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 for more, including information about a potential conference call for dairy farmers in Pennsylvania; 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.

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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.

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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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Dean pays independents for April milk, owes millions to co-ops, USDA FMMOs, MilkPEP

DeanLineup_2018 (2)

The Dean Foods product lineup as pictured on its website just prior to the November 2019 bankruptcy filing and May 2020 sale.

By Sherry Bunting, Farmshine, June 12, 2020

HOUSTON, Tex. — Dairy producers who ship milk independently to any of the former Dean Foods’ 57 milk plants began receiving their final payments for April milk on Monday, June 8. These were the payments due from Dean debtor in possession (DIP) in mid-May that became part of the administrative expenses in the post-sale proceedings of the Southern Foods Group (Dean Foods) bankruptcy in the Southern District Court of Texas.

Several dairy producers in several states confirmed to Farmshine Tuesday that they received these  payments. Furthermore, their May advance payments were timely made by the new owners of the former Dean plants — namely DFA and Prairie Farms.

The Pennsylvania Milk Marketing Board (PMMB) staff also confirmed late Tuesday that, “All Pennsylvania independent Dean producers have been paid what was due them for April.”

For its part, the PMMB staff had initially begun the process of auditing non-payments in preparation of filing bond claims. Seven of Dean’s plants are licensed and bonded in Pennsylvania – a requirement to buy milk from farms in the state. This includes four plants in Pennsylvania, one in New Jersey, one in New York and one in Ohio.

The PMMB quickly shifted gears early this week from auditing non-payments to auditing the payments to independent producers, and as conveyed, found that producers received what was due.

The PMMB staff also indicated they are completing their auditing of what is still owed to milk cooperatives. If payments to cooperatives are not received, PMMB will file the necessary bond claims for any Pennsylvania cooperative milk that remains unpaid by the Dean bankruptcy estate.

Nationwide, independent producers have been paid, but cooperatives are still owed for April milk as of June 10.

In addition, USDA AMS Dairy Programs in Washington replied Tuesday, June 9 that, “USDA has not received payment from Dean (DIP) for April producer settlement funds owed.”

USDA had previously indicated that not only were the pool funds outstanding, Dean had also not paid the FMMOs for producer marketing services, transportation credits and administrative service in nine Federal Orders. Dean Foods is fully regulated in all Federal Orders except for the Pacific Northwest and Arizona.

In mid-May, USDA reported that, “handlers were notified via memorandum of the non-payment and the pro-ration of the available producer settlement monies.”

The loss of Dean’s Class I contributions to Federal Order settlement funds from 57 plants regulated in nine Federal Orders would decrease the blend price paid to all producers in those areas — under normal conditions — by reducing the pool funds drawn by handlers for other class uses. Several cooperatives are handling the loss of pool funds from back in Oct./Nov., and potentially April, by way of milk check deductions that will continue until the pool shortfalls are covered.

In an email response this week to Farmshine, USDA AMS Dairy Programs confirmed that, “No claims for these April producer settlement funds have been filed with the bankruptcy court because the April Federal Milk Marketing Order (FMMO) obligations are post-bankruptcy debts and are recouped through the post-bankruptcy process.”

The post-bankruptcy process involves the Dean estate’s plan being filed with the court outlining how it will pay its vendors (including USDA producer settlement funds) as it winds down operations of the estate. According to USDA, Dean has notified the court that it will file the payment plan by August 3.

How much is owed for April milk to the USDA FMMO producer settlement funds across the U.S. is deemed proprietary information, according to USDA, and “it has not yet been aggregated with appropriate redactions and cannot be released at this time.”

However, some milk cooperative sources handling only manufacturing class milk in the Northeast and Mideast are pegging their losses from these unpaid April settlement funds to be upwards of 30% of the blend price.

In addition to the missed payments to FMMO settlement funds for April, USDA confirmed in an email that it filed proofs of claim in the bankruptcy proceeding for monies owed prior to the bankruptcy filing for October and mid-November 2019 milk marketings.

“Those proofs of claim (for Oct./Nov. 2019) totaled $13.8 million for monies owed to producer settlement fund, marketing service, administrative, and transportation credit funds, as well as the Fluid Milk Processor Promotion Program. The proof of claim documents were filed on April 21, 2020 and can be viewed on the Dean Foods Restructuring website,” USDA stated in an email response this week.

With more than 3000 documents on the Southern Foods Group bankruptcy docket, a search of claims did yield more than two dozen separate proof of claim filings by USDA on April 21, including information showing that Dean owes $3.1 million for Oct./Nov. 2019 to the Fluid Milk Processor Education and Promotion Program (MilkPEP). Fluid milk processors are obligated by USDA to pay 20 cents per hundredweight into this fluid milk promotion fund.

It is unclear how much of what was due the cooperatives back in Oct./Nov. 2019 is also upaid, but proofs of claim filed in March 2020 by milk cooperatives peg the largest amounts owed from last fall at $103.4 million to Dairy Farmers of America (DFA); around $14 million to Southeast Milk (SMI); and over $7 million to Land O’Lakes. The link to claims documents on the Southern Foods Group bankruptcy docket can be found at https://dm.epiq11.com/case/dnf/claims

As for what is owed to USDA for April 2020, it is difficult to estimate an amount based on the proof of claims filed for Oct./Nov. 2019 because COVID-19 disruptions completely altered the milk marketing landscape in April.

While Class I sales were much higher in April 2020 compared with October and November 2019, the Class I base price was $5.00 per hundredweight lower in April vs. Oct./Nov. Also, the amount of milk diverted to the lowest class “dumpage and other use” category for April was enormous – at 350 million pounds across all Federal Orders, this was up 960% from a year ago and represented almost 2% of the entire U.S. milk supply in April (see related story in next week’s edition of Farmshine).

These factors would most assuredly reduce the Dean settlement fund obligations to the FMMOs for April 2020 as compared with “normal conditions”. However, the marketing, transportation credits and MilkPEP checkoff obligations were likely higher in April than last fall.

Producers and state and federal sources indicate that the remaining skeleton staff for Dean Foods, post-sale, has been helpful in keeping lines of communication open. Each step of the way, independent producers, producer groups, state boards and others received information about the process and its potential timelines.

In the case of the independent shippers, at least, the Dean estate paid them the first week of June after letters were sent the week prior, indicating potential payment by mid-June.

State and regional organizations, such as Farm Bureaus, milk marketing boards, state departments of agriculture, and others had written letters to the bankruptcy court and the Dean estate, and articles about the unfolding situation had also been provided, leading up to Dean’s communication with producers and ultimately these payments to independent shippers being made.

As well, the bankruptcy court docket, hearing process, and bidding process seem to have been transparent, for the most part, albeit extremely complex.

In spite of this transparency, bidders other than Dairy Farmers of America (DFA) were not privy to details needed about payables for some of the Dean plants – information that was critical to putting together financing for potential bids. Furthermore, the 44-plant lump-bid by DFA provided an edge to win plants that had multiple contending bidders by lumping them together with plants that had no contending bidders.

What remains unclear is how the more than $100 million dollars, Dean owes to DFA will be handled in relation to DFA’s purchase of substantially most of Dean’s plants and assets at a price of $433 million. The U.S. Department of Justice (DOJ) approved the sale, with the stipulation that three plants located in Wisconsin, Illinois and Massachusetts be divested.

Dean-DFA_plants (2)

The map of Dean Foods plants as provided by Dean Foods after its bankruptcy filing last November juxtaposed with the map of DFA plants — both wholly owned and affiliated — according to locations listed as such or otherwise publicly available.

Through the Chapter 11 bankruptcy sale process, which was consummated the first week of May 2020, 44 of Dean Foods’ 57 milk plants (including all seven licensed to buy milk from Pennsylvania farms) were acquired by DFA, the nation’s largest milk cooperative, headquartered in Kansas City, Kansas accounting for one-third of the U.S. raw milk supply with members nationwide and sales nationally and internationally. DFA was Dean’s largest milk supplier and the Dean accounts represented DFA’s largest milk buyer, according to court documents.

Eight Dean plants and other assets were acquired by Prairie Farms, a milk cooperative headquartered in Edwardsville, Illinois with members as far south and east as Kentucky to as far north and west as Minnesota, marketing products in at least 14 states. Several years ago, DFA and Prairie Farms jointly purchased and incorporated the previously family-owned Hiland Dairy Foods, headquartered in Kansas City, Missouri, with its 17 fluid milk and dairy plants and 51 distribution centers that together stretch through the Heartland from Texas to South Dakota.

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USDA communicates with DOJ as Dean ‘Estate’ misses final payments on April milk; lawsuit filed to block sale to DFA

deanfoods

By Sherry Bunting, Farmshine, May 22, 2020

HOUSTON, Tex. — Dean is a dead duck, with an estate. The ‘pools’ (no pun intended), in which it reigned as top duck — and most of the pool toys it gathered over the past 20 years — have been sold to its largest supplier, Dairy Farmers of America (DFA), leaving just the Dean Foods (Southern Foods Group) Estate to settle its affairs, including paying farmers for April milk sold in good faith.

But the funds to do that are locked into the Chapter 11 plan handling all manner of administrative expense claims that could take days, weeks or months to sort out. Part of the issue is that the super-priority credit facility of $850 million was extended to Dean to keep operating before sale. Now the sale is consummated, and that credit facility is not being used for critical vendors. In fact, what was used of the $850 million becomes the first post-petition debt to settle.

Meanwhile, dairy farmers are looking at their contracts and the regulated pricing structures and even those states with bonding and wondering what recourse they have for payment. Most have no recourse. In states like Pennsylvania, there is bonding of licensed milk buyers through the Pennsylvania Milk Marketing Board, and it is a complex process.

On a recent DMI ‘open mic’ call for producers, Jim Mulhern of National Milk Producers Federation was a guest. He said they have looked into whether the Packers and Stockyards Act guaranteeing prompt payment for livestock could be use. It can’t, he said. There is no national insurance-bonding of milk buyers like there is for meat and poultry.

Not only did Dean milk suppliers not receive payment, cooperative handlers also went without payment, and the Federal Order pools in which Dean Foods is regulated did not receive their settlement payments. This then affects payments to handlers from the pool for April milk, which in turn affects other dairy producers paid by those other handlers.

Dean Foods did pay the April advance – the first of two monthly checks paid to dairy farmers. But the settlement funds for April milk due mid-May have not been paid, and Federal Milk Marketing Orders have established dates in each milk marketing area of the country stating when the settlement payments are made to the pool, when the handlers are paid from the pool and when the producers are paid by the handlers.

All of those dates for all Federal Milk Marketing Orders have now passed as of May 19, and Dean Foods’ Estate has not honored any of these April milk settlement obligations.

According to USDA Dairy Programs, “Dean Foods, DIP, (Dean) is fully regulated in all Federal milk marketing orders except the Pacific Northwest and Arizona. Dean did not make payment into the Producer Settlement Fund (PSF) for April pooled milk to any FMMO where it is fully regulated.”

USDA also confirms that, “Dean is responsible for paying the blend price to the independent producers who supply its plants. That payment is not contingent on whether or not Dean pays into the Producer Settlement Fund.”

Dairy farmers that ship to Dean Foods confirm no payment has been received, and the Pa. Milk Marketing Board confirms being notified of the same as it regulates these payments in Pennsylvania as well.

USDA indicates that it is “closely monitoring the situation and is keenly aware of the impact this failure to pay has on the dairy industry.”

Furthermore, USDA is continuing to consult with the Department of Justice in an effort to work within the confines of the bankruptcy laws to recoup monies owed to the Pool Settlement Funds.

UNITED STATES DEPARTMENT OF AGRICULTUREHandlers were notified by USDA via memorandum (see Order 5 example of what went out to all FMMO handlers above). They were notified of the non-payment and the pro-ration of available producer settlement monies.

Some handlers have indicated this affects their funds to pay their producers by 20 to 30% for April milk.

In Pennsylvania, where there is bonding through the Pa. Milk Marketing Board, every bond claim is unique and fact-dependent, so there’s no set time that has to pass before a claim is made.

Activity reports are not due to the Pa. Milk Marketing Board until May 25, so a bond claim cannot be made for Pennsylvania milk until the PMMB knows how much is owed.

On the national side, USDA confirms that Dean did timely file its milk receipts and utilization report for April, but these figures are confidential and proprietary, so the amounts owed to farmers and the Producer Settlement Fund are not known.

While USDA is communicating with the U.S. Department of Justice on this, the PMMB is reportedly doing their best to communicate and work with Dean to determine if there’s anything it can do — short of the agency filing a bond claim to have Pennsylvania producers paid. There are four Dean plants in Pennsylvania and at least two out-of-state plants, including one in New Jersey, receiving milk from Pennsylvania and surrounding states.

For Dean’s part, Gary Rahlfs is the chief financial officer overseeing the “winding down” of the Dean Foods Estate. In an email reply early this week, he referred to the May 6 public announcement at the Dean restructuring website after the sale of plants and other assets was completed that week, stating: “Dean Foods anticipates that the plan will provide for the full payment of all administrative expense claims in several months (following the repayment of its senior secured super-priority post-petition financing facility) as proceeds continue to come into the Dean Foods Estate.”

In addition to the public announcement, Rahlfs confirmed that administrative expense claims do include the payments Dean owes for April milk and many other payables.

“We are working diligently to ensure this process and the payments are made as quickly as possible,” Rahlfs wrote in an email response to Farmshine.

Unfortunately, it appears from the wording of the announcement that this could take several months, and the super-priority credit facility Dean used to continue operations during the bankruptcy sale process is being prioritized for repayment as income comes in from sale of assets and prior sales of product during this “winding down” plan for the bankruptcy.

All through the bankruptcy and sale proceedings in the Southern District of Texas, Judge David Jones referred often to how it was a priority of his to ensure a sale process that would not leave schoolchildren without milk and would not leave farmers without markets or employees without jobs. He talked often of fond memories as a child of milk delivered by the milkman.

In fact, this is one reason, Judge Jones approved retainment bonuses for professional staff to be sure that the people who understand the milk business would continue in their positions so the company and its 57 plants would remain in operation and viable during the bankruptcy sale to avoid the chaos that would result if the company fell into Chapter 7 status.

However, a detail left hanging is the final payment to farmers and cooperatives supplying milk to Dean Foods.

Back in November, when Dean Foods filed under Chapter 11, farmers had many questions about whether or not they would continue to be paid for milk. Credit facility of $850 million was secured, and the court gave permission to use income and credit facility for day to day operations to pay employees and critical vendors, including farmers.

Dean Foods Raw Milk Supplier FAQ — First Day

In fact, a Raw Milk Supplier FAQ dated November 2019 still searchable in a cache file of the Dean restructuring website stated (as shown above) states: “We intend to pay suppliers in full under normal terms for goods and services provided after the filing date (Nov. 12).”

That language is no longer readily shown on the website. It was replaced when DFA became heir-apparent by a completely new and different Raw Milk Supplier FAQ dated February 2020.

While DFA, the buyer of 44 of the 57 Dean plants at a price of $433 million, has been Dean Foods’ largest milk supplier, the company also has many independent family farm shippers throughout the Northeast, Southeast and across the country. All are left waiting for payment at a time when they’ve already come through five years of low income and below-break-even prices and at a time when they are taking further losses in milk pricing and additional marketing costs due to the COVID-19 pandemic.

In a separate action this week, a lawsuit was filed for an injunction against the sale of 44 of Dean’s 57 plants to DFA. The lawsuit was filed by Food Lion and Maryland Virginia Milk Producers Cooperative in Federal District Court for Middle North Carolina in Greensboro Tuesday, May 19.

The lawsuit states that DFA’s ownership of Dean’s milk plants is the “coup de grâce (final blow) for competition” in fluid milk markets, arguing the merger gives DFA monopoly over the dairy supply chain, the death of the independent, family-owned dairy farms, and higher prices ultimately for consumers.

Plaintiffs are specifically asking the Court to grant a preliminary injunction to block the sale and want DFA to divest at least one of the Dean facilities in the Carolinas to an unaffiliated independent purchaser.

“This action arises out of Defendant Dairy Farmers of America, Inc.’s (“DFA”) longstanding effort to seize control of the milk supply chain. Indeed, for the past two decades, DFA has rapidly consolidated and dominated the market for the supply of raw milk not by competing on the merits, but through unlawful conduct and anti-competitive agreements through which it has gained near-complete control over the purchasing of key nationwide milk processors,” the plaintiffs state in their filing.

“This anti-competitive campaign has allowed DFA to transform itself from a modest regional dairy cooperative into the Standard Oil of the modern dairy industry.”

The U.S. Department of Justice (DOJ) already approved the deal three weeks ago with the stipulation that three plants in Wisconsin, Illinois and Massachusetts be divested from the 44-plant DFA purchase.

Prior to the bankruptcy and sale, Dean Foods was DFA’s largest customer and DFA was Dean Food’s largest milk-supplier.

“Their partnership was forged through a corrupt bargain entered into at the time of a prior merger between Dean and another dairy processing giant, in order to avoid U.S. Department of Justice (“DOJ”) scrutiny through subterfuge and deception,” the plaintiffs state.

“On May 1, 2020, DFA and Dean closed on the Asset Sale, transforming DFA overnight into both the largest milk producer and the largest milk processor in the United States,” plaintiffs continue. “With capability to wield market power at two levels of the supply chain, DFA now has both the ability and the incentive to wipe out any remaining pockets of competition.”

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U.S. Ag Secretary Perdue: Small farms face difficult times

U.S. Secretary of Agriculture Sonny Perdue (right) and Wisconsin Secretary of Agriculture and Trade Brad Pfaff field questions and take in comments at dairy town hall meeting early Tuesday morning on the official first day of the 53rd World Dairy Expo in Madison, Wisconsin. Photo by Sherry Bunting

By Sherry Bunting, Farmshine, Friday, Oct. 4, 2019

MADISON, Wis. – Grabbing the headlines from a town hall meeting with U.S. Ag Secretary Sonny Perdue during the opening day of the 53rd World Dairy Expo, here in Madison, Wisconsin, was a comment the Secretary made about the viability of small family farms.

He was asked whether they will survive. To which he answered, “Yes, but they’ll have to adapt.”

In fact, the Secretary said that the capital needs and environmental regulations that impact farms today make it difficult for smaller farms to survive milking 50 to 100 cows.

“What we’ve seen is the number of dairy farms going down, but the number of dairy cows has not,” said Perdue. “Dairy farms are getting larger, and smaller farms are going out.”

But in additional discussion, Perdue said that consumers want local products. He said that marketing local, even without the buzzwords, can be done successfully to bring value to farms.

He noted two things about dairy farms. First, they can’t be sustainable without profitability and second, he described the dairy industry as prone to oversupply.

Picking up on these comments, recently retired northwest Wisconsin dairy producer Karen Schauf said Farm Bureau is looking at the Federal Milk Marketing Orders and how make some adjustments on the milk pricing.

“But what we really need to do is balance supply and demand of dairy products much closer,” she said. “I would ask if you would support a flexible mandatory supply management system to help producers keep that supply and demand in closer relationship.”

Perdue asked if she wanted the short answer or the long answer, stating that when his children want a quick answer, it’s always “no.”

Schauf replied, “Mr. Secretary, I just want you to think about it.” The subject went no further.

At another point in the questioning, a Wisconsin producer observed the disheartening price levels and said last year was a record high level of exports, while prices to farmers were worse than this year and worse than 2017.

He noted that exports hit 17.6% of milk produced, and settled out at 16% last year, which is a record, but his milk price averaged $14.60. He went on to say that, “our exports are off 2% this year, but I’ll probably come close to an average of $17 on my milk price.” He also noted that National Milk Producers Federation recently put out a press release stating 2015-18 as record years in domestic dairy consumption.

“This is all good,” the dairy farmer said, “but in Wisconsin we are losing 2.5 farms per day and I think the call centers are full with distressed farmers calling in, so beyond trade and some of these things you promote at the federal level, what can we be looking at so we never experience another five years like this?”

Perdue thanked the producer for his facts and said it is amazing that things “can be good and yet feel so bad.” He acknowledged that dairy has been under the most stress, and he said that the 2018 Farm Bill did “exactly the right thing” with the new Dairy Margin Coverage. He pointed out that this coverage is specifically in place for smaller dairy farms.

“Milk prices are cyclical, and I think we’ve met that trough, and things will improve for 2020,” said Perdue.

Referencing the 2% milk on the table in front of him, Perdue said: “You pretty much know what happened to milk in our schools, with the whole milk and the accusations about fat in milk. We hope to get some benefit, maybe, from the Dietary Guidelines this year, which drive a lot of this conversation.”

Noting that USDA “is leading” the Dietary Guidelines along with Health and Human Services, the Secretary said: “We have a great panel and they will bring together the best scientific facts about what is healthy, wholesome and nutritious for our young people and our older people  and all of us, so we’re looking forward to that.”

On trade, the Secretary was hopeful. He cited the recent trade agreement with Japan, but did not have exact numbers for dairy, just that it will be beneficial for dairy. On China, he was optimistic and said progress is being made, but that it has been important to take this stand because they have been “cheating” and are “toying with us.”

One area he mentioned in regard to trade with China is that U.S. agriculture has become too dependent on “what China will do.” He said the administration is really working on trade with other nations in the Pacific and elsewhere that do not represent such large chunks as to disrupt or distort markets as they come in and out of the game. This has held true for dairy exports from the U.S., which are rising in so many other parts of the world.

On the USMCA, Perdue said the outcome will depend on whether the Speaker of the House brings it to the floor for a vote. “It will pass both caucuses, but it has to come to the floor. We hope to see that happen by the end of the year, that distractions won’t get in the way,” said Perdue.

The town hall meeting covered a wide range of other questions and comments, and often, the answer to the toughest questions was “it’s complicated and we’ll be happy to look into it.”

On the Market Facilitation Program, several had questions about why alfalfa-grass is not included as a crop, just straight alfalfa. Perdue explained that alfalfa is a crop exported to China and that the crops in the eligible crops for MFP payments have to be “specifically enumerated.”

As with other questions, he emphasized the local FSA Committees who implement some of the more subjective pieces of these programs that farmers can appeal to their local committees if they’ve been denied.

In the prevent plant flexibilities for harvesting forage, Perdue said USDA is looking at this as perhaps something to be made permanent – the ability to harvest forage on prevent plant acres in September rather than waiting until Nov. 1.

Paul Bauer from Ellsworth Cooperative Creamery focused his comments on the spread between Cheddar blocks and barrels on the CME and how this is deflating the price paid to dairy farmers – especially in Wisconsin – but also across the U.S. because of how it affects the Class III pricing formula.

“For the last four years, the spread between blocks and barrels has been greater than 12 cents. Historically, the spread has been three cents or less per pound for the prior 50 years,” he said, noting that the spread at the end of the previous week stood at just shy of 35 cents per pound!

“The common thought is that this bounces back to a normal range, but it doesn’t,” said Bauer, noting that last year’s average spread cost dairy farmers 60 cents per hundredweight on their milk price. “Those farmers who ship to barrel plants, such as Ellsworth Cooperative Creamery, were affected by $1.20/cwt on their milk price due to this wide spread.

He noted that last week’s 34 ¾ cent spread between blocks and barrels cost dairy farmers $3.40/cwt, which is 20% of their base price.

Acknowledging that this is a complex issue, Bauer asked the Secretary if USDA will take the first step and admit there is a problem instead of “rolling their eyes because of the complexity.”

“This is unfavorable to our farmers and unfair to our producers,” said Bauer, explaining that all dairy products are priced off the block-barrel on the CME, ultimately.

“It’s important to get it right,” said Bauer, explaining that it is a problem when the industry can build barrel inventory to create this divergence in block / barrel prices on the CME, which in turn suppresses the price they pay to producers for the milk used in a multitude of other “modern” products.

“Barrel production comes from 16 plants (nationwide), and represents 6% of the nation’s dairy supply, and yet has had a 58% of the impact on all producers’ milk checks,” said Bauer. “When the system is out of sync, that negative value affects us all.

“It’s time for USDA to formally take action and for the data to come to light that are influencing the market,” said Bauer. 

He explained that the system is there to protect farmers and local buyers but is now being influenced by foreign cooperatives that keep one product – barrels – in oversupply in order to keep milk prices lower for products that are priced off the higher blocks in short supply. 

Bauer said the secrecy of buyers and sellers on the CME protects this practice. “It’s time to update the system to keep up with modern times to protect our farmers and our food supply also in terms of quality and safety.” 

Secretary Perdue drew laughter when he asked Bauer: “Would you repeat the question?”  But he took it in and asked for a written copy of the question to look into it. Perdue said that concerns are often raised about the Federal Milk Marketing Orders.

“They are a fairly complex issue, but we’d be happy to investigate. The government’s role in general is to be the balance between the producer and the consumer and ensure no predatory pricing practices,” said Perdue, “while not interfering with commerce and contracts.”

He gave the example of the fire at the Tyson beef plant in Holcomb, Kansas and the staggering loss to cattle prices since that fire over a month ago that have resulted in packer margins at an unprecedented $600 per head.

“We saw a spike in the delta – the difference between the live cattle price and the boxed beef price at historic highs, and we are investigating that, to make sure there was no pricing collusion,” said Perdue. “I’ve asked those packers to come in and give me their side of the story. That’s the role of USDA.”

Pete Hardin of the Milkweed asked about the cell cultured meat, citing a publicized comment by the Secretary last summer pointing to the value of this science. Hardin asked if any studies have been done on the safety of this technology.

Perdue did not know if any specific studies have been done, and he confessed to trying an Impossible Burger, adding “There’s now one restaurant I no longer attend.”

He stressed that these products cater to people who aren’t eating meat anyway for whatever reason, and he said: “In the end, consumers will be the ones to choose.”

Picking up on this in a separate question about how dairy and livestock farms can remain viable with all of the imitation products competing for consumers, the Secretary observed that, “As farmers we are independent and like to sit behind the farm gate and produce the best, most nutritious food in the world at the lowest cost anywhere in the world, but we’ve never told the story.

“It’s up to every one of us to speak out locally and statewide and federally, nationally in that area and tell the story of what’s happening. No longer can we hide behind the curtain,” said Perdue. 

“There’s a growing movement about knowing how you do your job, what’s in the milk, how the animals are treated, and there’s no going back from that. We have to engage with consumers. We have to tell the story loudly and proudly.”

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