Dairy situation analysis: What’s up with milk production?

Record high milk growth vs. record high losses, dissected

By Sherry Bunting, both parts of a two-part series in Farmshine, July 2021

The dairy industry continues to wait for USDA to provide details on three areas of dairy assistance already approved by Congress or mentioned as “on the way” by Ag Secretary Tom Vilsack.

The fly in the ointment, however, is the record-high 2021 milk production (Table 1) and accelerated growth in cow numbers (Table 2) at a pace the recent USDA World Agriculture Supply and Demand Estimates (WASDE) expect to continue into 2022.

USDA is reportedly looking at production reports — up vs. year ago by 1.9% in March, 3.5% in April, 4.6% in May — to determine how to assist without adding fuel to expansion that could threaten late 2021 milk prices in the face of rising feed costs and a worsening western drought. (The latter two challenges could temper those forecasts in future WASDEs.)

May milk production a stunner

U.S. milk production totaled 19.9 billion pounds in May. This is a whopping 4.6% increase above 2020 and 2018 and a 4.1% increase over May 2019.

Let’s look at year-to-date. For the first five months of 2021, milk totaled 96 billion pounds, up 2.3% vs. the 93.8 billion pounds for Jan-May of 2020, and it is 4.4% greater than the 91.9 billion pounds of Jan-May milk produced in pre-pandemic 2018 and 2019. Of the four years, only 2020 had the extra production day as a Leap Year.

Milk per cow was up 3% over year ago in May. Compared with 2019, output per cow is up 2.2%, according to USDA.

Cow numbers vs. 2018 tell the story

Milk cows on U.S. dairies in May 2021 totaled 9.5 million head, up 145,000 from May 2020’s 9.36 million, up 172,000 from 2019’s 9.33 million, and up 83,000 head from 2018’s 9.42 million.

Counter to the national trend, Pennsylvania had 48,000 fewer milk cows than May 2018 — dropping 30,000 into 2019; 10,000 into 2020, and 8,000 into 2021.

Elsewhere in the Northeast and Southeast milksheds, among the 24 major monthly-reported states, New York had 4000 more milk cows in May 2021 than 2018, Vermont 8000 fewer. Georgia dropped 1000, Florida 12,000, and Virginia 11,000. In the Central states, Illinois was down 10,000 head.

The total decline in cow numbers for the 24 lesser quarterly-reported states, the collective loss in cow numbers is 59,000 head from May 2018 to May 2021

Accelerated growth is coming from three key areas where major new processing assets have been built or expanded.

In the Mideast, where the new Glanbia-DFA-Select plant became fully operational in Michigan this spring, there is a net gain of 32,000 cows for 2021 vs. 2018, Ohio’s cow numbers that had been declining 2018-19, began recovering in 2020-21. Indiana had 18 months of substantial growth, and Michigan returned to its growth pattern in 2020. Taken together, the Indiana-Ohio-Michigan region had a loss of 8,000 cows heading into 2020, but gained a whopping 40,000 cows over the past year.

In the Central Plains, where new plant capacity is starting up this spring and summer — Minnesota, South Dakota and Iowa, combined, added 40,000 cows May 2018 to May 2021.

In the Southern Plains, where joint-venture processing capacity continues to grow, Texas has continued full-steam-ahead, gaining 87,000 cows from 2018 to 2021, along with 29,000 added in Colorado and 17,000 in Kansas. New Mexico regained earlier losses to be 2000-head shy of 2018.

The growth patterns in these regions somewhat mirrored dairy exits from other areas — until Jan. 2020 (Table 2). The past 17 consecutive months of year-over-year increases in cow numbers leave the U.S. herd at its largest number in 26 years (1995).

However, the assumption that ‘dairy producers are okay because the industry is expanding’ ignores several essential factors. The playing field has become more complicated and inequitable. There are four main factors at play. We’ll look at them one at a time.

Ben Butler of South Florida posted this photo that went viral on Twitter April 2, 2020 of milk being dumped in Florida because there was no home for it. A few days later, he tweeted photos of milk gallons also being donated to Palm Beach County families in need. Challenges abound in the dairy supply chain. The unofficial tally of milk dumped in the Northeast and Mid-Atlantic region the first week of April 2020 was north of 200 loads, with additional reports of 130 loads dumped in the Southeast. Meanwhile, stores were not well stocked, most were limiting purchases and foodbanks were getting more requests as over 10 million people were newly out of work.

Factor #1 — Milk dumping and base programs 

A year ago in April and May 2020 — at the height of the Coronavirus pandemic disruptions — the dairy industry saw dumping of milk, stricter base programs and bigger milk check deductions. Producers culled cows, dried cows off early, changed their feeding programs, even fed milk in dairy rations.

But milk production still grew, according to the USDA data.

Some cooperatives and milk buyers, like Land O’Lakes, had base programs already in place and triggered them. Others made changes to prior programs or implemented new ones.

Dairy Farmers of America — the nation’s largest milk cooperative, largest North American dairy processor and third-ranked globally by Rabobank — quickly implemented a new base program in May 2020, seeking 10 to 15% in production cuts from members, varying by region, with overage priced on ‘market conditions.’

It is difficult to assess the ‘equity’ in these base programs and the cross-layers among producers between and within regions, or to know how these ‘bases’ are being handled presently. When questioned, spokespersons say base decisions are set by regional boards.

Meanwhile, product inventory and pricing schemes affect all regions, and milk rides between FMMOs in tankers and packages — with ease.

According to USDA, the 11 FMMOs dumped and diverted 541 million pounds of milk pooled as ‘other use’, priced at Class IV, during the first five months of 2020, of which 350 million pounds were in April alone. This is more than three times the ‘other use’ milk reported by FMMOs during the first five months of pre-pandemic 2019 (171.4 million pounds). By June, the amounts were double previous years.

Of this, the largest amount, by far, was the 181 million pounds of ‘other use’ milk in the Northeast FMMO 1 during Jan-May 2020, comprising one-third of all the dumped and diverted milk pooled across all 11 FMMOs in that 5-month period.

In the Southeast milkshed, the Appalachian, Florida and Southeast FMMOs 5, 6 and 7, together pooled 88 million pounds of ‘other use’ milk in the first five months of 2020. The Southwest FMMO 126 had 106.2 million pounds of ‘other use’ milk; Upper Midwest FMMO 30 had 46.1 million pounds; Central FMMO 32 had 36.7 million pounds; Mideast FMMO 33 had 30.7 million pounds; California FMMO 51 had 28.9 million pounds; Arizona FMMO 131 had 21.7 million pounds; and Pacific Northwest FMMO 124 had 1.3 million pounds.

The dumping had begun the last week of March 2020 and was heaviest in the month of April. Producers also saw deductions as high as $2/cwt. for balancing costs, lost quality premiums, and increased milk hauling costs. Unaccounted for, were the pounds of milk that had reportedly been dumped on farms without being pooled on FMMOs.

All of this against a backdrop of pandemic bottlenecks and record-high March-through-August imports of butter, butteroil, milkfat powder, and blends — adding to record-high U.S. butter inventories and contributing to the plunging Class IV, II and I prices vs. Class III (PPD).

Meanwhile, not only did production growth in key areas move ahead, so did strategic global partnerships. Just one puzzling example in October 2020, after eight months of deflated producer milk checks, depressed butterfat value, burdensome butter inventory, record butterfat imports, and a plunging Class IV milk price that contributed to negative producer price differential (PPD) losses, Land O’Lakes inked a deal to market and distribute cooking creams and cream cheeses — Class II and IV products that use butterfat — from New Zealand’s Fonterra into United States foodservice accounts.

The New Zealand press reports were gleeful, citing this as a big breakthrough that could be followed by other of their cheeses entering the “huge” U.S. foodservice market through the Land O’Lakes distribution.

Factor #2 — Class price wars and de-pooling

As reported in Farmshine last summer, dairy farmers found themselves in uncharted waters. As Class IV prices tumbled from the get-go with all of the ‘other use’ dumping and diverting, butter inventory building as butter/powder plants tried to keep up with diverted loads at a disruptive time, the USDA Food Box program started drawing products in the second half of May, and really got going by July 2020. 

Cheese, a Class III product, was a big Food Box winner. The cheese-driven Class III milk price rallied $7 to $10 above Class IV, and massive volumes of milk were de-pooled by Class III handlers, which has continued through May 2021.

Reviewing the class utilization reports, an estimated 80 billion pounds of Class III milk normally associated with FMMOs has been de-pooled over the past 26 months.

At the start of this ‘inequitable’ situation, academic webinars sought to explain it.

“We’re seeing milk class wars,” said economist Dan Basse of AgResource Company, a domestic and international ag research firm in Chicago, during a PDPW Dairy Signal webinar a year ago. 

He noted that under the current four-class pricing system, and the new way of calculating the Class I Mover, dairy farmers found themselves “living on the edge, not knowing what the PPD (Producer Price Differential) will be” (and wondering where that market revenue goes).

“A $7.00 per hundredweight discount is a lot of capital, a lot of income and a lot of margin to lose with no way to hedge for it, no way to protect it, when the losses are not being made up at home as reflected in the PPD,” Basse said in that summer 2020 webinar.

What does this have to do with year-over-year milk production comparisons?

Two words: Winners. Losers. 

Some handlers, and producers won, others lost — between and within regions.

Here’s why all of this matters from a production comparison standpoint: Dairy economists — Dr. Mark Stephenson, University of Wisconsin, and Dr. Marin Bozic, University of Minnesota — are both on record acknowledging that USDA NASS uses FMMO settlement data, along with producer surveys, to benchmark monthly milk production.

So, on the one hand: How accurate are these data for comparison over the past 26 months, given the inconsistent FMMO data from dumping, diverting and de-pooling? 

On the other hand: Did the negative PPDs and de-pooling, resulting in part from the 2018 Farm Bill change in the Class I Mover, allow Class III handlers to capture all of that additional market value and use it to fuel the 2020-21 accelerated milk growth for regions and entities connected to the new Class III processing assets?

Factor #3 — New dual-processing concentrates growth

Accelerated growth in cow numbers is fueling record production in 2021. It is patterned around ‘waves’ of major new processing investments in some areas, while other areas — largely fluid milk regions — are withering on the vine or growing by smaller margins with fewer cows. 

In the 24 major milk states, production growth was even greater than the All-U.S. total — up 4.9% vs. year ago. In part one, the breakdown was shown vs. 2018.

Here’s the breakdown for just the 12 months from May 2020 to May 2021 — a time in which the industry dealt divergences that created steep losses for some and big gains for others, while FMMOs became dysfunctional. 

In just one year, over 40,000 cows were added in Indiana, Ohio, and Michigan, combined, and milk production was up in May 2021 by 12.6, 3.2 and 5.1%, respectively. The draw is the massive new Glanbia-DFA-Select joint-venture cheese and ingredient plant that began operations late last year in St. Johns, Michigan. Sources indicate it reached full capacity this spring. Add to this the 2018 Walmart fluid milk plant in Fort Wayne, Indiana and other expansions in Ohio and Michigan.

Ditto for the Central Plains, where new cheese and ingredient line capacity became operational this spring and summer. Supplying these investments, Minnesota grew production 6%, South Dakota 14.6%, and Iowa 6.2% over year ago. 

Number two Wisconsin grew by 5.6% in May 2021 vs. year ago.

Milk production was up 5% in number one California, even though cow numbers were down by 1000 head, and dairy farmers in a referendum voted recently by a slim margin to keep their quota system. They are also dealing with a devastating drought that news reports indicate is now impacting both the dairies and the almond growers.

Then there’s Texas, where growth continues to be a double-digit steamroller, up 10.8% in May 2021 vs. 2020 — pushing New York (up 4.2%) to fifth rank. 

The Southern Plains has had several strategic investments, starting in Texas and New Mexico (up 6% vs. year ago).

In Colorado, where production was up 5.3% in May, DFA’s joint ventures and strategic partnerships with Leprino, Kroger and others have fueled growth.

Kansas grew milk production 7.3% vs. year ago. In 2018, a state-of-the-art whole milk powder and ingredient plant became fully operational in Garden City, Kansas. The plant was to be a joint-venture between DFA and the Chinese company Yili but ended up as a joint-venture between DFA and 12 of its member farms that are among the 21 Kansas dairies shipping milk to it.

DFA’s Ed Gallagher gave some insights on this during a May 2021 Hoards webinar. He said, “We went through a period of investing in powder plants in the U.S. It seems like there is a follow-the-leader approach when deciding on investments, and it goes in waves. The industry just completed a wave of a lot of investment in Class IV manufacturing plants, and now… it’s flipping to Class III.”

Looking back on the Class IV ‘wave’ 2013 through 2018, there were several times in those years that Class IV beat Class III, leading to FMMO de-pooling, but not to the extreme extent seen in the past 12 months as Class III now beats all other classes, including Class I, leading to negative producer price differentials (PPDs).

Gallagher sees Class III and IV prices “coming together” in the “next period of years” because the ‘wave’ of capacity investment has flipped from Class IV to III. He predicted more Class III capacity will be added.

Are these past 26 months of PPD net losses for producers the industry’s answer to, in effect, increasing processor ‘make allowances’ without a hearing?

The average PPD value loss (see chart) across the seven multiple component pricing FMMOs was $2.57 per hundredweight for 26 months, which began with implementation of the new Class I pricing method May 2019 through the most recent uniform price announcements for June 2021 milk. 

Applying a conservative 5-year average PPD (prior to Class I change) for each FMMO, only the few gray blocks on the chart represent ‘normal.’

This means even positive-PPDs show margin loss for farm milk pooled on FMMOs. In fact, the CME futures markets as of July 14 show August through December divergence between Class III and IV above the $1.48 mark, indicating Class I value loss and negative PPDs or smaller positive PPDs could return after barely a two-month reprieve.

Many handlers that don’t pool on FMMOs also use the uniform prices as a benchmark.

This $2.57 net loss for seven MCP FMMOs across 26 months represents almost a doubling of the current make allowance levels.

Current USDA make allowances and yield factors add up to a processor credit of $3.17 per hundredweight on Class III and $2.17 on Class IV. This already represents 11 to 25% of farm milk value, according to 2018 analysis by John Newton, when he was Farm Bureau’s chief economist.

Why is this important? Because we are already seeing additional margin transfer from Class I to Class IV as the industry moves to blended beverages that mostly use ultrafiltered (UF) milk solids. Blends using whey would fall under Class III.

Looking ahead, DFA now owns most of the former Dean Foods’ Class I fluid milk plants since May 2020. New manufacturing synergies are undeniable, considering the direction of dairy checkoff’s fluid milk revitalization plan emphasizing these dairy-based-and-blended beverages and ‘dual-purpose’ processing facilities. 

Dairy + Almond is a Live Real Farms beverage made by DFA and was launched through DMI’s Innovation Center with checkoff funds paid by all dairy farmers. The milk in this beverage is not priced as Class I, though it competes in the dairy case and is being promoted as a “Purely Perfect Blend.”

As low-fat UF milk solids are blended with other ingredients in a manufacturing process to make new combined beverages, the result is a competing beverage, and the milk in the beverage drops from Class I to Class IV.

Meanwhile, these beverages cost more at the grocery store, and the ingredients are not part of the USDA end-product pricing ‘circle’. Therefore, no new make allowances should be requested because processors are already getting a reduced class value, and a higher margin.

DMI’ vice president of global innovation partnerships, Paul Ziemnisky, gave some insights into this “future of dairy beverages” — and how it ties into new processing plants investments during the virtual Pennsylvania Dairy Summit in February.

Ziemnisky went so far as to say new processing facilities will “need to be built as beverage plants able to handle all kinds of ingredients” for the blended products of the future. In essence, he said, the future of fluid milk is “dual purpose” processing plants.

DMI’s usdairy.com website touts the checkoff launches of ‘blended’ dairy-‘based’ beverages — key to DMI’s fluid milk revitalization plan. Not flavorings, these blends dilute milk out of Class I, the highest farm-level pricing, and mainly into Class IV, the lowest. The resulting beverages compete in the dairy cooler with Class I fluid milk. Screen view

While 11 of the top 24 states had milk production increases of 5% or more in May, the 13 states with increases below 5%, or negative, are mainly located within traditional Class I fluid milk marketing areas: Florida, up 0.5%, Georgia up 2%, Virginia down 2.3%, Illinois up 1.9%, Arizona, down 0.5%, Washington, down 0.9%, Pennsylvania and Vermont both up 1.8%, and New York up 4.2%. 

Idaho and Utah, up 2% and unchanged, are outliers and largely unregulated by FMMOs. Some beverage assets are coming to that region in the form of ultra-filtration and aseptic packaging, including a plant renovation to make Darigold’s FIT beverage. Additionally, a new Fairlife filtration membrane plant was opened near Phoenix, Arizona in March, and Kroger is doing filtration and aseptic packaging in Colorado.

Meanwhile, Pennsylvania is often described as a ‘fluid milk state’ with a Milk Marketing Board setting minimum prices for fluid milk, and a string of independent milk bottlers that figure prominently in their communities.

Ranked fourth in milk production in 2006, Pennsylvania was passed by Idaho in 2007. By 2016, Michigan had pushed Pennsylvania to sixth. The very next year, in 2017, Texas leapfrogged both Pennsylvania and Michigan. Now, Minnesota has pushed the Keystone State to eighth.

How does the future of dairy affect traditionally ‘fluid milk’ states like Pennsylvania, or the Southeast for that matter?

New dairy-‘based’ beverage innovations can be made anywhere and delivered anywhere, often as shelf-stable products. Most are not Class I products unless they meet the strict FMMO definition which was last spelled out in the USDA AMS 2010 final rule. 

For now, this also includes the Pa. Milk Marketing Board. Executive secretary Carol Hardbarger confirms that the 50/50 drinks are not regulated under PMMB, which generally uses federal classification, but that a legal interpretation of the Milk Marketing Law with regard to blends may be in order.

The 50/50 blends are already in some Pennsylvania stores and elsewhere in the Northeast, which is the second phase of the ‘undeniably, purely perfect’ marketing plan for fluid milk revitalization.

Factor #4 — USDA, industry coalesce around climate

Ag Secretary Tom Vilsack has been outspoken from the outset about using and aiming every available USDA program dollar in a way that also addresses the Biden administration’s strategies for equity, supply chain resiliency, and climate action.

Speculating a bit as to why USDA is taking so long to announce details about already funded dairy assistance, it could be that Sec. Vilsack is looking at the fit for ‘climate impact.’

Paid around a million a year in dairy checkoff funds to serve 4 four years as CEO of the U.S. Dairy Export Council — between prior and current Ag Secretary posts — Vilsack understands the future plans of the dairy industry’s checkoff-funded proprietary precompetitive alliances on a global scale. 

Vilsack has been privy to the DMI Innovation Center’s discussions of fluid milk revitalization through ‘dual purpose’ plants and blended beverages. He is no doubt looking at the accelerating growth in milk production that is occurring right now for ways to tie dairy assistance to measured climate impacts in the net-zero file.

Producers on the coasts and fringes of identified growth areas have a target — fresh fluid milk and other dairy products produced in regional food systems for consumers who have a renewed zeal for ‘local.’ Fresh fluid milk will have to find a path outside of the consolidating system and cut through the global climate-marketing to directly communicate fresh, local, sustainable messages about a region’s farms, animals, environments, businesses, economies, jobs and community fabric.

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Empowering dairy farmers: knowledge, tools, ideas shared

By Sherry Bunting, Farmshine, April 2021

GORDONVILLE, Pa. — Empowerment. One word with power in it.

“I got to thinking about introducing this session and thought everyone knows what empowerment means, right? Give power. But then I looked up the opposite of empowerment,” said Kristine Ranger, a consultant in Michigan working with farms and writing and evaluates grants. She traveled to Gordonville, Pennsylvania  with National Dairy Producers Organization board member Joe Arens to the farm of Mike Eby, NDPO chairman, for the ‘Empowering dairy farmers’ barn meeting Friday, April 23, 2021.

What is the opposite of empowerment?

“Here are the words in the dictionary,” said Ranger. “Disallow, forbid, hinder, inhibit, preclude, prevent and prohibit. Have any of you been experiencing any of that as you try to build a livelihood with your dairy farms?”

Good question.

From there, the daylong barn meeting moved headlong into weighty topics, but stayed focus on the positive concept of encouraging producer involvement in seeking accountability and transparency in the systems that govern dairy.

Although the sunshine and spring planting kept in-person attendance low, the event was livestreamed on visual and audio with producers listening in from all over.

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

A thought that kept surfacing in this reporter’s mind listening to the panel of speakers was this: The longer something goes uninterrupted, the more vulnerable it is to become corrupted.

In fact, it tied in directly with Arens’ personal account following Gary Genske on the program. Arens urged producers to look at annual reports and ask questions. “That’s what NDPO is all about, to support your efforts to get to the cooperative boards of directors about what they should be doing at the co-op level,” said Arens, a member of the NDPO board for two years.

“Members own the milk. Members have the power, but the whole thing has been tipped upside down,” said Arens.

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

“If producers do not hold their co-ops accountable, then silence is your consent,” said Genske, a certified public accountant since 1974 based in California with a dairy in New Mexico.

He kicked things off at the barn meeting, presenting details about the roles and responsibilities of cooperatives, boards and members. He shared his insights into improving dairy farm milk prices.

Genske is a longtime member of the NDPO board. He highlighted the marketing concepts of 100% USA seal for milk and dairy products, returning to the true standards for fat and components in beverage milk that are still used today in California, and moving toward aligning milk production with profitable demand.

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

The Genske Mulder firm does the financial statements for 2500 dairy farms each year and 10,000 farm tax returns annually. He sees the numbers and knows the deal.

Walking attendees through the various aspects of USDA regulation and the Capper Volstead Act, Genske gave producers the tools and encouragement to accept their responsibilities as cooperative members.

In October, he had a successful lawsuit in Kansas City. After requesting documents from the cooperative in which he is a member, and being denied or provided documents that were mostly redacted, he took the issue to court.

After a two-day hearing, the judge ruled in Genske’s favor on his request for documents, as a cooperative member, with a stated purpose.  

In short, Genske said, “We have to put people in the position of taking care of the members… We want to cull cows not dairy farmers.”

Bernie Morrissey, chairman of the Grassroots PA Dairy Advisory Committee talked after lunch about the 97 Milk effort when farmers empowered themselves to market whole milk, since no one else was; and all kinds of prohibiting, hindering, forbidding, preventing and precluding had been going on regarding whole milk availability and promotion.

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

“It started with Nelson Troutman who painted the first round bale, just like that sign: Drink Whole Milk 97% Fat Free,” said Morrissey pointing to the large banners and holding up the Drink Whole Milk School Lunch Choice Citizens for Immune Boosting Nutrition yard signs.

With a joint effort underway now for a little over two years – working to educate lawmakers and consumers about whole milk, and pushing efforts to legalize whole milk choice in schools — Morrissey said “It’s working. Things are happening.”

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

Dick Bylsma of National Farmers Organization (NFO) traveled from Indiana to brief producers on joint efforts between NFO, Farmers Union and Farm Bureau to empower dairy farmers by getting their individual votes back in Federal Order hearings. He traced the history of Federal Milk Marketing Orders, and the genesis of bloc voting at a time in history when there were hundreds of thousands of farmers and communication was slow.

“It’s time to end bloc voting,” said Bylsma, and he laid out some of the efforts underway around that proposition, also highlighting the purpose of the Federal Orders.

These are just some fast highlights from a day of deep learning. More from these speakers and additional speakers on co-op involvement, systems accountability, checkoff reforms and referendums, and other empowering topics — including more from Genske about ending the silence and exercising rights and responsibilities with communication tools that work for cooperative members — will be published in a future edition.

Similar in-person meetings recently encouraged producers in Michigan and northern Indiana, said Ranger.

For dairy producers who are interested in knowing more, want to get involved, but aren’t sure how, NDPO chairman Mike Eby suggests joining in on the NDPO weekly national Tuesday night call at 8:00 p.m. eastern time at 712-775-7035 Pin 330090#. Every dairy producer in America has a standing invitation.

To hear past calls and learn more, click here

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

Look for more in a future edition of Farmshine.

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Grassroots efforts continue seeking solution to Class I formula change losses

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

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

By Sherry Bunting, Farmshine, May 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IDFA is publicly silent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

— was not vetted through a transparent hearing process,

— disrupted orderly marketing,

— undermined Federal Order purpose,

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

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

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

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

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

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

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

By Sherry Bunting, Farmshine, April 30, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Covington: Class I change cost producers ‘real money’

Lack of vetting cited as impacts of negative PPDs continue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FMMOs in disarray

By Sherry Bunting, Farmshine, April 2, 2021

The efforts continue in hopes of addressing and rectifying the hundreds of millions of dollars in Class I value losses to dairy producers (net) over the last 23 months — due to the new Class I pricing method. But the window for a short-term fix is closing fast.

While the overall problem of severely negative PPDs has multiple reasons and resulted in well over $3 billion in milk payment shortfalls across 11 Federal Milk Marketing Orders (FMMOs), the loss attributed solely to the change in Class I pricing method is pegged at $732.8 million, NET, from May 2019 through April 2021, and looks to continue through most of 2021.

That is, unless a change is made – quickly – before the May Class I price is announced in a few weeks.

Farmshine readers are aware that dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, came together in early March to compose a letter to NMPF and IDFA, addressing the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S. The letter specifically identifies the change in how the Class I base price is calculated, which NMPF and IDFA put forward, Congress passed in the 2018 Farm Bill, and USDA implemented in May 2019.

Specifically, the Farm Bill language states that the new Class III / IV averaging method + 74 cents – instead of the previous “higher of” method – was to be implemented in 2-year periods. This suggests we are now at the point in time where it can be amended to tweak the formula before the next 2-year period of implementation begins.

Recall that this change was legislated without hearings, was implemented without a regulatory comment period, and was put through with very little discussion under the auspices of giving processors a way to “manage risk” even as the result has grossly interfered with producer risk management tools.

Considering that this policy has been a complete failure under the stress test of a major event, Congress and USDA should be on notice to fix it before the next 2-year period commences. But time is short.

Producers — through this letter and other efforts — are asking NMPF and IDFA to put their proposals on the table officially for how to remedy this failed change before the next 2-year implementation period begins in just a few weeks.

Discussions among producers and organizations have ensued for weeks now — talking about averaging vs. higher of. In fact, those with greatest firsthand knowledge of the purpose and workings of FMMOs state that the higher of method fulfilled the lawful purpose of the FMMOs, the averaging method does not.

Put simply, the FMMOs are in disarray during this time of market stress that pushed Class III and IV widely apart. A $2 to $10 spread between Class III and IV – along with the new “averaging” method for Class I – have together disrupted the function and purpose of the FMMOs.

NMPF and IDFA told the U.S. Congress that producers would be “held harmless” by the change when it passed in the 2018 Farm Bill. But, in fact, producers have lost hundreds of millions, if not billions, of dollars in value out of their milk checks over 23 months. The averaging method was never “stress-tested.”

NMPF leaders have reportedly referenced the idea of adding $1.63 to the simple average, instead of 74 cents, but this reporter has not seen the proposal put forward as an official ‘ask’ of the USDA Secretary to be part of the next 2-year implementation that begins shortly. Probably NMPF and IDFA will have to agree on this as the Class I pricing change was their agreement in the first place at the time it was passed in the 2018 Farm Bill.

Dairy producers cannot afford to see the drive for a solution stall out until the next Farm Bill. They cannot afford to roll into the next 2-year implementation using the current average + 74 cents formula. Meanwhile, dairy farmers can contact their milk buyers or cooperatives and ask their leaders to encourage NMPF and IDFA leadership to bring the discussion forward for implementation of a short-term solution beginning with the May 2021 Class I price. If this doesn’t happen, producers will be stuck with a failed pricing policy for at least two more years.

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

The deadline for dairy producers and/or their state, regional and national organizations to sign has been extended again until Mon., April 5, 2021. Visit this link to view and sign electronically through the automated short form.

In the letter, dairy producers ask NMPF and IDFA to work with them for a solution that is a fairer distribution of dairy dollars in the long term, but also want to support a short-term fix, now.

Time is running out for this to happen. Dairy farmers do not have two to three more years to wait for the 2023 Farm Bill as the formula losses add financial burden to their already distressed economic situation. They can’t afford to lose hundreds of millions, if not billions, over the next two years as has been their net loss over the past two years. Look for an update next week.

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

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

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

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

By Sherry Bunting for Farmshine

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

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

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

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

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

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

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

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

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

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

What’s happening and what dairy farmers should know:

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

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

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

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

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

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

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

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

Dairy farmers can do the same.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-30-

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

By Sherry Bunting, Farmshine, October 9, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-30-

DFA antitrust lawsuit in Vermont ends before jury trial began

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

By Sherry Bunting, Farmshine, October 2, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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