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

By Sherry Bunting, June 24, 2022

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

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

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

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

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

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

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

Dana Coale, Deputy Administrator, USDA AMS Dairy Programs

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

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

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

Scott Marlow, Deputy administrator usda fsa farm programs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Recorded hearing proceedings available at this link

Written testimony is available at this link


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A life lived in earnest

Tuesday was a day of significance with many shades to it. The much-debated 5-year Farm Bill got its final Congressional approval in Washington; the day was designated by American Cancer Society as World Cancer Awareness Day and Chevy developed its Purple Roads ad and “purple your profile” campaign to raise funds on facebook. Tuesday, Feb. 4, 2014 is also the day the world lost a good and courageous dairy farmer I was glad to call friend. Here are the thoughts I penned for this week’s Farmshine.

Zach Meck pictured here at Meck Brothers Dairy in Berks County, Pennsylvania in August of 2012

Zach Meck pictured here at Meck Brothers Dairy in Berks County, Pennsylvania in August of 2012

Zach Meck fought the fight, kept the faith

Zachary L. Meck, 33, of Womelsdorf, Pa., passed away Tuesday, Feb. 4 after a five-month battle with cancer. In the words of his wife Suzanne (Perdue) Meck, formerly of Whitehall, Md., “Zach saw a full healing as he was peacefully called to his heavenly home.” Over the past few months, she said, the couple felt the prayers and well wishes from around the world, and they were comforted to know so many people care.

In Zach, the world lost a good and courageous young dairyman. 2 Timothy 4:7 is the verse that comes to mind for a life gone too soon, loved by many and lived in earnest. Zach made a lasting impact on not just his family and friends, but also upon the future of the dairy industry he so loved and the solidarity he had with fellow dairymen, as well as the passion he had for the cow herd he and his brother Jeremy built up into a business through sheer determination.

It is not without notice that the next five year Farm Bill passed its final hurdle in the Senate on this same day. Zach had poured time and energy into being part of an effort to shape the future for young dairy farmers within the context of the Farm Bill’s dairy title.

Our paths crossed in 2009 when the dairy industry faced the most devastating milk prices ever endured. Zach and his brother Jeremy had built their Meck Brothers Dairy from scratch. They had started with the 4-H animals their late father Ronald bought them as youngsters growing up on their parents’ poultry farm in Lancaster County, Pa. They grew the herd in a rented barn — working all kinds of other jobs – then purchased and renovated a Berks County, Pa. farm they moved into during 2009.

Zach was not one to sit still. Sometimes it seemed he was going in multiple directions all at once. But his efforts were effective. In 2009, he was part of a group of dairymen meeting in two counties, which later became the grassroots beginnings of the Dairy Policy Action Coalition that spread beyond the borders of Pennsylvania as dairymen from various regions talked together about the future of their industry.

He also served as a Land O’Lakes delegate and ran a close race as runner up for a seat on the Land O’Lakes board in early 2013. Zach was a member of the Berks County Farm Bureau, Marion Grange, and Berks County Holstein Club. He graduated from Cocalico High School, where he was a member of FFA and was active in 4-H.

“We’ve been through a lot over the years,” wrote friend and mentor Nelson Troutman in a calendar-of-hope created for Zach in December. “Then came Suzanne, and when you made up your mind, I could tell. It was good. But with these health issues, try not to make sense of it all, it never will. Remember to always look forward and that you are not alone. Trust in the Lord with all your heart and lean not on your own understanding (Proverbs 3:5).” Wise words he heeded in his short time with his beloved Suzanne.

Having the privilege of writing a story about Meck Brothers Dairy in August of 2012, I could see the respect he and his brother Jeremy had for one another and their passion for what they worked to accomplish – with that edge of always pushing forward to do more to make the cows more comfortable, do more to tell the dairy story to the greater Berks community, do more to get the voice of the young farmer heard, do more to light a fire – even if only to send a smoke signal – that policies need to be changed to consider the context of the young farmer. Zach was impetuous, yet intuitive.

“It’s time to get the younger generation involved in the leadership of their cooperative,” Zach said during a summer of 2012 interview. “Our futures are at stake in the outcome of the decisions that are made. The mechanics of the market should be our focus. We should be looking out for our fellow dairy farmers around us. Large or small, we’re all important. We have to focus on creating opportunities and getting the mechanics of the market right.”

So we come back full circle to that verse, 2 Timothy 4:7: “I have fought the good fight, I have finished the race, I have kept the faith.” Yes, Zach, you surely have.

Born in Denver, Pa., Zach was the son of the late Ronald K. and Joyce (Stoltzfus) Meck. In addition to his wife Suzanne, Zach is survived by his mother Joyce, two brothers Matthew K., husband of Susan (St. Clair) Meck of Denver; Jeremy R. Meck of Womelsdorf; two nephews Jackson K. and Levi C. Meck of Denver; and his paternal grandmother Norma (Zimmerman) Meck of Lititz.

A visitation will be held on Friday, February 7 from 6:00 to 9:00 p.m. and on Saturday, February 8 from 9:00 to 11:00 a.m. at the Tulpehocken UCC Church, where services will be held at 11:00 Saturday.

Memorial contributions in Zach’s memory may be made to the American Cancer Society, P.O. Box 1274, Lebanon, PA 17042 or Vickie’s Angel Foundation, 511 Bridge St., New Cumberland, PA 17070.

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