy products produced in regional food systems for consumers who have a renewed zeal for ‘local.’ Fresh fluid milk will have to find a path outside of the consolidating system and cut through the global climate-marketing to directly communicate fresh, local, sustainable messages about a region’s farms, animals, environments, businesses, economies, jobs and community fabric.
WASHINGTON, D.C. — Senator Kirsten Gillibrand (D-NY), chair of the Senate Agriculture Subcommittee on Dairy, Livestock, Poultry, Local Food Systems, Food Safety and Security, told reporters in late May that she is working on milk pricing legislation and wants to have dairy pricing hearings in her subcommittee before the August congressional recess.
According to a document obtained by Farmshine, the Senator has been granted the request to hold the hearing in her subcommittee. The American Dairy Coalition (ADC) reports their appreciation for Senator Gillibrand moving forward on this, noting her office has established the hearing scope and is contacting testifiers. A date is anticipated for late summer 2021, though not yet confirmed on the Senate Ag calendar.
“We cannot lose the ability to feed our own people,” Gillibrand said during her May press conference. “If you have a market that’s fundamentally flawed and are constantly leaving producers unable to survive in the industry, there’s a problem. So, I think we need a very thorough investigation of my concerns.”
At that time, Gillibrand also talked about a multi-part scenario where this hearing could be followed by an investigation. Since 2003, the U.S. has lost almost half its licensed herds with milk price returns declining 23% in the past five years, according to USDA.
In addition to pricing and competitive market concerns over the past decade, the billions of dollars in dairy farm losses due to negative producer price differentials (PPDs) and de-pooling are part of the hearing equation.
Of this, a documented $783 million in net losses have accrued over 26 months directly tied to the reduced Class I price for beverage milk under the new averaging method implemented by USDA in May 2019 (See Chart 1).
That equates to a straight average loss of nearly $25,000 per farm or $83 per cow, but the Class I value losses would be greatest in milk marketing areas with a higher percentage of Class I use. Other types of losses were incurred by producers in milk marketing areas that have a lower Class I utilization but experienced large volumes of Class III milk de-pooled, making the much lower Class IV price a bigger portion of the blended price paid to farmers.
At the height of these losses being incurred, the American Dairy Coalition worked to bring dairy producers together through conference calls and emails, driving a letter signed by hundreds of producers and organizations to National Milk Producers Federation and International Dairy Foods Association. The March letter requested a seat at the table for producers to address the Class I method.
NMPF and other groups came out with statements about potential FMMO hearing requests, which did not materialize.
In May, ADC worked with Senators in supporting Senator Gillibrand’s letter to Ag Secretary Tom Vilsack, seeking use of available CFAP and PAP funds to assist dairy farm families with these losses.
Secretary Vilsack recently responded to questions from Senator Patrick Leahy (D-Vt.) during an Ag Appropriations hearing to say USDA is working on a plan to compensate Class I and Class III differential losses, but no details have been forthcoming. Producers are also waiting for details from USDA about the enhanced Dairy Margin Coverage base payments approved by Congress in December.
Sen. Gillibrand has observed the extreme volatility in milk prices over the past decade of her service as a member of the Senate Ag Committee. Dairy farm revenues have steadily declined due to a combination of trade wars, increased production costs, and competition from non-dairy alternatives leading to reduced consumption of fluid milk.
Other seismic shifts have also occurred in the dairy market landscape over the past five years, including shockwaves of rapid cooperative and plant mergers, plant closings, farms and small cooperatives losing milk markets since 2015, Walmart opening its own fluid milk processing plant in 2018, and the bankruptcy filing in 2019 and sale of plants in 2020 by the nation’s largest milk bottler, Dean Foods.
Multiple factors have also converged around the pandemic to create further losses for dairy farm families operating on already razor-thin margins and struggling to attain equitable markets and revenue.
Even the risk management tools purchased by producers did not function as designed because they are based on market values that most farmers did not receive in their actual milk checks. That’s like filing an insurance claim for a fire, but the adjuster looks at someone else’s intact property to determine your damages.
The upcoming hearing will likely look at all of this in relation to the change in the Class I pricing method for fluid milk, which was added to the 2018 Farm Bill without being vetted through a hearing process. The hearing is also expected to look at ways to address the Class I change and the FMMO hearing process, as well as FMMO pooling and de-pooling rules and dairy cost of production.
FMMO revenue sharing pools are the mechanism for how the usually higher Class I base price and normally positive differentials are shared with producers across a milk marketing area, no matter what class of products their milk is used in.
However, when the Class I price — due to the new averaging method — fell below Class III for 16 of the past 26 months, an estimated 85 billion pounds of Class III milk normally associated with FMMOs was kept out of the revenue-sharing pools, dropping the Class III portion to less than half its normal size from May 2019 through May 2021, and ultimately depressing milk check returns to producers. Some handlers may have paid their own shippers a portion of this de-pooled value, most did not.
In effect, the equitable method became inequitable when pricing turned upside-down, and risk management, at a time when farmers needed it most, failed.
Additionally, the USDA Farmers to Families Food Box cheese purchase effects on markets in relation to Class I pricing, are also expected to be part of the hearing.
The Food Box program included cheese, milk and other dairy products to help struggling families and at the same time was intended to support struggling farmers that were having to dump milk and be docked further penalties by milk buyers and cooperatives as ‘balancing costs’ or ‘market adjustments’ to handle milk supplies during the disruptions of the Coronavirus pandemic.
These purchases prompted cheese market rallies, followed by intervals of higher Class III milk prices (see Chart 2). However, this support became inequitable in large part due to the Class I pricing change, alongside a record large spread between the Class III and Class IV prices of $5 to $10 per hundredweight. This spread was affected on one side by record-large butter imports and inventories (Class IV), a slowdown in milk powder exports (Class IV) and on the other side by cheese sales (Class III) rising because of active exports and government cheese purchases for food boxes during the pandemic.
Even though every food box contained a gallon of fluid milk, there is no way to determine the ‘market value’ of Class I fluid milk, apart from the manufacturing class and component values. This is because fluid milk is treated as a base commodity. It is present in 95% of shopping carts, and thus used by large retailers as a loss-leader on the one hand, while on the other hand, the USDA regulates Class I fluid milk handlers as the only class that must pay a minimum FMMO price to farmers.
The hearing is also expected to look at processor ‘make allowances’ that are built into USDA’s end-product pricing formulas for bulk surveyed commodities: cheddar and dry whey (Class III) and butter and powder (Class IV).
Make allowances and yield factors currently add up to $3.17 per hundredweight on the Class III milk price and $2.17 per hundredweight on Class IV, according to a 2018 presentation by John Newton, formerly the chief economist for Farm Bureau who was hired this year by the Senate Ag Committee, explained make allowances as part of a risk management conference in Pennsylvania.
In effect, the make allowances are deducted from the milk component values as a ‘processor credit’ per pound of product, and the yield factors are applied, determining the number of pounds of product made per hundredweight of milk. Processors are indicating the make allowances should be raised because of the “circular” nature of end-product pricing.
But there’s another way to look at that ‘circularity.’ While it’s true that 12 years have passed since make allowances and yield factors were last updated (2008), it also true that in those 12 years vast amounts of value-added manufacturing have been added that benefit from these make allowances but are not part of the end-product-pricing ‘circle’ back into the farm milk price. The cost of making those products can be easily passed up the supply chain instead of back to the farmers.
For the plants making the four USDA-surveyed bulk commodities that determine class and component prices — cheddar, butter, nonfat dry milk and whey — the issue may be ‘circular’. However, if make allowances are too high and too rigid, then there’s too much incentive to make product for storage that further depresses raw milk prices through end-product-pricing. So make allowances can be circular in that way also.
Dairy pricing is complicated and intricate — a huge topic. But then again, maybe what can come out of a Senate Subcommittee hearing is a simple straightforward message about making milk pricing simple and straightforward.
Pennies per pound here and there across milk volumes mean millions for big players, and when they add up to nickels and dimes that turn into dollars per hundredweight in the farm milk price, the intricacies become something farmers should be able to see and understand.
In a word: Transparency.
As indicated in her May press conference, Senator Gillibrand is looking to have each part of the dairy sector represented to offer their unique perspectives in the upcoming hearing, which is expected to have two panels, the first being dairy farmers and the second panel bringing in cooperatives, processors and an expert on dairy policy and economics.
In May, Senator Gillibrand made it clear she wants to see a multi-part evaluation of current and longstanding dairy issues, with this hearing being a first step to get a look at the lay of the land.
By Sherry Bunting, published weekly in Farmshine Newspaper
Cutting through consumer confusion
Consumers and producers of food and beverages — anything in the protein market — are going to see a disruptor explosion of new products. As I look through the food-related publications coming across my desk and into my email inbox — Culinology, Progressive Grocer, Food Navigator, Meat + Poultry, Dairy Foods, Food and Beverage, and the list goes on — the sudden onslaught of animal-free cellular agriculture, portrayed as dairy and meat without the animals, is stunning.
Even Facebook pop-up ads push Nick’s ice cream every day in my Facebook ‘newsfeed’ — with the tagline ‘dairy without the cow’ courtesy of Perfect Day Foods.
They use ‘climate’ to generate interest from companies wanting to reduce a carbon footprint by incorporating the excrement of genetically-altered yeast to replace a portion of real dairy protein in the dairy manufacturing space. It’s an easy swap, Perfect Day founders say, and according to the USDA Bio-engineered labeling regulations that became official last January, the stuff doesn’t have to be labeled BE because the genetically-altered yeast are not being consumed — just their excrement harvested from the fermentation vats.
“We ran the numbers, and if we partnered with the dairy industry to use Perfect Day protein in just 5% of their products, we’d save 12.3 million metric tons of greenhouse-gas emissions – equivalent to the carbon emitted from every single car registered in the city of Los Angeles,” says Nicki Briggs, Perfect Day’s vice president of corporate communications in a Berkeleyside online interview on the third day of June 2021. Ms. Briggs was formerly an employee of Chobani.
There are other dairy turncoats and straddlers moving between real and fake and seeking to blend them to some sort of climate / carbon standard. But data like that of Ms. Briggs doesn’t tell the whole cow story. Just like the data Impossible Foods is using to coax schools to replace 50% of their beef with Impossible Burger — now that it has the coveted USDA Child Nutrition Label — are figures that do not consider the entire cycle of cattle for a net figure on GHG.
It is maddening. This onslaught of bright packaging with new and clever names and claims populating the meat, dairy and seafood offerings — starting with plant-based concentrates and chemical combinations and leading to cells growing in bioreactors and yeast excreting protein in fermentation vats. Big Tech is the new wannabe farmer, and Big Ag, Big Food, Big Finance, and Big ole Uncle Sam are in for the deal.
Consumers will begin to feel like they are stuck inside a pinball machine, or to be more current with my analogy, a warp-speed version of a video game bombarded by bangs, pops and whistles.
That’s what Gen Z wants, they all say. And yet, a survey by the Hartman Group recently showed Gen Z — just like the Millennials before them — are most comfortable with the food choices they grew up with, but unlike Millennials who still had a preference for local, seasonal and farm-to-table, Gen Z-ers have a preference for fast food and foods with familiar tastes.
We’ve got some work to do to navigate all of this with a straight forward message that cuts through the climate half-truths and outright lies about cows, that penetrates the government dietary restrictions based on outdated and incomplete reviews of the scientific literature on dietary fat.
We’ve got our work cut out for us to keep educating others, giving them the facts that are being ignored and bullied out of the national, even global, conversation about food as the industry grows its margins for investors through consumer confusion at the expense of consumer’s knowing what’s real.
USDA joins global school lunch deal
USDA can’t even get U.S. school lunch right, but now plans to lead America’s joining into a “global coalition” called the “School Meals: Nutrition, Health and Education for Every Child.” There’s also a bill before Congress seeking to make three meals and a snack universal for all children through school.
As for the global coalition, this is right up Secretary Vilsack’s alley. In a press release Wed., June 23 about USDA’s leadership in joining the global deal, Vilsack talked about “powerful incentives” and “building resilience to future shocks” by focusing on improving the nutrition, health, and education of vulnerable children and adolescents worldwide. Sounds good, right? Who can argue with words like that? But like everything else out of USDA these days, where’s the details? And what’s it really mean?
The global coalition is centered around education and school meals and will launch at the United Nations’ Food Systems Summit in September. Like the 30 x 30, the Net Zero initiatives, and everything else coming through the pipeline from World Economic Forum, the goal line for this, too, is 2030 — making nutritious meals available for all children by 2030, with other benchmarks set for 2022.
Who can argue with nutritious meals for all children? There’s not a single person who doesn’t want all children to have nutritious meals. The problem is this: Who defines what is nutritious? How will the systemization child-feeding change the future of food and agriculture?
“We look forward to bringing our expertise to bear, expanding our reach, and benefiting millions more vulnerable children by partnering with the World Food Program and other like-minded countries as part of this important coalition,” said Vilsack in Wednesday’s press release.
Okay, let’s hear those details.
Will USDA do dairy?
In a June 15 press release about previously authorized aid for dairy, USDA announced $580 million for Dairy Margin Coverage base changes and $400 million for Dairy Donation Program would be implemented within the next 60 days, but we’ve yet to see the details.
As part of that news release, USDA also noted that, “Additional Pandemic Assistance for Producers (PAP) payments would be targeted to dairy farmers who have demonstrated losses not covered by previous payments.” No details on that either.
However, on the same day of that press release — June 15 — Senator Patrick Leahy, Chairman of the Senate Appropriations Committee, asked USDA Secretary Tom Vilsack about delivering urgently needed relief to dairy farmers. Vilsack replied to say that USDA was announcing that day (again without details).
In the exchange between Vilsack and Leahy during a Senate hearing, Vilsack said: “We are creating a program to help reduce the differential that occurred between Class I and Class III milk pricing because of the disproportionate number of purchases of cheese during the Food Box effort. That distorted the market, and it caused a lot of harm to smaller producers. We’re putting resources in to reimburse those producers for some of the loss they incurred.”
Those ‘differential’ discrepancies have not been outlined yet by USDA, but here are several manifestations Farmshine and other publications have been documenting:
As much as $3.5 billion was potentially withheld or represented as inequitable transmission of milk value when massive volumes of Class III milk were withdrawn from FMMOs, as further reflected in severely negative PPDs. This would be a net loss after months of positive PPDs are applied; however, even positive PPDs in some months were smaller than normal.
Both 1 and 2 contributed to the inequitable transmission of Class III value to many producer milk checks
These losses affected the performance of purchased risk management tools, meaning that a change in Class I pricing that was supposed to help dairy processors manage their risk, had the resulting effect of making it more difficult or impossible for dairy farmers to manage their risk — during a time when they needed it most.
Conundrum: U.S. milk production up4.6% in May
But here is the conundrum in regard to USDA dragging its feet on details for ‘dairy aid’: May milk production nationwide was up a whopping 4.6% over year ago — so says the USDA report released June 22. April production was up over 3% vs. year ago.
USDA looks at this as though dairy producers are doing so well that they are expanding their herds. In fact, in May, there were 145,000 more milk cows in the U.S. than a year ago. Could this be another sign of the inequitable transfer of value in the milk pricing formulas?
More insight on the production report next week’s Market Moos.
July Class Iadvance $17.42
The July advance Class I base price, or ‘mover,’ was announced Wednesday (June 23) at $17.42. This is 87 cents lower than June’s Class I base price and 86 cents higher than a year ago. The July 2021 Class I base price at $17.42 — using the current formula of average plus 74 cents — is 34 cents higher than it would have been if figured using the previous ‘higher of’ method at $17.08.
July 2021 marks the first time in 12 straight months that the new calculation method resulted in a higher Class I base price than the old method. However, there’s a lot of ground to make up, considering that for 16 of the 27 months since the new method was implemented, the difference between the new ‘average plus’ and the old ‘higher of’ was lower and only 11 months were higher.
In fact, the Class I base value losses for 16 months averages to $3.28 per hundredweight while the value gains (including upcoming July 2021) for 11 months averages to just 39 cents.
Class III/IV milk futures plunge
Class III and IV milk futures were all lower across the board this week. The only green in the sea of red, was the Class III current month gained a dime heading into the last week of June contract trading, but the Class III July contract lost 15 cents and August plunged by $1.00 below week ago, with the rest of the board on Class III milk ranging 10 to 50 cents lower. On the Class IV board, the losses were more evenly spread ranging 20 to 50 cents lower across all 12 months.
As all four dairy commodities trended lower on the CME spot market this week, the 12-month futures average lost 29 cents on both classes, equally, by midweek, so the spread between Class III and IV 12-month future contract averages remained exactly at 67 cents on Wednesday, June 23 — right where it was a week ago and still well below the $1.48 mark.
On Wed., June 23, Class III milk futures for the next 12 months averaged $17.67, down 29 cents from the previous Wednesday’s average, the 7th straight week the 12-month Class III futures price average was lower than the prior week. Class IV contracts averaged $17.00 — down 29 cents from the 12-month average on the previous Wednesday.
Dairy commodities all lower
Butter slid lower almost daily, on the CME daily spot market. By Wed., June 23, the price was pegged at $1.73/lb — down 7 cents from the previous Wednesday with 6 loads trading.
Grade A nonfat dry milk (NFDM) also slipped this week. On Wed., June 23, the CME spot market price was pegged at $1.2575/lb, a penny lower than a week ago with a single load trading.
Cheddar trade plunged lower on the CME, then firmed up a penny or two at midweek. Barrels took the brunt of the decline and by Wed., June 23, both the 40-lb block Cheddar and 500-lb barrel cheese were pegged at $1.49/lb on the spot market with 2 loads of blocks and a single load of barrels changing hands. This was a net 3-cent loss for the week on blocks and a 15-cent loss on barrels.
Whey price was firm on the CME spot market, pegged at 59 1/2 cents with zero loads trading.
GORDONVILLE, Pa. — Empowerment. One word with power in it.
“I got to thinking about introducing this session and thought everyone knows what empowerment means, right? Give power. But then I looked up the opposite of empowerment,” said Kristine Ranger, a consultant in Michigan working with farms and writing and evaluates grants. She traveled to Gordonville, Pennsylvania with National Dairy Producers Organization board member Joe Arens to the farm of Mike Eby, NDPO chairman, for the ‘Empowering dairy farmers’ barn meeting Friday, April 23, 2021.
What is the opposite of empowerment?
“Here are the words in the dictionary,” said Ranger. “Disallow, forbid, hinder, inhibit, preclude, prevent and prohibit. Have any of you been experiencing any of that as you try to build a livelihood with your dairy farms?”
From there, the daylong barn meeting moved headlong into weighty topics, but stayed focus on the positive concept of encouraging producer involvement in seeking accountability and transparency in the systems that govern dairy.
Although the sunshine and spring planting kept in-person attendance low, the event was livestreamed on visual and audio with producers listening in from all over.
A thought that kept surfacing in this reporter’s mind listening to the panel of speakers was this: The longer something goes uninterrupted, the more vulnerable it is to become corrupted.
In fact, it tied in directly with Arens’ personal account following Gary Genske on the program. Arens urged producers to look at annual reports and ask questions. “That’s what NDPO is all about, to support your efforts to get to the cooperative boards of directors about what they should be doing at the co-op level,” said Arens, a member of the NDPO board for two years.
“Members own the milk. Members have the power, but the whole thing has been tipped upside down,” said Arens.
“If producers do not hold their co-ops accountable, then silence is your consent,” said Genske, a certified public accountant since 1974 based in California with a dairy in New Mexico.
He kicked things off at the barn meeting, presenting details about the roles and responsibilities of cooperatives, boards and members. He shared his insights into improving dairy farm milk prices.
Genske is a longtime member of the NDPO board. He highlighted the marketing concepts of 100% USA seal for milk and dairy products, returning to the true standards for fat and components in beverage milk that are still used today in California, and moving toward aligning milk production with profitable demand.
The Genske Mulder firm does the financial statements for 2500 dairy farms each year and 10,000 farm tax returns annually. He sees the numbers and knows the deal.
Walking attendees through the various aspects of USDA regulation and the Capper Volstead Act, Genske gave producers the tools and encouragement to accept their responsibilities as cooperative members.
In October, he had a successful lawsuit in Kansas City. After requesting documents from the cooperative in which he is a member, and being denied or provided documents that were mostly redacted, he took the issue to court.
After a two-day hearing, the judge ruled in Genske’s favor on his request for documents, as a cooperative member, with a stated purpose.
In short, Genske said, “We have to put people in the position of taking care of the members… We want to cull cows not dairy farmers.”
Bernie Morrissey, chairman of the Grassroots PA Dairy Advisory Committee talked after lunch about the 97 Milk effort when farmers empowered themselves to market whole milk, since no one else was; and all kinds of prohibiting, hindering, forbidding, preventing and precluding had been going on regarding whole milk availability and promotion.
“It started with Nelson Troutman who painted the first round bale, just like that sign: Drink Whole Milk 97% Fat Free,” said Morrissey pointing to the large banners and holding up the Drink Whole Milk School Lunch Choice Citizens for Immune Boosting Nutrition yard signs.
With a joint effort underway now for a little over two years – working to educate lawmakers and consumers about whole milk, and pushing efforts to legalize whole milk choice in schools — Morrissey said “It’s working. Things are happening.”
Dick Bylsma of National Farmers Organization (NFO) traveled from Indiana to brief producers on joint efforts between NFO, Farmers Union and Farm Bureau to empower dairy farmers by getting their individual votes back in Federal Order hearings. He traced the history of Federal Milk Marketing Orders, and the genesis of bloc voting at a time in history when there were hundreds of thousands of farmers and communication was slow.
“It’s time to end bloc voting,” said Bylsma, and he laid out some of the efforts underway around that proposition, also highlighting the purpose of the Federal Orders.
These are just some fast highlights from a day of deep learning. More from these speakers and additional speakers on co-op involvement, systems accountability, checkoff reforms and referendums, and other empowering topics — including more from Genske about ending the silence and exercising rights and responsibilities with communication tools that work for cooperative members — will be published in a future edition.
Similar in-person meetings recently encouraged producers in Michigan and northern Indiana, said Ranger.
For dairy producers who are interested in knowing more, want to get involved, but aren’t sure how, NDPO chairman Mike Eby suggests joining in on the NDPO weekly national Tuesday night call at 8:00 p.m. eastern time at 712-775-7035 Pin 330090#. Every dairy producer in America has a standing invitation.
HARRISBURG, Pa. – Shipping 7 pounds of combined milk fat and protein is the threshold minimum for improved profitability. Heather Dann of Miner Institute in Northeast New York was part of a panel discussion during the Pennsylvania Dairy Summit, which included Alan Waybright of Mount Rock Dairy, Newville, milking over 800 Holsteins and crossbreds, and Jennifer Heltzel of Piney Mar Farm, Martinsburg, milking 120 Holsteins.
“Focusing on maximizing fat and protein is a key driver of profitability on the dairy farm,” said Dann, noting that a few years ago Cornell Pro Dairy did research showing return on assets (ROA) is highly correlated to milk income over feed cost (IOFC), and the biggest thing to affect IOFC is pounds of components produced.
At the Miner Institute, 480 Holsteins produce 98 pounds/cow with 1262 pounds of fat and 945 pounds of protein.
Dann showed a Federal Milk Marketing Order graph of the USDA milk price value of fat and protein over the past 10 years. No matter where milk prices are at — the combined pounds of fat and protein should be 7 pounds, or more, for the best return, she said.
“Protein has typically been worth more than fat,” Dann observed. “But the goal is to maximize both (protein and fat) to achieve profitability.”
She noted that this can be done through higher levels of milk production or through lower levels of milk production containing higher pounds of fat and protein.
To calculate, add the fat percentage and the protein percentage and multiply that total percentage to the pounds of milk. The goal is to be in the 7-pound range or higher, and at a minimum to be over 6 pounds total.
“To maximize components, get the diet and the dining experience right,” said Dann, noting that most farms use a nutritionist, so rations are formulated. Where the biggest area of opportunity lies is in the management of that ration – from the forages that are harvested, stored and utilized to the feedout, mixing and delivery of the TMR.
On larger farms with different people doing the feeding, Dann noted the importance of feed management software like TMR tracker.
Waybright talked about feeding to 3% refusals and then incorporating those refusals back into the TMR. Heltzel noted her husband feeds for accuracy to 1% refusals. Being that they milk 2x instead of 3x, the cows use the overnight time as resting time.
Dann talked about a research project at Miner where video cameras captured cow activity overnight when the bunk was purposely left empty. There was a lot of standing around at the bunk waiting for feed, she said.
“We never want to see an empty bunk,” she said. “We looked at what cows do when they don’t have feed. We removed feed and watched them, putting up trail cameras and videos to document. We tend to think if there’s no feed, they’ll go lay down, but what we found is they stand idly and wait for feed.”
During this study, they used different stocking densities to see the consequences of feed access as well.
“Cows running out of feed is bad for everyone, and even worse when cows are overcrowded. When the feed is delivered, if there is less time to access it, this changes their behavior and leads to slug feeding,” said Dann.
These are just some examples of how management of the feeding situation can contribute to low rumen pH that affect milk fat production to create milk fat challenges.
“We want to focus on ration formulation to optimize forage inclusion to maintain rumen health for milk component yields. And, if we think about the steps in the process, have a goal to make the metabolized ration the same as the formulated ration,” Dann explained.
On the forage side, harvesting and storage for a quality fermentation is critical. Also, when it comes to mixing feed for cows, loading ingredients in the right order and the right amounts with the appropriate mixing time and good maintenance of the mixer are important.
Dann noted that pushing up feed within the first hour of delivery helps with sorting.
Preparing the cow for the next lactation with how she is fed in the dry period is also important.
Both Waybright and Heltzel indicated they keep their dry cow rations simple.
“We look to control energy intake for her to have a good appetite after calving, while providing enough metabolizable protein to build her protein reserves as a dry cow,” said Dann, adding that they are big advocates of amino acid balancing for both lactation and dry cow rations.
Dann said the fat is the most variable component in milk. She talked about the composition of milk fat and testing that is available to know the fatty acid composition – whether preformed fatty acids, De Novo fatty acids and the amount of mixed profile fatty acids.
The De Novo fatty acids are made in the mammary gland and formulated through rumen activity. The mixed profile can include De Novo as well as pass-through ingredients from the ration.
“The fiber in the diet, when fermented in the rumen, creates the building blocks of the milk fat,” said Dann, adding that the microbial protein that is part of this process is also a great source of amino acids for the cow on the protein production side.
In a 40-herd study, Miner looked at the components and found high fat herds also had high levels of the De Novo fatty acids – the ones produced in the mammary gland from rumen function. This finding supports the idea that focusing on rumen health maximizes fat and protein production, whereas the amount of time cows spend in low rumen pH can reduce milk fat production and may reduce milk protein production.
The research showed that high De Novo fatty acid herds tend to have managers that are five times more likely to deliver feed twice a day in a freestall environment and 11 times more likely to deliver feed five times a day in tie stalls.
“Fresh feed delivery motivates cows to eat,” said Dann. “The 2x/day feeders vs. 1x/day feeders saw decreased sorting, increased feed intake and milk yield as well as rumination for a healthier rumen. That higher pH translated to more De Novo fatty acids which led to higher fat content in the milk.”
The research also showed that among the 40 herds, the higher fat herds were 10 times more likely to be provided with at least 18-inches of bunk space per cow and 5 times more likely to see stocking densities at 110% or less.
“Overstocking changes feed behavior,” said Dann. “With overcrowding, the cows slug feed and are more aggressive at the bunk, and this decreases rumination, which modifies rumen pH and increases risk of subacute acidosis or time spent in low pH. When we see up to two hours or more a day of low rumen pH, this affects milk yield and components.”
Miner research also has shown that cows will prioritize lying time over eating time. They will sacrifice eating time to compensate for lost resting time. This is why paying attention to the time budgets of cows in milking and holding time is important, as well as keeping feed at the bunk so they are not standing around at the bunk not eating.
“We want them eating or lying down, not standing and waiting,” said Dann.
In short, said Dann, “We want to manage the herd, the cows, to optimize key behaviors that maximize milk components.”
This means implementing cow comfort strategies that enhance rest and rumination, keep feed available 24/7 and lead to consistent feed quality.
Carefully formulated rations plus great forage and feed management plus top notch management of the environment add up to more components – a key to more milk income.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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-
By Sherry Bunting, republished from Farmshine, April 9, 2021
Class III futures gain big, Cl. IV modest, spread widens
CME Class III and IV milk futures made a strong turnaround last week and continued to rally higher this week — especially on the Class III where $19s returned to the board for May through August and new contract highs were set all the way across the board.
The big gains on Class III vs. smaller gains on Class IV widened the Class III / IV spread that is currently averaged to determine the Class I base price, which affects PPDs and de-pooling.
The spread between the 12-month averages expanded to $1.75 over the next 12 months, with May through September contracts showing the potential for a $2 to $4 spread between Class III and IV.
On Wed., April 7, Class III milk futures for the next 12 months averaged $18.43 — up 32 cents from last week and almost $1.00 higher than two weeks ago. (Additional gains were made through Fri., Apr. 9.)
Class IV milk futures for the next 12 months, on the other hand, averaged $16.68 on Wednesday — up just 8 cents from last week and 75 cents higher than two weeks ago
CME cheese, powder higher, whey firm, butter melts off early gain
On the spot dairy product markets via the CME this week, cheese had big gains, powder put on a penny, whey stayed firm at last week’s higher levels, and butter advanced early before erasing the advance at midweek to be a fraction of a penny lower than a week ago.
By Wed., April 7, the 40-lb block cheddar price was pegged at $1.80/lb, up 6 cents from a week ago with 4 loads trading; 500-lb barrel cheddar was at $1.58/lb, up a full dime from a week ago with 3 loads changing hands.
Dry whey on the CME spot market remained firm at last week’s advance, pegged at 66 cents/lb again Wed., Apr. 7 with zero loads changing hands.
Butter gained its way to $1.83 by Tuesday before losing almost 2 pennies Wed., April 7 when 9 loads traded, and the CME spot price was pegged at $1.8150/lb — a fraction of a penny lower than the previous Wednesday’s spot butter price.
Nonfat dry milk gained a penny this week. On Wed., April 7, the spot price for Grade A NFDM was pegged at $1.1925/lb with 2 loads changing hands.
March protein question answered
Last week in this column, the March Class and Component prices announced by USDA last Wed., March 31 were reported, and the protein price at $2.6954/lb — down about 30 cents from February — seemed to be a “head-scratcher” given the fact that all end-product prices were higher, and the Class III, IV and II prices also ended up higher.
Reaching out to USDA questioning whether this was correct or a typo, here’s how a USDA source explained the interaction of the fat and skim as a sort of ‘snubber’ or offset for protein vs. fat when butter gains are larger than cheese gains in value in the wholesale market as reflected by by end-product pricing, with fat and skim yields applied. (There’s a story to this phenomena, stay tuned for another edition explaining the how and why this ‘snubber’ came to be.)
Meanwhile, USDA referred me to this formula for the protein price calculation on page 5 of the monthly Class and Components announcement:
Protein Price = ((Cheese Price – 0.2003) x 1.383) + ((((Cheese Price – 0.2003) x 1.572) – Butterfat Price x 0.9) x 1.17).
The USDA source explained in an email as follows:
“The protein price is a function of both the cheese price and the butter price. If you look at page 5 of the report ‘Announcement of Class and Component Prices’ for March 31, 2021, you will find the formula for the protein price. In that formula, you will note the use of both the cheese price, which is the weighted average of both block and barrels, and the butter price. Please note that the use of the butter price has a negative sign, i.e. as the butter price goes up everything else held the same, the protein price goes down. So, while both the cheese price and butter price went up; the increase in the butter price for March compared with the February price was much larger than the (increase for the) cheese price, so the protein price declined.”
The USDA explanation continues:
“The Class III skim milk price is down in March about 60 cents per cwt ($0.0060 per pound) when compared with February, i.e. using the lower protein price of about 30 cents per pound times 3.1 pounds plus a small increase of about 5 cents in the in the other solids price times 5.9 pounds results in the decline of about 60 cents per cwt ($0.0060) for the Class III skim milk price. The Class IV skim milk price in March is about unchanged, up 1 cent per cwt ($0.0001 per pound) as the nonfat dry milk price was up only $0.0005 per pound.
“Both the Class III and Class IV prices are equal to 96.5 pounds of skim milk times the skim milk price for each class plus 3.5 pounds of butter times the same butterfat price. So, with the Class III skim down 60 cents per cwt ($0.0060 per pound) but the butterfat price up $0.28 per pound. The Class III and Class IV prices both increase. The gain in Class IV was $0.99 per cwt while the Class III price was up 40 cents per cwt.”
USDA reports Feb. All Milk price at $17.10, DMC margin $6.22
February’s All Milk price was announced last week at $17.10 and based on an national average butterfat of 4.10%. This was 40 cents lower than the January All Milk price at the same time that feed costs went higher.
The combined result was a Dairy Margin Coverage (DMC) margin for February announced this week at $6.22/cwt, the lowest since April and May 2020 when at the height of the Coronavirus pandemic shut down, the DMC margin was calculated at $6.03 and $5.37, respectively.
Letter signed by producers, groups, seeking remedy for failed Cl. I formula makes its way to NMPF / IDFA
On Federal Milk Market Order pricing — namely the failed change in how the base Class I price is formulated — National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) are at the table, according to U.S. House Ag Committee Ranking Member G.T. Thompson.
Sources indicate they are discussing various proposals and approaches. Meanwhile grassroots organizations representing dairy producers are continuing their almost weekly group conference calls and seeking a seat at that table.
Farmshine readers are aware that dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, came together in early March to compose a letter to NMPF and IDFA, addressing the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S.
The letter specifically identifies the change in how the Class I base price is calculated, which NMPF and IDFA put forward, Congress passed in the 2018 Farm Bill, and USDA implemented in May 2019. The letter, signed by hundreds of producers and many producer organizations, will be officially sent to NMPF and IDFA by the end of this week (April 9), according to the ADC.
Specifically, the Farm Bill language states that the Class III / IV averaging method + 74 cents – instead of the previous “higher of” method – was to be implemented in 2-year periods. This suggests we are now at the point in time where something can be done to adjust this formula before the next 2-year period of implementation begins.
Meanwhile, dairy economists are being featured in webinars, zoom conferences and other venues to explain and ‘educate’ producers on PPDs, what impacts them, and how other aspects of Federal Milk Marketing Order pricing formulas, rules and provisions all work. All of it has become a hot topic since the new Class I formula implemented May 2019 leaves in its wake over $700 million in NET losses on Class I value, alone over 23 months, and upwards of $3 billion when negative PPDs and depooling are factored in.
While the change assisted in the idea of risk management for milk buyers, it has introduced significant and costly basis risk for milk producers, interfering with producer risk management tools, and has led to staggering net value losses by most dairy producers over 23 months since implementation, also undermining the purpose of the FMMOs with regard to the orderly marketing to assure milk moves to Class I fluid milk use.
Education is good. Solutions are better. Remember, the selling point to Congress for making the Class I formula change from ‘higher of’ to average + 74 cents in the 2018 Farm Bill was that dairy producers would be “held harmless”… Instead, they are being robbed. Stay tuned.
The efforts continue in hopes of addressing and rectifying the hundreds of millions of dollars in Class I value losses to dairy producers (net) over the last 23 months — due to the new Class I pricing method. But the window for a short-term fix is closing fast.
While the overall problem of severely negative PPDs has multiple reasons and resulted in well over $3 billion in milk payment shortfalls across 11 Federal Milk Marketing Orders (FMMOs), the loss attributed solely to the change in Class I pricing method is pegged at $732.8 million, NET, from May 2019 through April 2021, and looks to continue through most of 2021.
That is, unless a change is made – quickly – before the May Class I price is announced in a few weeks.
Farmshine readers are aware that dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, came together in early March to compose a letter to NMPF and IDFA, addressing the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S. The letter specifically identifies the change in how the Class I base price is calculated, which NMPF and IDFA put forward, Congress passed in the 2018 Farm Bill, and USDA implemented in May 2019.
Specifically, the Farm Bill language states that the new Class III / IV averaging method + 74 cents – instead of the previous “higher of” method – was to be implemented in 2-year periods. This suggests we are now at the point in time where it can be amended to tweak the formula before the next 2-year period of implementation begins.
Recall that this change was legislated without hearings, was implemented without a regulatory comment period, and was put through with very little discussion under the auspices of giving processors a way to “manage risk” even as the result has grossly interfered with producer risk management tools.
Considering that this policy has been a complete failure under the stress test of a major event, Congress and USDA should be on notice to fix it before the next 2-year period commences. But time is short.
Producers — through this letter and other efforts — are asking NMPF and IDFA to put their proposals on the table officially for how to remedy this failed change before the next 2-year implementation period begins in just a few weeks.
Discussions among producers and organizations have ensued for weeks now — talking about averaging vs. higher of. In fact, those with greatest firsthand knowledge of the purpose and workings of FMMOs state that the higher of method fulfilled the lawful purpose of the FMMOs, the averaging method does not.
Put simply, the FMMOs are in disarray during this time of market stress that pushed Class III and IV widely apart. A $2 to $10 spread between Class III and IV – along with the new “averaging” method for Class I – have together disrupted the function and purpose of the FMMOs.
NMPF and IDFA told the U.S. Congress that producers would be “held harmless” by the change when it passed in the 2018 Farm Bill. But, in fact, producers have lost hundreds of millions, if not billions, of dollars in value out of their milk checks over 23 months. The averaging method was never “stress-tested.”
NMPF leaders have reportedly referenced the idea of adding $1.63 to the simple average, instead of 74 cents, but this reporter has not seen the proposal put forward as an official ‘ask’ of the USDA Secretary to be part of the next 2-year implementation that begins shortly. Probably NMPF and IDFA will have to agree on this as the Class I pricing change was their agreement in the first place at the time it was passed in the 2018 Farm Bill.
Dairy producers cannot afford to see the drive for a solution stall out until the next Farm Bill. They cannot afford to roll into the next 2-year implementation using the current average + 74 cents formula. Meanwhile, dairy farmers can contact their milk buyers or cooperatives and ask their leaders to encourage NMPF and IDFA leadership to bring the discussion forward for implementation of a short-term solution beginning with the May 2021 Class I price. If this doesn’t happen, producers will be stuck with a failed pricing policy for at least two more years.
The deadline for dairy producers and/or their state, regional and national organizations to sign has been extended again until Mon., April 5, 2021. Visit this link to view and sign electronically through the automated short form.
In the letter, dairy producers ask NMPF and IDFA to work with them for a solution that is a fairer distribution of dairy dollars in the long term, but also want to support a short-term fix, now.
Time is running out for this to happen. Dairy farmers do not have two to three more years to wait for the 2023 Farm Bill as the formula losses add financial burden to their already distressed economic situation. They can’t afford to lose hundreds of millions, if not billions, over the next two years as has been their net loss over the past two years. Look for an update next week.