Empowering dairy farmers: knowledge, tools, ideas shared

By Sherry Bunting, Farmshine, April 2021

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?”

Good question.

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.

Traveling from Michigan to the Lancaster County, Pennsylvania farm of Mike Eby (center) for an ’empowering’ farmers meeting were Joe Arens (left), NDPO board member and Kristine Ranger, a knowledge consultant working with farms. Ranger worked with Eby to secure a grant for the in-person meeting and multi-media production. In addition to serving as NDPO (National Dairy Producers Organization) chairman, Eby is executive director of Organization for Competitive Markets (OCM), represents the south district on the PA Farmers Union board and is a member of the Grassroots PA Dairy Advisory Committee collaborating with 97 Milk education efforts.

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.

“We need to do something to change this,” said Arens. “Get in front of your board members… They are talking about expanding plants, not talking about producer price. Their one and only responsibility is that price on the milk check settlement statement.”

“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.

Gary Genske was the kickoff panelist, presenting virtually from his office in California.

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.

“This is it,” said Bernie Morrissey. “The dairy farmers made me successful, so this is me giving back.” He talked about the whole milk education effort and the push to legalize whole milk choice in schools. If ever there was an example of the opposite of ’empower’, it would be the treatment of whole milk by industry and government, especially since 2008. The steep decline in fluid milk sales from 2010-2018 is starting to stabilize as consumers and policymakers are getting the message. Each step is hard work.

“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.”

With the FMMO map on the screen behind him, Dick Bylsma of NFO talked about the history, purpose and hot FMMO topics of the day. He said the most empowering tool a dairy producer can have is the right to vote on milk order changes, instead of being bloc-voted by the cooperative.

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.

To hear past calls and learn more, click here

To view a video or listen to a recording of the empowerment meeting, click here

Look for more in a future edition of Farmshine.

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Achieving 7 lbs fat/protein has big impact on milk income

In the virtual breakout panel on maximizing components to improve the dairy’s bottom line, during the Pa. Dairy Summit recently, Heather Dann joined Pennsylvania producers Alan Waybright and Jennifer Heltzel. Dann is a research scientist at the William H. Miner Agricultural Research Institute, Chazy, New York.  Photo provided

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.

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Grassroots efforts continue seeking solution to Class I formula change losses

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

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

By Sherry Bunting, Farmshine, May 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IDFA is publicly silent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

— was not vetted through a transparent hearing process,

— disrupted orderly marketing,

— undermined Federal Order purpose,

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

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

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

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

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

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

Covington: Class I change cost producers ‘real money’

Lack of vetting cited as impacts of negative PPDs continue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Market Moos – Apr. 7, 2021

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.

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Time is short for short-term fix of failed Class I pricing change

FMMOs in disarray

By Sherry Bunting, Farmshine, April 2, 2021

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.

A feature in the March 5 edition of Farmshine discussed the letter, the background, and included a copy of the letter, itself.

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.

Check out this primer on understanding milk prices basics and PPD.

Hot topic: Understanding milk pricing basics and PPD

Gratitude to Blimling and Associates for this flow chart illustrating the complexity of USDA milk pricing

By Sherry Bunting, Farmshine, March 26, 2021

I challenge anyone to find a pricing system on anything in the universe as complicated as the pricing of a hundred pounds of milk (See Fig. 1).

The Federal Milk Marketing Order (FMMO) system goes back to the 1930s Ag Marketing Law.  In 2000, changes were made to use end-product pricing formulas for four base commodities – Cheese (block and barrel Cheddar average), Butter, Nonfat dry milk (NDFM) and Dry Whey.

Today, these four commodities trade daily on the spot cash market at the Chicago Mercantile Exchange (CME), where less than 1% of volume, closer to 2% on butter, is sold. Since 2018, this 10-minute daily spot auction is done completely as an electronic auction.

The CME spot market sets the pace for actual sales reported weekly to USDA by around 100 processors. From these weekly-reported prices, a weighted average for each of the four commodities is calculated by USDA. The weighted averages are used in formulas that account for yield and deduct specific “make allowances” (See Table 1) to then calculate Class and Component prices.

But first, these weighted price averages for just the first two weeks of each month are plugged into a multi-step formula to determine an Advanced Skim Pricing Factor for Class III (cheese/whey) and Class IV (butter, NFDM). The adjusted butter price is also used to calculate the Advanced Butterfat Pricing Factor.

Effective May 2019 — as a result of a change agreed to by National Milk Producers Federation and International Dairy Foods Association and then passed by Congress in the 2018 Farm Bill — the 2-week Class III and IV Advanced Skim Pricing Factors are averaged together, plus 74 cents to calculate the Base Skim Price.

Prior to May 2019, the Base Skim Price was simply the “higher of” either the Class III or the Class IV Advanced Skim Pricing Factor.

(Author’s Note #1: The previous ‘higher of’ method was the way the FMMOs could make sure Class I always brought the highest price to fulfill the purpose of the Federal Orders – assuring fresh milk supplies – and to keep other handlers invested in pooling their milk. We can’t lose sight of the fact that the fluid milk sales (Class I) have no market transparency as to their value – at all. In some states there are loss-leader laws or minimum pricing provisions, but in most states, Class I fluid milk sales are treated as a base commodity by large retailers like Walmart and Kroger. They loss-lead the retail consumer price of fluid milk to extreme low levels, even as low as $1 per gallon, to win shoppers. They do this because supermarket data show fresh fluid milk is in over 94% of consumer shopping carts! Because it is treated as a loss-leader in some states, and regulated with minimum pricing in other states, it’s impossible to know the real market value of Class I fluid milk apart from the value of its components in making other products.)

Next, the Base Skim Price is multiplied by a yield factor of 0.965 and the Advanced Butterfat Pricing Factor is multiplied by a yield factor of 3.5 and then added together to become the Base Class I Price. This price, known as the Class I ‘mover,’ is announced before the 23rd of each month but is used in the following month.

The various location differentials throughout the 11 FMMOs are next added to this Base Class I Price.

Whew! Now back to those weekly-reported commodity prices, yield factors and make allowances… Announced around the 5th of the next month, the other class prices are a function of the component values based on average weekly prices for the four commodities for four weeks: Component Value = Yield x (Commodity Price – Make Allowance).

In Multiple Component Pricing FMMOs like the Northeast (FMMO 1) and Mideast (FMMO 33), a Statistical Uniform Price (SUP) is calculated from these Class and Component prices according to how the milk in the FMMO was utilized. The SUP is announced around the 11th of the next month before settlement checks are paid for the previous month’s milk.

(Author’s Note#2: Another wrinkle… did you know that an uptrending cheese and butter price can leave producers with a lower protein price? It happened in March 2021. Every end-product — butter, cheddar, nonfat dry milk and dry whey — was higher in March than February, and Class III, IV and II pricing were also higher, but the uptrending butterfat portion of the cheese price creates a ‘snubbing’ effect on the ability of protein to rise within the skim portion. Yes, it’s complicated, and the answer from USDA is a story of its own in the future.)

The FMMO SUPs are based on a 3.5% Butterfat test, but the FMMOs also report for information purposes a uniform price based on the average actual fat test. Your price will differ in your milk check based on your fat, protein, and other factors. In general, producing protein and butterfat above the statistical level nets a higher price, under normal conditions. Lately this has not held out because of negative PPDs.

What are PPDs? Along with the SUP, the FMMO calculates a Producer Price Differential (PPD). This shows how money remaining in the producer settlement fund is divided across the qualified hundredweights of milk, after all components are paid. Sometimes this is a negative number, meaning there was not enough money in the producer settlement fund to pay all of the actual component value after the location differentials on Class I were paid. A negative PPD represents spreading the shortfall across qualified milk in the pool. Severely negative PPDs represent unpaid component value.

The PPD is calculated by subtracting the Class III price from the average of all classes together: PPD = SUP – Class III. In the Northeast and Mideast FMMOs, this PPD has typically been a positive number but has been shrinking in recent years and has been negative for 13 of the past 23 months.

Negative PPDs happen for any or all of four main reasons:

1) When a rapid rise in commodity price(s) is not captured in the 2-week Advanced Pricing Factors.

2) When Class II and IV are far below Class III.

3) When Class I price falls below Class III because of the new averaging method when the spread between III and IV is greater than $1.48/cwt. Half of the months from May 2019 through December 2020 had a lower Class I Base price under the new method, representing a net loss of over $700 million on Class I pounds across all FMMOs. (See Table 2)

4) When handlers de-pool Class III milk because it is higher — to avoid paying into the pool.

Only Class I handlers are required to pool all of their milk. Other handlers can choose what non-Class I milk to pool or not pool based on what is financially advantageous. De-pooling is more likely when multiple months have negative PPDs because of wait times to re-qualify milk for the pool. Some FMMO pool-qualifying requirements are more stringent than others, and the rules have been loosening in recent years because handlers say they need more flexibility to meet fluctuating fluid milk needs.

Occasionally, when cooperatives or plants de-pool Class III milk, some will pass the higher value they withheld from the pool directly to their own producers. In most cases, however, this did not happen in 2020. Additionally, the severity of negative PPDs across FMMOs varied and this created a wide range of milk check pricing of $8 to $10 from top to bottom, when normally this range is $2 to $3, maybe $4. USDA relates that the value is still in the marketplace, so even when the PPD goes negative, some of that value is attributed to the All Milk price used in Dairy Margin Coverage margins because the value is in the market even if it is not in the “pool.”

In addition, for Pennsylvania dairy producers, all Class I milk from Pennsylvania farms that is bottled in Pennsylvania and sold in Pennsylvania stores receives the Pa. Milk Marketing Board (PMMB) over-order premium, which currently stands at $1.00/cwt. Processors can reduce this obligation by selling and sourcing milk from in and out of state as well as other methods.

Cooperatives are producers under the Pennsylvania law, so they collectively receive this premium also, where applicable, and have the ability to disburse the premium to members as they see fit.

Every farm’s mailbox price is further affected by premiums, such as quality bonuses, and deductions, such as trucking cost and marketing fees, which all vary across cooperatives and milk buyers.

This ‘primer’ just scratches the surface of current milk pricing issues. A related topic affecting many producers since May 2019 is how the new Class I pricing method, and the negative PPDs and depooling that can result when Class III and IV are so divergent, affect the way price risk management tools work, creating additional losses in many cases.

(Author’s Note #3: This article has been updated since it was previously published in R&J Dairy Consulting’s customer newsletter.)

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

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

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

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

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

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

The deadline to sign is March 12, 2021.

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

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

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

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

A photo example of the electronic form appears below.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pandemic economics, concerns on the radar, and valuable business insights shared as Dr. Kohl kicks off PA Dairy Summit

Dr. Kohl covered the gamut of what’s on his dairy and agriculture radar at home and abroad. Then he encouraged producers to separate the controllables from the uncontrollables to focus on the business. One tool he highlighted evaluates business management IQ using 15 critical questions for crucial conversations because it gets people thinking.

China, fake meat and dairy, propaganda seeking to eliminate the dairy cow, and much more concern him. But Dr. Kohl encourages farmers to seek opportunities, be flexible, innovative and adaptive, and to follow a process for their business and sharpen their business focus. Be sure to check out the navigation points on Dr. Kohl’s compass at the end of this article.

By Sherry Bunting

HARRISBURG, Pa. – The disruptions and challenges of the past year also create opportunities, said Dr. David Kohl, Virginia Tech professor emeritus and co-owner of Homestead Creamery for the past 20 years.

He was the keynote speaker kicking off the 2021 Pennsylvania Dairy Summit held virtually this week through an online convention format that had much of the signature Summit feel.

In his characteristic style, Dr. Kohl stepped the virtual audience through a broad global and domestic view of events and evolution down to the impacts at the dairy farm level with motivational thoughts on how to navigate.

He urged farmers to navigate rocky roads of change by adopting two key management elements. First, be flexible, innovative and adaptable. Second, follow a process for the business with a business focus.

Kohl also encouraged producers to manage around the things they can’t control like election results, pandemics and the strategies of China’s Xi Jinping.

 “A good marketing and risk management plan is critical. In this environment, we have to separate the controllables and uncontrollables… and look for the opportunities,” he said.

As he has in past seminars since the pandemic, Kohl highlighted the ‘buy local’ movement is picking up steam post-Covid. “Many of you are in that footprint. One-third of the U.S. population is in your area, so this movement might be sustainable,” he said.

That’s good news. The bad news is the acceleration of economic divide, said Kohl. He sees this affecting agriculture, other businesses and households, which will add to the economic volatility and extremes in the big three: milk prices, feed costs and interest rates.

Market supercycle

“We are in another supercycle that is really impacting the grain sector,” said Kohl. He cited the stimulus checks as “dangerous one-off income” leading to printing more money, which devalues the dollar. This fuels more exports, especially when coupled with the ‘China-effect’ as they rebuild their protein sector and livestock industry.

This, along with weather concerns in South America and investor speculation have “shot those grain prices higher, especially on corn, beans, and we see it in cotton, all up.”

He sees this grain market supercycle abating through 2021 and 2022. The grain price rally is not sustainable, in his view, unless weather problems in South America persist and unless weather affects North American crops this coming season.

Globalization

Kohl noted that globalization started six decades ago, and he marked 1995 through 2015 as the period of “hyper-globalization, but in recent years, we’ve moved away from this. Dairy is right in the crosshairs of this shift because exports have become a much bigger share of milk production,” he said. “If de-globalization continues, this will impact agriculture in the U.S.”

He warned that the dairy industry would be well advised to not shape itself with China’s market in mind.

“Don’t bet your dairy expansion on trade with China,” said Kohl. He gave the example that 300 million people in China were without power a month ago because China would not allow Australian coal in to fuel plants.

Kohl observes that while the U.S. and Europe are bickering about everything, China has been pursuing world power. China has invested a trillion dollars in 68 countries – the agriculture ‘hot-spots’ around the world.

“Their initiatives will impact our competitiveness,” said Kohl, noting that China is also moving ahead on building a world supply chain for vaccines made at sites they have cultivated in developing countries.

“China could be the leading power by 2040, even 2027. They are going to move forward very fast if we don’t get our act together,” he said, explaining the recent “regional” trade pact China made that makes China the central focus in Asia.

Market Concentration

The flipside of globalization is the domestic U.S. food supply and marketing chain.

“That’s our Achilles heel,” said Kohl. “We have too much concentration with too few firms, and I’m being very blunt about this. We saw what happened when plants shut down. Now we see more nations saying they want to become more self-reliant. This is something to watch closely over the next five years.”

Kohl said the industries that are linked to dairy are in 50 to 75% recovery while at the same time Amazon, Walmart, Target are operating at 125%.

“They are getting too much power here in the U.S. and around the world,” he said, noting that on one hand the buy-local movement is accelerating, but on the other hand, the pandemic environment has moved even more market power to these large global entities.

Expressing agricultural ‘serfdom’ concerns, Kohl responded to a question about China purchasing agricultural land and assets in the U.S. This also hit upon the recent news in business journals that Microsoft founder Bill Gates has been buying up farmland and is now the single largest owner of U.S. farmland (not total land but good arable farmland).

“I am worried about this one,” said Kohl. “Some of this big investment money creates serfdom. We need to do some due diligence, and we don’t have enough political forces looking at this. Canada put the kabash on China buying their land.” He noted that his research shows the land purchased by Gates through Cascade Investments is fertile land next to rivers and near international ports, as well as land with mineral rights.

’They want to eliminate the dairy cow’

Kohl’s Summit keynote discussion came the morning after the Super Bowl. And yes, he noticed the Oatly (oat beverage) ad that ran before halftime.

“Did you see the guy last night singing in the field talking about eliminating the dairy cow?” he asked, quoting other CEOs of brands like Beyond Meat also stating their goals to replace cows entirely.

On fake dairy and meat alternatives, Kohl was emphatic about how closely this needs to be watched.

“They’ve got the money. They’ve got the power. And they think they are saving the environment,” he said, explaining that these products are going to become more competitive with real dairy and meat as large investors and large companies in the traditional dairy and meat supply chain ecosystem get involved to drive the alternative product prices down and change the packaging. He gave the example that Beyond Meat is already closing that gap at $6.79 to $6.99 per pound compared with ground beef at $5.49 per pound.

“They are coming after traditional agriculture. That much is loud and clear,” said Kohl. “Big Ag has to look themselves in the face — that they allowed this to happen — with too much market power. This is me speaking, and I’m being blunt.”

During the chat session that followed, Kohl noted that even their Homestead Creamery based in Blacksburg, Virginia is seeing competition from non-dairy alternatives where they sell their fresh local dairy products.

“It is interesting that we are getting more questions on the non-meat and non-dairy products out there. Our customers are asking our sales team,” said Kohl. “We try to go into it with more education, and we are going A2A2 as a differentiator for our milk and ice cream.”

Minimum wage impact

Current legislation being considered in Congress includes a four-year phase-in to raise the minimum wage to $15 per hour. That’s more than double the current federal minimum wage.

“This will be bad for small business. The big guys can handle it,” Kohl observes. “This creates more business consolidation. We’re seeing a little push back on this now, but there needs to be a lot of push back. America was built on small business and entrepreneurs. We don’t want to create a serfdom where we just work for big business.”

Stimulus, taxes, regulation

With $2 billion a day in stimulus checks being written by governments worldwide, Kohl said this ‘black swan (pandemic event) can turn into an angry bird.

When government writes check, what comes next is encroachment, said Kohl. He sees federal, state and local taxes increasing and “regulators are going to have more swagger. This makes it imperative, to surround the farm business with your best advisors and have a good tax accountant who understands agriculture.”

Regulations in the environmental, labor, banking and financial service sectors are likely to increase, said Kohl. “Regulators have a lot of pent up energy from the past four to five years, and they’ll likely be coming out with a full-court press.”

Energy independence

Noting that the U.S. had its longest economic expansion until February of last year (pandemic), Kohl said a key reason is that the U.S. became the number-one energy-supplier in the world.

The effort to become energy independent began after the tragic attack of 9-11 in 2001. Today, the U.S. is number one energy producer, Canada is number four and Mexico is number eight. This means three of the top 10 energy producers are in North America.

“Now we are seeing a rollback of this playing right into the hands of Opec,” said Kohl, noting that the advertising and policy points about moving to electric vehicles can all sound good. “But we’re not thinking of the unintended consequences, where 74% of the components (for EV vehicles) are produced in China.”

How energy plays out policy-wise is important for agriculture, according to Kohl, because “$8 out of every $10 we spend is linked to energy.”

Kohl sees a “fine balance” to be had on sustainability and climate action.

“Some things we are doing for water, air and soil health are important, but there are contributors other than fossil fuels. I see a need to think about unintended consequences. If components for new sources come all out of China, and we get locked down, that creates a problem. Also, a lot of people seem to forget: when gas goes to $5 to $7 per gallon, it shuts a consumer and a farm down very quickly.”

Navigation points on Dr. Kohl’s compass:

— Surround yourself with good advisors and a good tax accountant.

— Be careful with one-off income from government support. Are you using that money to build efficiencies or pay down debt? Don’t make long-term expansion decisions based on this one-off income.

— Watch the value of the U.S. dollar relative to other currencies, but land value should hold.

— Expect to see acceleration of ‘carbon payments’ replacing direct farm program payments.

— Keep the non-dairy and meat alternatives on the radar screen, especially if you are involved in dairy leadership.

— Healthy soil, water and air quality are important focuses as agriculture deals with weather extremes.

— See the positives that have come out of the pandemic: farms labeled essential, local food movement acceleration, time with family, time to re-evaluate priorities.

— Be flexible, innovative and adaptive.

— Have a risk management plan and realize you are going to leave money on the table when you follow a plan that works for you 8 out of 10 years.

— Keep working capital available as your shock absorber and so you will be ready for emergent circumstances and unexpected opportunities. The recommended ‘war chest’ is to have greater than 25% of the farm’s expenses (not including interest and depreciation) as working capital reserve.

— Have a written farm budget and compare periodically (monthly) to actual expenses.

— Have a separate family living budget and compare periodically to actual expenses.

— Use advisory teams. They are the fastest growing trend, and they work.

— Be proactive on a plan to transition the business and to merge older and younger views of the future.

— Evaluate your business management IQ with 15 questions to ask yourself about your business and have each member of the family in management fill it out separately. This is a great way to measure business management progress, “and it gets you to think,” said Kohl. (See chart.)

— Do your baseline cash flow projections for the farm business, but also do financial sensitivity analysis. Work through the numbers in a best-case scenario to the aspiring goals of the business, but also run worst case scenarios. Look at the analysis if interest rates go up 1 to 2% — or with changes in the input and output values — to see how those changes affect the bottom line. “This gives you the parameters to keep you out of the ditches as you move forward,” said Kohl. “If those values experience extreme change, you can fall back on that working capital reserve.”

— Monitor those cash flows monthly against projections.

— Work with ag lenders to lock in interest rates where you can.

— Re-examine your vision and your goals and make sure expansion or investments line up with these goals; keep your working capital cushion. 

— Look for your “three’s” – 3 things you want to continue, 3 things you want to improve. When isolating goals and actions, limit to three to intensify your focus.

Published in Farmshine, February 12, 2021

Grassroots dairy meet with Rep. Thompson, a champion for Ag; Dietary Guidelines, whole milk in schools top the agenda

Congressman G.T. Thompson (center) is flanked on left by Dale Hoffman of Potter County and Sherry Bunting of Lancaster County and on his right by Bernie Morrissey of Berks County, Krista Byler of Crawford County and Nelson Troutman of Berks County. The Grassroots PA Dairy Advisory Committee involved in the 97 Milk effort met with Rep. Thompson this week on dairy issues.

By Sherry Bunting, Farmshine, October 30, 2020

BELLEFONTE, Pa. — From the Dietary Guidelines and whole milk choice in schools to dairy checkoff and milk pricing formula concerns, five members of the Grassroots PA Dairy Advisory Committee involved in the 97 Milk effort from across northwestern, northern tier and southeast Pennsylvania met with U.S. Congressman Glenn “G.T.” Thompson (R-15th) in Bellefonte, Pa. this week to talk about dairy.

Rep. Thompson helped lead the writing of a letter signed by 53 members of the U.S. House, including Ag Committee Chairman Collin Peterson (D-Minn.) and Ranking Member Mike Conaway (R-Texas) to Secretary of Agriculture Sonny Perdue asking for a delay on the decision about final Dietary Guidelines for Americans (DGAs) for 2020-25 until all of the science on saturated fat is considered.

Despite the bipartisan letter, Thompson indicated that USDA and Health and Human Services (HHS) will move ahead to finalize the guidelines by the end of the year.

Thompson shared his thoughts about the disconnect between the legislative branch and a bureaucratically appointed DGA Committee in formulating the DGAs which have so much impact on children and Pennsylvania’s rural economy.

With the election next week in the balance, Thompson said he is looking at introducing language that would give the legislative branch some role in advise and consent with regard to the DGAs. He also praised his colleagues from Pennsylvania as many have cosponsored the Whole Milk for Healthy Kids Act and the Give Milk Act. These bills would allow whole milk as an option at school and in the WIC program.

Under the current House leadership, the bill on school milk is not moving as it has not been taken up by the chair of the Committee on Education and Labor.

“As you know, our office made recommendations for members of the DGA Committee, but that didn’t happen,” said Thompson. “It’s hard to believe that the modern-day science is being ignored on this issue of whole milk. We need checks and balances, not only to serve the needs of children in school, to give them this choice, but also because of the damage these rules do to our rural economy.”

It goes without saying that if the Republicans are able to gain a majority in the House, there would be a better pathway to moving on some of these issues surrounding the way whole milk (and even 2% milk for that matter) are banned from school choices while other less nutritional beverages are offered unchecked. With Democrats in the majority for the past three years, there has been no movement on the bills.

Grassroots PA Dairy Advisory Committee member Krista Byler of Spartansburg, Crawford County, reported to the Congressman that while the beverages offered ala carte at school are calorie controlled per serving, there are no limits on how many of these beverages a student can purchase. At the middle and high school level, sports drinks, diet tea coolers, diet soda, and energy drinks are all allowed.

“But students can’t purchase even one serving of whole milk,” she said. “They simply aren’t allowed.”

“We need to get back to where milk is not tied to the school meal calculation and let it stand alone, and give students the choice,” said Thompson.

Byler serves as head chef and foodservice director for Union City School District, and her husband Gabe operates a 125-cow dairy farm with his father and brother, along with beef cattle and grain crops.

She explained that schools are afraid to move outside of the USDA edicts based on the Dietary Guidelines because of financial repercussions, and it’s difficult to get others to see the issue because so many people are generally unaware that children are limited to only fat-free and 1% low-fat milk options at school.

Five members of the Grassroots PA Dairy Advisory Committee from around the state talked about dairy issues with Congressman Thomspon, especially the Dietary Guidelines and getting whole milk choice in schools.

The group discussed ideas for how to obtain waivers from USDA to do a statewide trial where schools could simply offer all fat levels of milk and collect the data. One such trial, done quietly in Pennsylvania during the 2019-20 school year, revealed that when students at the middle and high school level were given the choice, they chose whole milk 3 to 1 over low-fat. At the same time total milk consumption rose by 65%, and the volume of milk discarded daily by students declined by 95%.

“That’s huge,” said Byler, a constituent of the Congressman. “We don’t need to reinvent a new ‘kids milk,’ we already have one that students will choose if given the opportunity.”

Thompson agreed, stating that, “Now is the time to look at something like this because what have families been turning to in this pandemic? Whole milk,” he said.

This is supported by the most recent USDA data through June showing that both whole milk and 2% milk sales made big gains in June as supply chains worked through the early Covid issues – pushing total fluid milk sales up 2.2% over year ago year-to-date January through June with whole and 2% unflavored white milk together accounting for more than 70% of all fluid milk sales categories, and whole milk alone being the largest selling category.

“Whole milk is what families are seeking when the choice is up to them,” said Thompson, indicating that while consumers are seeing the science on whole milk, the DGA committee is not.

“All of the doctors interviewed on news programs during this pandemic are talking about Vitamin D as boosting the immune system,” said Bernie Morrissey of the Grassroots PA Dairy Advisory Committee.

Thompson observed that with Vitamin D and other nutrients being fat soluble, the DGAs are missing the boat.

Morrissey and Troutman are working with businesses and organizations buying and distributing “Vote Whole Milk School Lunch Choice, Citizens for Immune Boosting Nutrition – 97milk.com” yard signs that are proliferating across the countryside. A link at the 97 Milk website lets citizens know how to get involved, and a second link provides information to get involved in delaying the 2020-25 Dietary Guidelines until all the science is considered on saturated fat.

Concerns about the transparency and accountability of the dairy checkoff program were also discussed, and Thompson was receptive to looking at ways to turn this around.

The Grassroots PA Dairy Advisory Committee suggested ending the influence of importers by ending the import checkoff of 7.5 cents per hundredweight equivalent. This seemed like a good idea when it was implemented in 2007, but in retrospect has set the globalization direction of the national dairy checkoff’s unified marketing plan and ended the practice of promoting Real Seal, made in the U.S. products.

The committee was also looking at the promotion order asking the Secretary of Agriculture, who can amend the order at any time, or to work legislatively to clarify producer rights under the law in where their ‘local’ dime portion of the checkoff is assigned for education and promotion.

Nelson Troutman, a dairy farmer in Richland, Berks County, who started the Drink Whole Milk 97% Fat Free ‘baleboards’ noted that the corn and soybean growers have periodic review of their checkoff programs, and asked if there is a way for dairy farmers paying the mandatory checkoff to have more say on whether it should continue, or more transparency to see all of the expenditures and the plans submitted by DMI to USDA.

The Committee also suggested evaluating the way the boards are formed and even noted that the language of the order suggests the Secretary can call for a referendum even without a petition by 10% of the producers and importers. 

They noted that fresh fluid milk and other fresh dairy products are a critical market for Pennsylvania producers, but the emphasis of the industry appears to be moving in a different direction. Education, promotion and research are important, but the current direction of the national drivers is in question.  

Dale Hoffman of Hoffman Farms, Shinglehouse, Potter County and Troutman both shared the economic conditions in milk pricing and marketing of milk, especially the extreme difference between high protein value and CME cheese markets since June compared with what dairy farmers in the Northeast are actually seeing in their milk checks as negative PPDs subtract the value of their milk components.

In fact, the official Dairy Margin coverage margin for Pennsylvania is running $1 to $3 behind the U.S. average for June through September, when normally Pennsylvania runs with the U.S. average or 20 to 50 cents above it. The divergence makes it hard for producers to use risk management tools and have them function as intended.

Hoffman noted that producers have lost their ability to market their milk competitively in the region – especially in the north and west of the state — and their voice in how milk is priced is lacking. He observed that even Farm Bureau is recognizing this issue with some new recommendations.

Thompson welcomed the idea for a national hearing on milk pricing, especially as the next Farm Bill is not far off, and these issues need to be on the table early.

But first, there’s an election to get past. It is hoped that after November 3, these issues can be looked at. This has certainly been a difficult year on many fronts for all Americans, and the Grassroots PA Dairy Advisory Committee was grateful to speak with the Congressman about their concerns.

Dale and Carol Hoffman of Hoffman Farms took “Vote Whole Milk” yard signs home to Potter County.

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