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

By Sherry Bunting, Farmshine, April 30, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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-

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.

Ghost of milk payments past invoked as intimidating letters seek money from farmers for big bottler’s bankrupt estate: Don’t pay. Don’t panic. Don’t sign anything. Sit tight. Gather records.

BREAKING NEWS UPDATES 4:00 – 9:00 p.m. Dec 2: Updates after the essential background article below, appear in separate articles here and here.

USDA is forwarding inquiries about ‘preference action’ letters to DOJ. In PA, the Attorney General’s office is involved.

By Sherry Bunting for Farmshine

Disclaimer: I am not a lawyer, and this is not legal advice, but researched information based on many people working on the issue. This is a ‘what we know now’ pre-press preview of a rapidly evolving story, check Friday’s Farmshine and this link for updates, including information about a conference call for dairy farmers in Pennsylvania and open to affecte producers outside of PA (call details here); other states also mobilizing!

BROWNSTOWN, Pa. —  Notices of Intended Litigation and Settlement Offers have been received by dairy farmers last week from ASK LLP, a law firm in St. Paul, Minn., seeking payment to the Dean Foods Company Estate under what is known as preference action recovery or trustee avoidance claims covering payments to dairy farmers for raw milk (and co-ops for ingredients) from August 14 to November 12, 2019 — the 90 days prior to Dean’s Nov. 12, 2019 filing for Chapter 11 bankruptcy protection and sale.

We have confirmed these predatory letters have been received by Dean Dairy Direct producers in numerous states – including Pennsylvania, Ohio, New York, Kentucky, Tennessee and assuredly others — on the day before and after Thanksgiving. These letters contain a record of payment transactions (on the Federal Order specified dates), list a total claim amount the farmer will be sued for, and a settlement offer at about 15 to 20% of that amount due December 19 or 24, 2020 (depending on the date of the letter).

Under Southern Foods Group LLC, case number 19-36313 in the bankruptcy court of Houston, Texas, with Judge David R. Jones presiding, the Dean Chapter 11 reorganization is headed to an omnibus hearing scheduled for Dec. 11, 2020 and disclosure hearing Jan. 11, 2021. Debtor filed its Plan of Reorganization as file number 3230 today, Nov. 30, on the docket at https://dm.epiq11.com/case/dnf/info

If you are a dairy farmer who received a ‘demand package’ from ASK LLP representing the Dean Foods Company Estate, don’t ignore the letter, but don’t panic, don’t pay anything, don’t sign anything, sit tight for a bit, get prepared, and know many trustworthy, well-situated people are working on this.

The letters and legal packets are an intimidating threat to see what ‘other people’s money’ the law firm can shake loose for the Dean Foods Estate after the fire sale in which the bulk of assets were sold to Dairy Farmers of America (DFA). For its part, DFA as the new owner of the bulk of Dean’s plants issued a statement that it does not control Dean’s decisions on their bankruptcy and did not participate in this decision.

The letters do mention two potential defenses in a separate “additional instructions” piece, urging producers to “make a copy of this letter and all enclosures to send to your attorney should you choose to defend this matter rather than settle and return the payments.”

The instructions go on to state: “Under certain circumstances you may have a defense warranting settlement of this action at less than the settlement offer extended. We will be happy to consider your defense and ‘explore’ settlement.”

Even in that statement the ‘instructions’ intimidate the dairy farmer receiving it to feel they might have some financial obligation to the Dean Estate (absurd).

Please know that as dairy farmers, you have produced milk that was paid for according to federal and state milk marketing laws, that provided nourishment to families and that has enabled the Dean Foods Company to continue to operate until it was sold.

What’s happening and what dairy farmers should know:

First. Know that you are not alone and stay tuned. A range of emotions and reactions are no doubt happening on receipt of these letters.

Second. Don’t panic, don’t pay, don’t sign, and hold off in hiring an attorney. If you already have a trusted attorney advisor, talk to them, but these letters are concerning from a collective perspective. They name individual farms as defendants and demand a refund of a portion of what they were paid for milk they produced and shipped to Dean, that was bottled by Dean and sold by Dean in the 90 days BEFORE Dean filed for bankruptcy protection.

The situation may ultimately require farms to individually hire a bankruptcy attorney to assert a defense and prove qualification for exemption. But, well-situated sources indicate that it is also possible that collective group action could occur. More answers are needed by authorities and interested parties.

Yes, this preference recovery action is a loophole in bankruptcy law with farms caught in the shakedown net cast by the law firm working for the Dean Estate. There are concerning aspects based on how dairy farms are paid via federal and state laws that preclude the normal business activities of “invoicing.”

In Pennsylvania, the Pa. Milk Marketing Board is looking into this, and the State Attorney General’s office is aware of these letters. Dairy farmers selling milk to a dairy processor and being paid per federal/state regulations is ordinary course of business.

Third. Sit tight but use this time to be prepared by gathering milk statements for the past 15 to 18 months. Many trustworthy and reputable people are working on this issue affecting hundreds of independent dairy farms, and entities to which portions of their milk checks were assigned.

Sources indicate regional cooperatives may have received such letters for raw milk sales, though none have confirmed this. USDA has not confirmed nor denied whether market administrators received similar letters regarding producer settlement fund payments in the pre-bankruptcy period.

One regional cooperative executive has confirmed receiving a letter six weeks ago in relation to ingredient sales during the 90-day pre-bankruptcy time-period and indicates other regional co-ops have as well. They have not agreed to nor negotiated any settlement, but they provided their volumes and documentation of these sales to the soliciting law firm through their bankruptcy attorneys — and are monitoring the situation.

Dairy farmers can do the same.

  1. Absolutely don’t pay or sign anything right now.
  2. Start gathering deposit records for the 3-month period (Aug 14 – Nov 12, 2019) plus the 15 months before that as stated in the letter’s instructions about potential defense assertions.
  3. Don’t worry about putting any of this information into the requested spreadsheet or other formats mentioned in the letter, just get these items together for now.
  4. The Pennsylvania Attorney General’s office is aware of these letters. Producers in other states could look at involving the offices of their Secretaries of Agriculture and/or Attorneys General.
  5. The ordinary course of business affirmative defense means that the vast majority of farmers most likely will owe nothing, and people are working on how to get producers to that point in the most efficient way possible.

Fourth. Know that USDA AMS Dairy Programs has been contacted and is looking into the matter. Know that every one of the Federal Milk Marketing Order websites shows the strict dates and procedures concerning payment for milk. Dean Foods – or Southern Foods Group LLC as it is named covering all holdings in the bankruptcy case #19-36313 – could not have operated nor could it have been sold to yield any funds for the estate had the farmers not been paid for the milk sold.

Fifth. Know that in Pennsylvania, the Pa. Milk Marketing Board (PMMB) became involved immediately. The board and staff started their day Monday morning with a joint meeting on this issue that was brought to their attention over the weekend. Know that they have begun a conversation with Pennsylvania’s State Attorney General who is looking into this and is already familiar with some of the elements having been involved in getting final payments arranged using the mandatory bond insurance Pennsylvania requires all licensed milk dealers to carry. Know that in Pennsylvania, milk plants follow state payment and bonding regulations in addition to federal orders. Know that there are seven Dean Foods plants regulated by PMMB because they receive milk produced on Pennsylvania farms, and four of these plants are located in Pennsylvania.

Know that producers outside of Pennsylvania can band together and through their state dairy organizations or Secretaries of Agriculture – ask their State Attorneys General to look at this.

Sixth. Know that other well-situated people are looking into a way for all affected producers to fight this together instead of each farm going it alone and having the expense of hiring legal counsel with bankruptcy experience to “assert” their defense in writing to the law firm ASK LLP (aka Ebenezer Scrooge).

Seventh. Know that answers to various questions and concerns are being sought. More will be learned in the coming days, and the situation is one that is rapidly evolving.

Eighth. Know that ASK LLP should know better. The Dean estate trustee should already know that these dairy farmer critical vendor payments are not “preferential” payments warranting trustee avoidance claims. Not only should they know the critical vendors of Dean Foods — since the bankruptcy judge issued orders that dairy farmers be paid as critical vendors during the proceedings so Dean could operate and be sold – they should know that Judge David R. Jones in hearings on several occasions stated his big concern that school children would continue to receive their milk and dairy farmers would continue to be paid during the bankruptcy proceedings.

ASK LLP should know that the very charts they included in their ‘demand packages’ — showing all transfers from Dean plants to individual ‘defendant’ dairy farmers — are made on the precise same dates twice a month as is the regulation for milk payments under Federal Orders.

Ninth. Know that Bankruptcy Judge David R. Jones’ office in Houston, Texas has been notified of the ‘demand packages’ sent to dairy farmers for the pre-petition period. Several high-profile members of the U.S. House and Senate Agriculture Committees have also been notified.

BACKGROUND: The letters descended on dairy farms the day before and after Thanksgiving with due dates of December 19 or December 24.  No, these were not Happy Thanksgiving and Merry Christmas John and Jane Q Dairy Farmer, these were thinly veiled attempts at blackmail – demands to pay Dean Foods Company Estate a portion of milk checks from August 14 through November 12, 2019 in order to avoid being sued for much larger sums of money.

Ebenezer Scrooge (ASK LLP) conjured up the ghost of Dean Bankruptcy Past to insinuate that monetary transfers from Dean to dairy farmers — or their assigns — in return for milk they received, processed and sold, were ‘preferential’ resulting in what are called Trustee Avoidance claims by the law firm purported to represent Southern Foods Group LLC the conglomerate name for the bankruptcy and sale of Dean and all of its holdings.

A Trustee Avoidance claim – the legal action that the letters state will occur after the due date for payment of the settlement offer – indicate that such payments to farms could have been ‘preferential’ to avoid the bankruptcy trustee making sure all creditors are treated fairly. In layman’s terms, the claim is that a defendant farmer’s payment for milk pre-bankruptcy could have been a ‘better deal’ than the ‘trustee’ would have divvied out.

Wrong. Federal and state law set forth dates and formulas for milk payments as a requirement for milk companies to operate. That money has already been spent by dairy farmers keeping cows fed and keeping lights on at farms already beleaguered by five years of marginal and below breakeven prices. No windfall there.

Sure, the intimidating packet shows ways a recipient can assert their defense – through hiring a bankruptcy attorney. They can show invoices for those three months – and the 15 months before that – to show “ordinary course of business.” They can assert their defense with milk check statements the scrooge law firm says must be supplied in Excel spreadsheets requiring certain types of entries and documentation. Or they can just pay the settlement offer at a reduced rate to avoid legal action commencing the week after the due date.

Did I mention the due dates are December 19 for some; December 24 for others?

Did I mention farmers have 21 days from the date of the letter to sign and pay the ‘settlement offers’ with checks payable to Dean Foods Company or risk – says the letter – paying amounts 5 to 6 times higher?

Yes. This is what intimidation looks like, a shakedown to see what they can get away with, what money can be extorted, to improve their cut on the deal by threatening hard-working, nose-to-the-grindstone dairy farmers with big numbers, big words, and big assumptions.

They know better, and if they don’t, they should.

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New Cl. I milk price formula puts $403 mil. in processor pockets since May 2019, $436 mil. ‘pulled’ from ‘pools’ in May-Oct 2020 period

By Sherry Bunting, Farmshine, October 9, 2020

BROWNSTOWN, Pa. — The bottom line is the Federal Milk Marketing Orders are not functioning as farm-level pricing can be easily manipulated.

Negative PPDs continue to persist, and all indications are this could be the case through yearend. Several stories in Farmshine since May have covered the Producer Price Differential (PPD) situation and what it means to producer milk checks.

Now, even the American Farm Bureau Federation (AFBF) is on record evaluating the fallout from the new way of calculating the Class I advance base price as implemented May 2019 after passage of the change was made part of the 2018 Farm Bill.

In terms of the money subtracted from Federal Milk Marketing Order (FMMO) pools, Farmshine first reported the $1.48 billion in FMMO revenue gap across 7 of the 11 FMMOs that are multiple component pricing orders. The article and above chart were published in the September 18 edition. September losses will be reflected in FMMO reports in mid-October, and so far PPDs for September milk are mixed, some positive and some negative, but all are well below what would be the case under the old Class I pricing method.

This week, AFBF dairy economist John Newton pegged the cumulative loss to Class I value, alone, at $2.00 per hundredweight or $403 million to-date, across all FMMOs just on Class I milk — money unpaid to farmers that stayed in processor pockets. That figure is about 28% of the $1.48 billion component loss figure shown in FMMO negative balance and it correlates to Class I utilization being roughly 28% of total U.S. milk volume.

The Farm Bureau summary also shows the concentrated loss of $436 million in Class I value for May through October 2020. (Interesting coincidence: DFA is today the largest Class I milk bottler with the May 2020 acquisition of 44 of Dean Foods’ 57 milk bottling plants at a bankruptcy auction price of $433 million.)

“Due to the rapid rise in Class III prices and a modest increase in Class IV prices, the spread between the two was $6.83 per hundredweight in July, $10.96 per hundredweight in August, $10.30 per hundredweight in September and (will be) $3.56 per hundredweight in October,” writes Newton this week in the Farm Bureau analysis.

“As a direct result of no longer including the higher-of in the milk price formula, the Class I milk price never fully captured the rally in Class III milk prices. Instead, the new Class I milk price was as much as $4.57 per hundredweight below the higher-of formula price in August and $4.26 lower in September,” he continues. 

“As identified in Figure 2 (above), had the higher-of formula still been in place, the Class I mover would have exceeded $24 per hundredweight in August,” states Newton.

Newton cites a Class I minimum example for the Southeast, stating that these losses are “before Class I location adjustments are added. In South Florida, for example, with the $6 per hundredweight location adjustment, the Class I milk price would have been more than $30 per hundredweight in August 2020.”

Newton notes that from May 2020 to October 2020, the average difference between the old and new Class I milk price formulas was $2.04 per hundredweight in favor of the beverage milk processor. This means that the regulated minimum prices fluid milk processors had to pay dairy farmers from May through October 2020 were an average of $2.04 lower than what they would have been if the higher-of was still in place.

Going back to May 2019 when the new Class I formula was implemented, Newton notes that the Class I milk price was 62 cents per hundredweight lower on average for the past 19 months compared with the pre-farm bill higher-of formula. (Fig. 3 above)

When looking just at the 12 months pre-Covid from May 2019 to May 2020, the new Class I calculation added 9 cents per hundredweight to Class I pooled volume.

Newton writes that the Class I volume, alone, saw a $32 million benefit in the new Class I pricing in the first 12 months May 2019 through April 2020. Post-Covid, the new Class I pricing method is reflected as a $436 million loss May to October 2020, so the cumulative loss is estimated at $403 million over 19 months of implementation.

This analysis, says Newton, was based on actual Class I pool volume as determined pre-Covid, and does not account for the impact on all milk in and out of the pool for which producers were paid at or near FMMO blend price, before deductions.

The bottom line in looking at the Farm Bureau analysis, along with our own past four months of analysis, the new way of calculating Class I – per the 2018 Farm Bill – would be a relatively benign factor in a ho-hum market if dairy product and component values were at least somewhat accurately reflected across multiple manufacturing classes.

On the other hand, it works poorly in a lopsided market where markets are disrupted, huge government purchases occur on some products and not others, and where huge imports of some products (butter) and not others (cheese) impact accumulating inventory differently for the different milk classes.

While magnified in a severe market disruption like Covid-19 has created, the dairy “market” complex has had lopsided markets in the past and will again in the future at some level. The fact that this pricing change was made without a national hearing and without a dairy producer vote and without an FMMO administrative hearing is concerning.

Some members of Congress have stated that National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) — together — agreed on and requested this Class I pricing change and that Farm Bureau took a non-position, making the change a “no-brainer” for Congress to include in the Farm Bill. 

Farm Bureau had done analysis before the change was implemented showing the average over time was neutral. But neutral over time does not reflect month to month cash flow impacts and messed up risk management tools when markets diverge.

What we see in this so-called “neutral” change is the capacity for processors to manipulate the transfer of market value by playing one class against others and essentially removing ‘market value’ from producer milk checks.

Congress needs to hear the story of how dairy farms are impacted in their cash flow and use of risk management tools when a minimum of $1.48 billion in component value is simply sucked out of milk checks over a 4-month period. 

Yes, CFAP payments help dairy farmers. But government payments lead dairy even farther away from establishing market value to become more reliant on government payments that, quite frankly, come with more and more strings attached.

Remember, USDA Dairy Programs responded in a Farmshine interview in August to explain that the value missing from pools is “still in the marketplace” even if it doesn’t show up in the FMMO blend prices.

Specifically, USDA stated in that August 3 email that, “The blend price (SUP) is a weighted average of the uses of milk that was pooled for the marketing period (month). If some ‘higher value’ use milk is not in the ‘pool’ then the weighted average price will be lower. It is important to note that the Class III money still exists in the marketplace. It is just that manufacturing handlers are not required to share that money through the regulated pool. 

From the looks of milk checks shared in Farmshine’s Market Moos survey in June and July — and looking at the All-Milk prices reported by USDA through August — this ‘money that still exists in the marketplace’ has been largely unshared with producers.

The Class I pricing change was made, according to NMPF / IDFA to so that Class I processors could manage their price risk with forward contracting.

However, CME market brokers and analysts who were questioned about the use of forward contracting by Class I milk bottlers say that few, if any, are doing it. Part of the NMPF / IDFA push for this change was their statements that Class I bottlers would use risk management to stabilize their milk costs if the higher-of method was abandoned in favor of “averaging”.

In fact, some analysts we spoke with report there’s no incentive – even with the new formula – for processors to forward contract a perishable, quick-turnaround product like gallon jug milk. It doesn’t sit in a warehouse like cheese or butter or powder.

… Unless it is shelf-stable ultrafiltered milk — like Coca Cola’s Fairlife products. Coca Cola purchased the remaining shares of Fairlife from the Select Milk Producers cooperative on Jan. 3, 2020 — just 9 months after the new Class I pricing method was implemented.

The industry said this Class I pricing change was needed so that fluid milk processors could stabilize prices and in turn be positioned to invest in fluid milk processing and innovation, which would help dairy producers in the end by providing more Class I markets.

But what happened? Just 6 months after the new Class I pricing method was implemented, the largest fluid milk bottler, Dean Foods, filed for bankruptcy protection and sale in November 2019 with DFA waiting in the wings to buy. Then, 3 months after that, Borden filed bankruptcy and ended up selling to a consortium headed by former Dean CEO Gregg Engles.

Farm Bureau’s analysis this week estimates the impact on dairy farmer revenue from a purely Class I perspective. It does not quantify the full extent of component value removed from FMMOs in the process. Thus, the $403 million cumulative loss impact declared by Farm Bureau represents about 28% of the total loss – which is equivalent to the current nationwide Class I utilization.

This is a Class I pricing calculation change, but its impact on FMMO blend prices and farm-level mailbox prices is pervasive.

In addition, it is important to be aware in this discussion of loss impacts that there is absolutely zero method of calculating the market value of fresh fluid milk. It is not possible to determine what fresh fluid milk is worth because it is:

1)      Regulated by federal and state milk marketing orders and boards,

2)      Used as a loss-leader by supermarkets selling it far below its cost – especially the largest milk bottling retailers like Walmart and Kroger, and

3)      Federal government restrictions on the fat level of milk children are “allowed” to consume at school or daycare.

In short, the federal government controls fluid milk through USDA in lockstep with NMPF / IDFA — and don’t forget, DMI. Dairy checkoff figures prominently in this equation with the same heavyweights at the same table — pushing fat-free, low-fat, ultrafiltered, shelf-stable products, even 50/50 plant-based blends. 

Even DMI CEO Tom Gallagher is on record stating that the white gallon isn’t the future because even if children can have whole milk “innovation” is needed and admitting that his job is to “get processors to do stuff with your milk”. 

For processors to “do stuff with your milk”, they have to be promised a bigger margin. This could explain why the forward-looking focus of farmer-funded checkoff efforts is on innovation (processing partner margin), not on promoting and educating consumers about fresh fluid milk. And, it might explain why this new Class I formula was needed to average the only so-called market value left in the so-called dairy market.

CFAP payments are salve on some wounds, but the larger issue is still clear: Dairy producers need a voice — apart from the organizations that claim to represent them.

-30-

DFA antitrust lawsuit in Vermont ends before jury trial began

Potential settlement details undisclosed; Case had revealing ‘wins’ over four years, but FMMO 1 map limitations posed problems 

By Sherry Bunting, Farmshine, October 2, 2020

BURLINGTON, Vt. – In an unexpected twist this week, the civil antitrust case Sitts et. al. vs. Dairy Farmers of America / Dairy Marketing Services was dismissed on the eve of the jury trial that had been set to begin Sept. 30 in the U.S. District Court of Vermont with Judge Christina Reiss presiding.

A Stipulation of Dismissal with Prejudice was accepted by attorneys for defendant DFA / DMS and the 116 dairy farmer plaintiffs that had opted out of the previously settled Northeast Class Action Antitrust lawsuit to file the civil suit.

The Stipulation of Dismissal with Prejudice docket simply states: “The parties hereby stipulate to the dismissal of the above-captioned action with prejudice,with all rights of appeal waived, and each party to bear their own costs and attorney’s fees.”

A ‘stipulation of dismissal with prejudice’ is a legal term meaning that the case is over and done with and can’t be brought back.

We have learned that the stipulation requires parties to not discuss the terms of the “dismissal”, which means that settlement details will not be disclosed as public information.

Over the four years since the civil antitrust case was filed in October of 2016, some of the 116 plaintiff dairy farmers have since exited dairy farming.

Dairy farmers who looked forward to “a day in court” with a jury hearing evidence about the increasingly concentrated and anti-competitive milk marketing environment they live every day are likely disappointed by this outcome.

But even though this case is over, some ‘wins’ happened over the four years that could accomplish transparency in smaller case filings in the future. 

Throughout the four years, information about the alleged antitrust monopsony actions of defendant DFA, and the position of the plaintiffs as dairy farmers, was revealed at intervals during the proceedings.

Judge Reiss’s Opinion and Order exactly a year ago on Sept. 27, 2019 is one example.

Her Opinion and Order on this case in denying in part DFA’s request for summary judgment stated that, “Plaintiffs’ identify evidence that several of Defendants’ agreements violate a 1977 Consent Decree and Defendants’ own Antitrust Policy and Guidelines. A rational jury could find this evidence demonstrates that Defendants’ ‘acquisition of [ monopsony] power’ was through ‘predatory means.’”

In fact, this 58-page Opinion and Order, along with the amicus brief filed by the U.S. Department of Justice as a Statement of Interest in July, have provided support for others to move forward in smaller cases seeking vital financial information about the workings of DFA, the cooperative of which they are members. (More on that in the future.)

The DOJ statement filed in the Vermont antitrust case in July stated that the alleged activities fall outside of Capper-Volstead protections and that the allegations in the case “do not appear to have involved efforts to increase farmers’ bargaining power but rather efforts at monopsonization.”

The DOJ’s 15-page statement filed in July 2020 represents the first time the DOJ has really weighed-in on the monopsonization of milk markets to basically say the “heartland protections” of the Capper-Volstead Act do not apply to the activities alleged.

In fact, DOJ stated in the brief that the claims at issue fell outside the Capper-Volstead protection because “they do not involve claims that farmer cooperatives acted anticompetitively against processors and other middlemen, but rather that these were claims that farmer cooperatives through agreements with processors, middlemen and other cooperatives, acted anticompetitively against other farmers.”

Part of the issue for the plaintiffs in the Vermont antitrust case — throughout the procedural elements of four years — was that exhibits, testimony, depositions about activities just outside of the Northeast Milk Marketing Federal Order One lines on an arbitrary map were deemed outside the jurisdiction of the case.

It is interesting to note that even evidentiary exhibits at the case docket about activities in central Pennsylvania was scratched from use in the trial simply because central Pennsylvania is one of several geographies in the Northeast that are technically “unregulated” by FMMO 1 and thus not included in the FMMO 1 “map” — even though central Pennsylvania is surrounded on one side by FMMO 1’s map and on the other side by FMMO 33’s map, and the milk from these farms moves through these FMMO marketing channels, plants and cooperatives.

So many moving parts to assemble and so many challenges to use information subject to exclusion based on FMMO maps, it boggles the mind.

Similarly, ‘collaborations’ of one sort or another — revealed through exhibits, testimony, depositions and the like — that occurred in other FMMOs linked to how milk markets function in FMMO 1, or showing a pattern of behavior, were also deemed outside the jurisdiction of this case.

This, despite defendant DFA / DMS being a national footprint milk cooperative that interestingly draws its own area council maps in ways that blend geographies between FMMOs. This, despite defendant DFA / DMS in testimony before the Pa. Milk Marketing Board or in requests made to FMMO 1 market administrators often positions itself as the all-knowing one on milk flow from its birdseye view of the national, even global, dairy grid.

A basic tenet of the case was plaintiff’s claim that DFA is ’empire-building’ not bargaining on behalf of farmer members. During the four years of process on this case, information has been revealed, but DFA has continued to boldly forge its dairy dominance by aggressively bringing the Northeast regional cooperatives and independents that had been market-managed by DMS into the milk supply membership structure of DFA-proper 2017 through 2019, and then acquiring 44 of Dean Foods’ 57 fluid milk plants across the country in 2020.

DFA was listed by Rabobank last month as the largest dairy processor in the United States and third-largest dairy processor globally behind Nestle and Lactalis.

Through additional partnerships, joint ventures and marketing alliances, DFA has a hand in every pie, and no one, not even its members, really knows how the milk (and revenue) really flows.

-30-

Farmers send June milk check data and preliminary review is revealing

MilkCheckSurvey072920

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Farmers wonder what happened? June PPDs ugly, pool volume down 36%

TableOne_FMMO_Statistics_June2020_Bunting (1)

By Sherry Bunting, Farmshine, July 17, 2020

BROWNSTOWN, Pa. — The negative PPDs are turning out to be whoppers as expected for June, and experts say the situation will repeat in July. In fact, by the looks of the milk futures markets, the wide spread between Class III and IV is projected to remain above the magic number of $1.48/cwt. through at least September and quite possibly through the end of the year.

That’s the big news. This divergence is messing with PPDs more than normal and changing the ‘basis’ for producers in a way that defies most risk management tools. While the Upper Midwest milk checks reflected some of the marketplace rally, other regions fell quite flat. The range in uniform prices among FMMO’s is $4 from the $13s in in California, the Southwest and Mideast (Ohio, western PA, Indiana, Michigan) to $15s in Northeast, Southeast, Appalachia to $16s in Florida and the highest uniform price in the $17s for the Upper Midwest.

In fact, depending what Federal Milk Marketing Order (FMMO) you are in, and depending upon how much of that higher Class III “marketplace” value makes it into payments by plants to co-ops and producers, this could alter how “real” the Dairy Margin Coverage margin is, as well as the workings of Dairy Revenue Protection (DRP) program insurance and other risk management options that play off Class III but settle out on an “All Milk” price USDA will calculate for June at the end of July.

Producers who purchased DRP policies and based them on components to stabilize their risk in markets that utilize a blend of classes, are realizing an indemnity they expected to receive as protein doubled from May to June is now deflated to a smaller number due to negative ‘basis’.

Experts admit —  There’s no good way to manage PPD risk (or as it’s referred to in the skim/fat Orders of the South “revenues available to pay”). Interestingly, Dairy Farmers of America (DFA), at its member risk management website, is touting it has “strategies” for members to “mitigate future negative PPD risk”.

(Read to the end to learn how to participate in the Farmshine Milk Market Moos milk check survey on this issue.)

So, what changed? Other than a pandemic disrupting things.

A big change is the new way USDA calculates the Class I Mover. This was implemented in May 2019 and is currently adding on to the largeness of the inverse relationship between Class III and the uniform price in multiple component pricing orders.

In fat/skim orders of the South, producers are seeing one price on their check but then “revenues available” to pay a different price. In some cases, the “revenues available” is reference to dispensing with “overbase penalties” in June because revenues were available to pay a better price on that milk.

There are no PPDs in the four FMMOs still pricing on a fat/skim basis. But those Orders are seeing a flat-out reduction in their uniform price as announced for Florida and the Southeast FMMOs being lower than May! Meanwhile the Appalachian Order gained just 13 cents over May. (See Table I above.)

During the formation of the 2018 Farm Bill, National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) agreed on this new way to price Class I so that Class I processors could find “stability” in their costs by forward pricing without having to “guess” which manufacturing class price contract would be the “higher of.”

Farm Bureau remained neutral at the time that this was going through, and their analysis showed, historically, this new way leveled out over time for dairy producers. In fact, supporters stated that the stability of averaging Class III and IV to make the Class I Mover offered stability in input costs to milk bottlers so they could forward price, which in turn would offer stability to farmers by keeping bottlers in a position of strength to invest for the future. These are the reasons we heard, and it wasn’t much debated at the time.

No hearings were held by USDA on this major change in Federal Order pricing for the one and only class that is actually regulated. It was done in the Farm Bill, legislatively, because cooperatives and processors agreed it was what they both wanted. (More information next week on what factors Covid and non-Covid-related that are contributing to these diverse trends between Class III and IV.)

Under the current method, instead of using advance pricing factors from the “higher of” Class III or IV to calculate the Class I Mover, the two classes are averaged together and 74 cents is arbitrarily added.

The reason this is such a big issue right now, and likely for months to come, is the size of the spread. Rapidly rising block Cheddar — which hit another record of $3.00 per pound on the CME spot market early this week – keep pushing the AMS end-product pricing higher, more than doubling the value of protein between May and June and pushing Class III milk futures further into the $20s.

In fact, Class III milk futures settled Tues., July 14 at $24.34 for July, $23.09 August, $20.23 September, $18.40 October, $17.44 November and $16.35 December. Meanwhile those months for Class IV milk futures settled Tuesday at $14.03 for July, $14.51 August, $14.85 September, $15.07 October, $15.31 November and $15.53 December. Not until December is the spread within the $1.48/cwt range where the new way of averaging the two classes returns from being so out of kilter to Class III.

Remember, these negative PPDs are the result of Class III being larger than the uniform blend price, and the large amount of depooling that resulted keeps that higher value from being shared in the pool. Class III handlers are accustomed to taking a draw, not writing a check, and there’s no requirement to be pooled unless a plant is a pool supplier or wants to stay qualified for the next month in most FMMOs.

A Farmshine article two weeks ago explained these price relationships in more detail.

Now the numbers are coming in. The recently announced uniform prices and PPDs range from nearly $4 to near $8 — just as leading dairy economists had estimated.

The least negative was the Upper Midwest FMMO 30, at minus-$3.81, where 50% of the milk utilization was Class III, and the uniform price gained a whopping $4.92 at $17.23 for June. In fact, producers in Wisconsin and Minnesota report $20 milk checks for June.

The most negative PPD was minus-$7.91 in California, where less than half of one percent of the milk utilization was Class III, and the uniform price gained just $1.18 at $13.13 for June.

The Southwest FMMO 126 wasn’t far from that at minus-$7.62 with a uniform price announced at $13.42 — up 41 cents from May.

In the Northeast FMMO One had a minus-$5.38 average marketwide PPD, but the uniform price gained $2.19 over May at $15.66 with 18.5% Class III milk utilization.

The Mideast Order PPD is minus-$7.05, and the uniform price gained $1.26 at $13.99 with just over 9% Class III utilization.

In the southern FMMOs, pricing is still on a fat/skim basis, not multiple components, but the inverse relationship of the Class I Mover to Class III pricing is keeping June uniform prices flat or lower compared with May. The Southeast FMMO 7 saw a penny decline in the uniform price to $15.38 in June, and Florida Order 6 uniform price fell 46 cents from $17.29 in May to $16.83 for June. The Appalachian FMMO 5 gained just 13 cents at $15.27 for June.

Nationwide, just over 9.5 billion pounds of milk was pooled across all Federal Orders in June, down 36% from 14.4 billion pounds a year ago and down 28% from the 13.2 billion pounds last month.

May milk production was down 1.5% compared with a year ago, but the pooling volume nationwide was already 13% lower than a year ago in May.

USDA confirms that handlers making just Class II, III or IV products are not required to pool the milk, and therefore, due to “expected price relationships,” some handlers decided to not pool some of their milk receipts in May, and most definitely elected not to pool in June.

“Only Class I handlers are required to pool all of their milk receipts no matter how it was used,” USDA Dairy Programs explained in an email response to Farmshine this week.

In Table I are the marketwide FMMO data for June from Market Administrator announcements on different dates over the past several days. Comparing Class III volumes reported to month ago and year ago, an estimated 45 to 94% of Class III milk was depooled in various FMMOs, with the exceptions of Arizona and the Pacific Northwest where depooling was less of a factor.

Looking at the Northeast FMMO, alone, the estimated 45% less Class III volume in the pool in June vs. May, kept just over $110 million in collective component value out of the Northeast pool.

The question is, since USDA confirms that money is “in the marketplace”, will that “marketplace money” make it to farm-level milk checks, 13th checks, reduced retains? And will the “Covid assessments” and “marketing or balancing fees” and “overbase penalties” be adjusted or eliminated in June?

Others wonder how this will affect the All Milk price for June as calculated by USDA NASS at the end of July. Will the erraticness of how this “value in the marketplace” could be handled make winners and losers in terms of the Dairy Margin Coverage? How will this situation translate to those margins as a national average?

USDA AMS Dairy Programs defined the NASS All Milk price in an email as follows: “The NASS U.S. All Milk Price is a measurement of what plants paid the non-members and cooperatives for milk delivered to the plant before deduction for hauling, and this includes quality, quantity and other premiums and is at test. The NASS price should include the amount paid for the “not pooled milk.”

USDA explained that, “The blend price (Statistical Uniform Price, or SUP) is a weighted average of the uses of milk that was pooled for the marketing period (month).  If some ‘higher value’ use milk is not in the ‘pool’, then the weighted average price will be lower.”

However, the USDA response also points out that, “It is important to note that the Class III money still exists in the marketplace.  It is just that manufacturing handlers are not required to share that money through the regulated pool.”

So, will it be shared at the producer level outside of the pool? From the looks of a few June milk check settlements that have been reported to Farmshine on the morning of July 15, it’s not looking like the higher Class III value is helping checks shared from the Southeast FMMO at this writing. How will that stack up to a margin that gets figured also looking at the Upper Midwest where the uniform price saw almost a $5 gain?

We’ll look at that more closely next week.

Dairy producers who want to participate in my Milk Market Moos survey of June milk checks, please email, call or text your June milk price, fat test and PPD, and the list of deduct line items, especially any “Covid-deducts,” and include any overbase penalties. Also, provide your location or in what FMMO your milk is marketed. All the information will be anonymously aggregated. Email agrite2011@gmail.com or call or text 717.587.3706.

The Jersey Cattle Association is doing a similar June milk check survey sampling across the country.

This is a big topic when risk management is based largely on components and Class III, even though Class III use is not regulated unless processors want it to be, and certainly not in a pricing scheme that no longer prices the higher of two divergent manufacturing price trends into the only truly regulated class — Class I fluid milk. 

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Understanding these negative PPDs, massive depooling; ‘New’ Class I calculation doubles the rub

 

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Large negative PPDs, Class III depooling and buyers reblending the milk price paid to farmers in June and July could be with us through August and even September because of how wide the divergence is between the Class III and Class IV prices, based on what the CME futures markets are showing. This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

By Sherry Bunting, Farmshine, July 3, 2020

BROWNSTOWN, Pa. – Dairy producers seek to understand record-large negative PPDs (Producer Price Differentials) for June milk, meaning the the significant gains made in cheese markets and and Class III milk price are not making it to milk checks, especially for Federal Milk Marketing Orders (FMMOs) that are not predominantly cheese markets. (See FMMO data here

The extent of these negative PPDs – ranging from -$3.00 to -$8.00 per hundredweight (cwt) – has several factors, including the new way the Class I Mover is calculated since the 2018 Farm Bill changed it from the “higher of” Class III or IV pricing factors to an average of the two with an arbitrary 74-cent add-on. (See related July 28 story on revealing milk check data here)

“Expect historically large negative PPDs in Multiple Component markets for June and July,” writes Calvin Covington, retired breed association executive secretary and milk cooperative CEO, in an email interview with Farmshine this week.

He also estimates the volume of milk depooled in June will set a record (it did), further limiting how much of the past six weeks of higher dairy product prices will even make it into their milk checks.

Covington confirms Class III milk was already being depooled in May. As reported in last week’s Farmshine, we calculated the volume of milk pooled across all Federal Orders in May was already 13% below year ago levels.  For June, the depooling volume will be much more significant, in fact it is likely to be enormous.

“There is little economical reason to pool any Class III milk in June,” Covington asserts. “The only Class III milk that will be pooled in June is Class III milk going to a pool plant, and to meet any requirements to keep milk pooled in July.”

In fact, if buyers pooled Class III milk on Federal Orders in June, they would have to write a check to the settlement fund (instead of taking a draw from the fund as they do in normal conditions when the Class I bottlers are writing that check).

This is because the Class III price for June was announced this week at $21.04 – nearly $10 per cwt higher than the Class I Mover for June, which was set at $11.42 back in the beginning of May. The June Class I Mover is the lowest since the Great Recession while the June Class III price is the highest since 2014 — both now occurring in the same pooling month!

The reasons for the steep negative PPDs producers in Multiple Component Pricing (MCP) FMMOs will see for June milk, says Covington, are the high Class III price ($21.04) vs. Class IV ($12.90) and Class II ($12.99), the Class I Mover advanced pricing lag at $11.42, and the new method of calculating the Class I Mover, especially for July.

“In skim-butterfat priced markets – the Southeast Orders – blend prices will be lower than the Class III price,” Covington adds.

He explains that the PPD is paid on a hundredweight (cwt) basis, and it impacts all milk the same regardless of milk components.

“High component herds, especially in Multiple Component markets, see larger variation in milk prices,” Covington explains. “It is all due to arithmetic. Milk is paid on fat and protein. The more fat and protein in the milk, the greater the price change when fat and protein prices change.”

Covington spoke at World Dairy Expo last fall about the makeup of the milk check, and all of the factors that go into it. He reminds producers that only regulated plants are required to pay minimum class prices. Unregulated non-Class I plants choose to be associated with the pool so they can draw from it to pay a blend price to their farmers.

Now that the price for milk used to make cheese is so much higher than the price for milk used as a beverage or to make yogurt, ice cream, dips, butter, powder and all other products —  cheese plants are free to disassociate themselves from the FMMO pool, and there is no regulation stating they must pay their producers even the minimum announced Class III price for components.

Under the current system, when the Class III price rises quickly to overshadow the previously-set Class I Mover, there’s no reason for those Class III plants to pool the milk, unless they want to remain “qualified” to participate in the pool (draw) in the following month.

Covington observes that the upside-down pricing and negative PPDs will be with us at least through July. Dairy economists Mark Stephenson, University of Wisconsin and Andrew Novakovic, Cornell, noted in a recent Dairy Markets and Policy brief that this situation of negative PPDs, Class III depooling and buyers reblending the price paid to farmers could be with us through August and even September because of how wide the divergence is between the Class III and Class IV price via the CME futures markets.

This divergence lowers all other classes in the pool (I, II and IV), especially now with the new “averaging” method of calculating each month’s Class I Mover in effect since May of 2019.

Covington notes that it all boils down to math. The PPD is simply the difference between a Federal Order’s revenue available for producer payment (Class I, II, III and IV combined), minus the payment to producers at the Class III price based on components.

When Class III components are higher than the available revenue in the pool, the PPD is negative. When the Class III milk is depooled in that scenario, the funds aren’t there to pay the value.

“Factors impacting the size of the PPD, positive or negative,” he says, “are Class III price relative to the other class prices, volume of Class III milk pooled and an Order’s Class I price and usage.”

The primary factor in June’s negative PPDs is the extreme rapid increase in the Class III milk price. The rising cheese markets and Class III milk futures were mostly translated into the June Class III price because it was based on four weeks of June cheese sales.

The Class I Mover, on the other hand, was calculated six weeks earlier based on what the trade was doing at the end of April and beginning of May.

In the Covid-19 market-disrupted environment this is like two different world’s colliding based on timing and calculations.

Add to this the fact that Class IV and Class II prices saw muted increases during June compared to Class III’s large and abrupt increase, and what we are left with is the scenario where Class III beats all other classes by $7 to $10 in the same pooling month.

FMMOs with larger utilization of Classes I, II and IV will not see much boost from the uptrending cheese markets in their June blend price.

FMMO’s with large Class III utilization would see that boost. But depooling, reblending and assessments will all play further roles in how even those mailbox milk checks look once June milk is paid for.

Negative PPDs are not new. Dairy producers have experienced negative PPDs on milk checks in the past. Seeing a negative number in an uptrending milk market always brings questions and frustration. In fact, the November 2019 through January 2020 period in several of the past five years produced negative PPDs.

Last November, for example, the seven Multiple Component Pricing FMMOs saw a negative PPD averaging -$2 and ranging from just under -$1 to over -$3.

That pales in comparison to the negative PPDs producers will see for June, July and potentially August or September of 2020. Expect to see PPDs that are double, even triple, what was seen last November.

By now, most dairy farmers understand that a rapidly rising cheese market and corresponding Class III milk price presents the key factor putting PPDs into negative territory. When this happens, producers are reminded that a rising Class III milk price is still a positive development because it indicates milk markets are improving.

But in what some are calling a “whipsaw market” where prices turn abruptly in unexpected directions due to an unforeseen disruption like Covid-19, it’s useful to look at the other factors, for the long term.

First, when Class III milk’s component value is higher than the value of all the classes combined, the result is a negative PPD because after the Class III component values are paid, there is nothing left in the pool for the PPD draw. When the Class III milk is depooled, then that value is not available either.

When the blend price is higher than the Class III price, which is the norm, those Class III plants take a draw. When the reverse is true, they would technically owe the pool.

What sets this up against a huge market-disrupting event like Covid-19 is the lag-time between the calculation of the Class I Mover based on two weeks of trade and calculated six weeks in advance compared with the calculation of the manufacturing class prices based on the current month’s market conditions weighted over four weeks.

Even in those prices, there is a one to two week lag between what happens on the CME daily spot market and its translation to the weekly USDA National Dairy Product Sales Report, on which the class and component prices are based. There is no daily reporting of actual trade, actual sales of the four main dairy commodities, just weekly surveys that are published the following week.

On the flip-side, for April, the Class I Mover was set at $16.64 based on market conditions (advance pricing factors) during the first two weeks of March, before the Covid-shutdown. The Class III price came to $13.07 for April based on the economic shutdown affecting foodservice demand while retailers had a tough time keeping dairy products in stock.

With Class I sales rising dramatically in April, and the Class I Mover sitting $3.57 higher than Class III and $5.24 higher than Class IV – there was incentive to pool everything, even the displaced milk as the industry adjusted to an unforeseeable event and the Class I Mover stood well above all other classes, especially the dumped milk that was pooled at Class IV value.

Thus, April set a record the amount of ‘other use / dumpage’ milk as 350 million pounds of displaced milk was pooled at the lowest class price across all FMMOs, nearly 10-times the amount that is normally pooled as ‘other use / dumpage’.

Now, that lag-time produces an opposite situation for June and July, and there is another wrinkle in the FMMO fabric – the new method for calculating the Class I Mover doubles the rub.

As a result of changes made in the 2018 Farm Bill, the Class I mover is now established by averaging Class III and Class IV and then adding 74 cents to that average. It used to be calculated using the higher of Class III or Class IV. In this case, that would have made a difference as Class III and IV have significantly diverged.

The calculation change for the Class I Mover was made to help processors hedge their future milk costs on the futures markets without having to guess which futures contract to use – Class III or IV. This was said to be something that would provide stability for Class I producers by stabilizing pricing for Class I processors. However, in these very unstable ‘whipsaw market’ times, the rub on producer milk checks will sting.

When it was proposed in 2017, American Farm Bureau Federation studied this method and documented little change to the net result for dairy producers when multiple years of pricing were averaged together and evaluated. In fact, when the new method went into place, there were several months where the average-plus-74-cents made the Class I Mover higher than it would have been under the old “higher of” method.

Not so in a volatile market with a time-lag involved.

These issues of negative PPD affect disproportionately the Federal Milk Marketing Orders (FMMOs) that have more Class I and IV utilization. FMMOs with small Class I utilization and large Class III utilization are relatively untouched as those blend prices would reflect mainly the much higher Class III cheese milk component value. But with depooling and reblending, those checks may also be impacted.

Looking ahead to July, the Class I Mover was already announced at $16.56, based on the advance pricing factors from the first two weeks of June. While July’s cheese trade is yet to be seen, the July Class III contract on the CME futures market stood at $22.85 at this writing on July 1st, which is $6.29 per cwt higher than the already set Class I Mover for July.

Even though the July Class I Mover stands $5.14 per cwt above the June Class I Mover, not even July’s Class I had the benefit of the full advance in June cheese trade because it was based on just the first two weeks of the June rally.

According to John Newton American Farm Bureau chief economist , there is currently, no mechanism to prevent negative PPDs. Newton writes in a recent ‘market intel’ piece:

“Historically, negative PPDs occur less than 15% of the time. Methods to prevent or mitigate negative PPDs  — such as eliminating the advanced pricing component, reconsidering the higher-of pricing formula (but with forward contracting of Class I milk), requiring mandatory pooling of milk in all Classes or consideration of decoupling the Class I milk from the price of manufactured milk products  – could be explored.”

UPDATE: Negative PPDs will be here for a while. Looking at these price spreads does not bode well for the continued inverted relationship between Class III and the Class I Mover — or what milk market analysts call “unorthodox pricing arrangements” — that will lead to continued negative PPDs and de-pooling of the higher Class III value milk from Federal Milk Marketing Order pools. In fact, the discussion of this issue has many twists and turns, a few questions have been forwarded to USDA Dairy Programs for some explanations, and June pooling data and blend price / PPD information is anticipated after the 14th.

Here’s the problem. Even when the ‘advanced pricing’ method gets caught up, the real problem is the way the Mover is now calculated. The 2018 Farm Bill made a huge change without a USDA administrative hearing and without a producer (bloc) vote.

Fluid milk processors wanted stability. They wanted to be able to forward-contract their milk costs and not have to deliberate over which futures contract to use — Class III or IV — since the Class I Mover used to be based on the “higher of” the two classes. Now, the futures markets are showing us that the spread between Class III and IV is going to be well above $1.48/cwt through November. That’s the significant number because the new Class I Mover method is calculated by averaging Class III and IV and adding 74 cents to that average. Once the III / IV spread hits $1.48/cwt, the 74 cents no
longer covers the difference.

Once we get to 2021, the spread narrows through those months, according to what the futures show now, but the Class III / IV spread looked reasonable and well within that $1.48/cwt for this current period back when viewed on the futures markets six months ago. If Congress can make a big change like this to Federal Order pricing formulas based on NMPF and IDFA agreeing on such while the Farm Bureau took a neutral position
— other than to review it and show it to be a wash when averaged over time — why can’t the Congress require a USDA National Hearing on milk pricing with Report to Congress?

Previous Farm Bills had such language, but the National Hearing “cost” was never funded. Now, the idea of a National Hearing on milk pricing, and a producer vote on Federal Orders, is seldom discussed. What we see from this Class I Mover example that a big changes can be made and implemented quite readily at the legislative level — no hearing or vote required — as long as the cooperative processors and proprietary processors agree on the change in advance. If milk is substantially depooled to keep higher end product values in hand, hopefully through the reblending process, plants and cooperatives will pay the marketplace value to dairy farmers, given the sacrifices producers have made to bring production into line with demand.

FYI: The Pennsylvania Milk Marketing Board (PMMB) successfully “decoupled” and stabilized the Class I milk price for two months by setting a Class I floor of $15 through the state’s over-order premium authority. The Federal Milk Marketing Orders were going to have a national hearing on this in April, but chose not to after economists and organizations in the Upper Midwest cheese region complained. The PMMB action was limited only to Pennsylvania, so for two months (the limit of the Order), when the Class I beverage milk price for milk produced, processed and sold in Pennsylvania fell below $15, the current over-order premium of around $1.00 per cwt was expanded automatically to bring the price back up to $15 for May-July 2020 for this very reason.

Trouble is, with the FMMOs not considering a similar move, this PA ‘premium’ only pertains to bottling plants paying milk suppliers for milk produced on PA farms (and they are free to take milk from other farms outside of PA). This price was built into the PA minimum retail milk price for May and June, but retailers, processors and cooperatives are not required to pass these state-mandated premium funds paid by PA consumers back to PA farms — unless the milk meets all three of these criteria: produced, processed and sold in Pennsylvania.

Author’s Opinion: There is one other thing worthy of consideration. A national hearing on milk pricing, period, to look at options, updates, simplification, transparency, daily reporting, producer voting, consolidation, transportation and deductions. Some grassroots groups have been asking for a national hearing with report to Congress for nearly 10 years as there is no other way for farmers to access the FMMO system run by market administrators, and they don’t even get a vote because cooperatives bloc-vote changes on behalf of their members. Previous Farm Bills included language for such a national hearing, but they were never conducted. At some point, the complexities at play here need to be evaluated from both regional and national perspectives in terms of “orderly marketing” and how farm viability and farm and food security in regions are affected and in terms of fulfilling the desire of many consumers wanting fresh, local milk.

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U.S. milk production falls 1% in May, FMMOs pool 13% less milk

OtherUsePooledMilk_Table_I(withMay2020) (1)

Table 1 showing “other use / milk dumpage” totals by Federal Order includes data for May 2020. The month of May saw 13% less milk pooled on Federal Orders compared with a year ago, and 13% less milk in the “other use / dumpage” category compared with a year ago — down dramatically from the enormous 350 million pounds of “other use” milk pooled in April 2020.

States east of Mississippi cut production, west mainly grow

By Sherry Bunting, Farmshine, June 26, 2020

WASHINGTON, D.C. — As April’s dismal Covid-impacted dairy market spilled into May milk checks, the supply-side of the ship turned in May at the same time as demand was strengthened by dairy donations, retail demand and food-service re-stocking.

USDA Dairy Market News reports each week have signaled progressively tighter milk supplies heading into summer vs. stable to strong demand pushing spot loads to sell above class price in some areas.

In April, cooperatives across the country set base limits on member milk production for May until further notice. Some severely discounted any milk provided that was above 80 to 90% of a member farm’s March marketings. Many producers chose to leave this penalty milk out of the tank.

As these co-op ‘base’ programs went into effect in May, the impact is demonstrated in the USDA May Milk Production report, estimating  U.S. output at 18.8 billion pounds, which is 1.1% below year ago for May.

Cow numbers were down 11,000 compared with April, according to USDA, but still 37,000 more milk cows were estimated on farms compared with a year ago.

Nationally, milk output per cow dropped by one pound/cow/day in May compared with a year ago, the report stated.

In addition, Federal Order milk pooling totals and “other use / dumpage” data provided to Farmshine by USDA AMS by request, showed the total volume of milk pooled across all Federal Orders in May dropped like a rock to levels 13% below year ago.

Similarly, the volume pooled as “other use / dumpage” across all Federal Orders fell to levels 13% below year ago nationwide — from the enormous 350 million pounds recorded in April to 36 million pounds in May. (See Table 1.)

What is eyebrow-raising is how the numbers in these reports geographically arrange themselves.

In last Thursday’s Monthly Milk Production Report, the national drop in total output for May masks the fact that among the 24 top milk producing states listed individually in the report, those east of the Mississippi accounted for all of the production decline – plus balancing the accelerated western growth to get the U.S. total a significant 1% below year ago.

States east of the Mississippi saw large decreases in production, while in contrast, the growth states of Texas, Colorado, Idaho, Kansas, Arizona, South Dakota saw increases in production ranging from 1.4 to 9.7% above year ago.

East of the Mississippi, the Northeast milkshed really clamped down on production with Pennsylvania 3% below year ago, New York down 3.7%, and Vermont down 6.4% vs. year ago in May.

Further south, Virginia and Florida were unchanged from a year ago, while Georgia’s production fell 1.4%.

In the Mideast and Midwest, Michigan was off a fraction (0.4%), Minnesota down 1.9% and Wisconsin’s production fell by 3.1% vs. year ago. Indiana, Illinois and Iowa were down 1.7 to 2%. Ohio was the outlier, gaining 0.4% in production over year ago.

In the West, May production was larger than a year ago with South Dakota leading on a percentage basis producing a whopping 9.7% more milk compared with a year ago. Number five Texas grew by 1.9%. Number three Idaho grew by 4.6%, and Colorado grew by 4.8%. Arizona grew by 1.4%, and Kansas by 2.4%.

Three western states were key outliers as California dropped production 1.5% below year ago, Utah was down 3%, and New Mexico fell a whopping 7.2% below year ago. The Pacific Northwest had generally steady production with Oregon unchanged from a year ago and Washington down fractionally.

In Federal Order pooling, the volume pooled nationwide was down a whopping 13% from 15.1 billion pounds in May of 2019 to 13.2 billion pounds this May of 2020.

In the Northeast, total pooled pounds on Federal Order One for April and May of 2020 were essentially equal at 2.3 billion pounds each, but relative to year ago, this was a decline of 1.7% while production on farms in the region fell a whopping 4%, collectively. The difference likely came from elsewhere.

Meanwhile, the amount pooled as “other use / dumpage” in the Northeast Order One dropped abruptly from the enormous 131 million pounds in April to 12.3 million pounds in May, representing a 35% drop in “other use / dumpage” compared with a year ago.

Pooled milk classified as “other use / dumpage” in the Appalachian, Florida and Southeast Orders 5, 6 and 7, also dropped significantly in May compared with April’s large records. In fact “other use” milk in those three Orders fell to levels that were 19% (Appalachian), 9% (Florida) and 32% (Southeast) below year ago. At the same time, total pooled pounds for these three Orders – 5, 6 and 7 – were calculate below year ago in May by 1% in Order 5 (Appalachian), 2.5% less in Order 6 (Florida) and a significant drop of 11.7% less milk pooled compared with a year ago in Order 7 (Southeast).

In a sense, the pull back in production in the Northeast, Mid-Atlantic and Southeast regions, where April’s dumping had been so extreme, helped bring down total pooled pounds in those areas to rein-in the “other use” pounds as well.

Growth areas of the nation showed significantly less “other use / dumpage” pounds in May vs. April. However, in some of the Orders, such as the Southwest (Order 126) and Upper Midwest (Order 30), the “other use / dumpage” category was still above year ago levels by a modest margin, according to the USDA AMS figures.

As the dairy industry right-sizes itself after COVID-19 supply-disruptions that abruptly cut 30 to 40% from producer milk checks, it remains to be seen how states east of the Mississippi can regain their footing as western growth areas kept shipping more milk right on through — without missing a beat.

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