Covering Ag since 1981. The faces, places, markets and issues of dairy and livestock production. Hard-hitting topics, market updates and inspirational stories from the notebook of a veteran ag journalist. Contributing reporter for Farmshine since 1987; Editor of former Livestock Reporter 1981-1998; Before that I milked cows. @Agmoos on Twitter, @AgmoosInsight on FB #MilkMarketMoos
NMPF, NAJ say higher solids worth more nutritionally,Seek FMMO updates to avoid misalignments and disorderly marketing
Calvin Covington (left) for Southeast Milk and Peter Vitaliano for National Milk Producers Federation testified on what the outdated skim milk component standards mean in terms of underpaying farmers and eroding producer price differentials (PPD), leading to disorderly marketing. This occurs because the skim portion of the milk that is utilized in manufactured products (Class III and IV) is paid per pound of actual protein, solids nonfat and other solids; whereas the skim portion of the milk bottled for fluid use (Class I) is paid on a per hundredweight basis using the outdated standard skim solids levels. The fat portion is not an issue because it is already paid per pound in milk class uses. Screen captures, hearing livestream
By Sherry Bunting, Farmshine, Sept. 8, 2023
CARMEL, Ind. – The national Federal Milk Marketing Order hearing completed two weeks of proceedings, so far, in Carmel, Indiana. The entire hearing is expected to last six to eight weeks, covering 21 proposals in five categories.
Picking up the livestream online, when possible, gives valuable insight into a changing dairy industry and how federal pricing proposals could update key pricing factors.
The first week dug into several proposals to update standard skim milk components to reflect today’s national averages in the skim portion of the Class I price.
Here is a bite-sized piece of that multi-day tackle.
National Milk Producers Federation (NMPF) put forward several witnesses to show what the outdated component levels mean in terms of underpaying farmers, and how paying for the skim portion based on outdated component levels has eroded producer price differentials (PPD), leading to disorderly marketing.
IDFA’s attorney Steven Rosenbaum grilled NMPF economist Peter Vitaliano on this. He tried on seven attempts to establish that the fat/skim orders in the Southeast don’t have component levels as high as the national average, suggesting this change would “overpay” producers in some markets.
In his questioning, Rosenbaum stressed that fluid milk processors can’t recoup the updated skim component values if those components do not “fill more jugs.”
Vitaliano responded to say that protein beverages are a big deal to consumers, and some milk marketing is being done on a protein basis. Rosenbaum asked for a study showing how many fluid processors are actually doing this.
Attorneys for opposing parties kept going back to this theme that the skim solids should not be updated because the FMMOs are based on “minimum” pricing. They contend that processors can pay “premiums” for the extra value if they have a way of recouping the extra value by making more product or marketing what they make as more valuable.
Vitaliano disagreed, saying that even though many processors do not choose to market protein on the fluid milk label, “more protein makes fluid milk more valuable to consumers.”
Attorney Chip English went so far as to ask Calvin Covington on the stand: Why should my clients (Milk Innovation Group) have to pay more for the additional solids in the milk when they are removing some of those solids by removing the lactose?
“Consumers don’t want lactose,” English declared.
Covington, representing Southeast Milk and NMPF, responded to say: “I don’t know that to be true. It is unfair to suggest all.”
Bottomline, said Covington, raising standard skim solids to reflect the composition of milk today vs. 25 years ago adds money to the pool to assist with the PPD erosion so that Federal Orders can function as they were intended and so producers are paid for the value.
As English further questioned whether consumers even care about the higher skim solids and protein levels of milk today, Covington replied: “Skim milk solids have a value in Class I, or fluid milk. People don’t buy milk for colored water. The solids give it the nutritional value. That’s the reason they buy milk. That’s why FDA set minimum standards in some states. Why would you drink milk if not for the nutritional value?”
He also pointed out that the increase in solids nonfat over the past 20-plus years has improved the consistency of lower fat milk options. As noted previously, the milkfat is a separate discussion and is not included in this proposal because farmers are already paid per pound for their actual production of butterfat in all classes, including Class I.
Under cross examination, Covington explained that the Class I price in all Federal Orders pays for skim on a standardized per hundredweight basis and pays for fat on actual per pound basis. Meanwhile, the manufacturing classes pay for both skim and fat on a per pound of actual components basis.
As skim component levels have risen in the milk, the alignment of Class I to the manufacturing classes narrows because of the differences in how the skim is paid for. When this happens, it becomes more difficult to attract milk to Class I markets. That’s one example of disorderly marketing. PPD erosion and depooling of more valuable manufacturing class milk is another example.
Covington explained the impact of this misalignment on moving milk from surplus markets to deficit Class I markets, that the lower skim value becomes a disincentive.
Vitaliano explained the depooling issue as “creating disorderly marketing conditions also, and great unhappiness when one farm is paid a certain price and another handler pays a different price (in the same marketing area). That’s disorderly unhappiness for the Federal Order program,” he said.
He noted that the fundamental reason for pooling is to take the uses in a given area with different values to achieve marketwide pooling where producers in that Federal Milk Marketing Area are paid similarly, regardless of what class of product their milk goes into.
“This removes the incentive for any one group to undercut the marketwide price to get that higher price (for themselves),” he said. “The Orders create orderly marketing with a uniform price. Depooling undermines that fundamental purpose that is designed to create orderly marketing.”
Either way, whether indirectly paying to bring supplemental milk into Class I markets from markets with higher manufacturing use, or in the case of depooling, the dairy farmers end up paying for the fallout from this erosion of the PPD.
Since the beginning, even before 2000 Order Reform, figuring the Class I base milk price had to begin somewhere, according to Covington. Federal pricing has always used the manufacturing class values in determining that base fluid milk price.
The trouble today is that Class III and IV handlers pay farmers per pound of actual skim components in the milk they receive, while the Class I handlers pay per hundredweight based on an arbitrary outdated national average skim component standard. Thus, the “opportunity cost” of moving this now higher component milk to manufacturing classes that pay by the actual pound of protein, for example, instead of by the old standard average protein levels is not accounted for in the Class I price that still uses the old standard average levels.
Pressed again on how it makes sense to raise Class I prices by raising the component level of the skim to more adequately reflect the national average today, Covington said: “It adds to the nutrition, and I stand by that. In proposal one, the price will go up (estimated 63 cents per cwt or a nickel per gallon). I am comfortable charging that extra price to Class I processors.”
Attorney English, representing MIG, retorted that, “The handlers who buy milk and then by adding a neutralizing agent remove the lactose, they’re going to pay more for the milk that they then have to process to subtract the lactose.”
Covington responded that, “There are consumers who think about lactose. There are consumers who buy lactose-free products, yes, because it is on the shelf, but it’s not all consumers.”
On the higher protein, English asked Covington how Class I processors are supposed to monetize that protein in a label-less commodity, a commodity that is declining in its share of total milk utilization?
“We are still selling 45 billion pounds of packaged fluid milk (annually) in this country,” said Covington. “Consumers wouldn’t buy that 45 billion pounds if it wouldn’t have some nutrition.”
English argued that milk is sold as whole, 2%, 1% and non-fat. It is not sold by its protein, so isn’t it “so highly regulated in ways that alternatives are not that any increase in price hinders sales of fluid milk?”
Covington acknowledged that, “yes, it is regulated, but I’m not convinced that this proposal will hinder fluid milk sales. Again, (higher components) add to the nutrition and I stand by that.”
Opponents kept coming back to these value questions, while proponents focused on the price alignment issue and orderly marketing.
Consensus evident on some key proposals, such as returning the Class I mover formula to the ‘higher of’; but 10 packages contain over 30 variations and a few new biggies.
New to the party are:
AFBF wants to end ‘advance’ pricing of Class I;
NAJ wants uniform component-based pricing of Class I in all Orders;
MIG, made up of 7 fluid processors want organic exemptions, an assortment of new credits, and they want to knock $1.60 off the Class I differentials, forgetting they already get over $3.00 in ‘make allowance’ credits while not incurring those costs
California Dairy Campaign seeks an extension to consider alternative pricing formulas
Some proposals want to drop products (500-lb barrel cheese) from the FMMO formulas and price surveys, others want to add products (ie. 640-lb block cheese, mozzarella, unsalted butter)
Dana Coale, Deputy Administrator (top, left) and Erin Taylor, Director (top, right) and their USDA Dairy Division staff engaged with leads for 30 hearing proposals contained in packages submitted by 10 organizations in the pre-hearing information session Friday, June 16. Tim Doelman (bottom), CEO of Fairlife, a Coca-Cola subsidiary, explains one of the Milk Innovation Group’s (MIG) proposals that bucks the consensus on going back to the ‘higher of’ in setting the Class I mover. MIG wants to keep the averaging method with their ‘Floored Adjuster” proposal. He said returning to the ‘higher of’ prevents processors from forward-pricing their milk like soda and other beverage companies do for other ingredients. MIG also wants to knock $1.60/cwt off the current Class I differentials, and they want an assortment of new credits (obviously forgetting that fluid milk processors already get more than $3/cwt in various Class III and IV product manufacturing credits. These so-called ‘make allowances’, are built in as credits on the Class I and II prices also, for costs that fluid processors do not incur.) Zoom screen capture
BySherry Bunting, Farmshine, June 23, 2023
WASHINGTON – In preparation for a potential national Federal Milk Marketing Order (FMMO) hearing, the Dairy Division of USDA’s Agricultural Marketing Service had a pre-hearing information session Friday, June 16. During the day-long session, held virtually through zoom, Deputy Administrator Dana Coale, Director Erin Taylor and others heard presentations of the more than 30 pieces contained in proposals submitted by 10 organizations, and they engaged in questions for clarification as well as accepting requests for data before the 10 proposals were to be modified for final submission June 20.
While the Secretary of Agriculture has not yet declared a hearing, the AMS Dairy Division has publicized the timelines and action plan.
Coale stated that mandated time frames by Congress, govern the amount of time from the point at which a proposal is received to the end of a hearing 120 days later. “All of our proposed time frames are based on keeping us focused to meet the 120-day mandate,” she said.
“Once submitted, USDA will further evaluate them, and the Secretary will make the determination,” said Coale. “If the Secretary intiates rulemaking, you will see a hearing notice containing all proposals to be heard. This will be mid- to late-July, and we would expect to move forward – if a hearing is initiated – on Aug 23 as the start of that hearing.”
The location will be Carmel, Indiana, and because of the new time constraints, new procedures will be put in place, she said.
“Expect to see a very different process than customarily done to create a very efficient process while maintaining transparency and a robust evidentiary record,” she explained, noting this includes a process for submitting testimony in advance, and a naming vs. numbering convention for exhibits.
After the hearing is noticed, there will be another information session, said Coale.
“It takes an entire village,” she stressed. “Ex parte communication does not begin until a hearing is noticed, so if you have questions or need explanation or discussion on data for submitted proposals, contact us at fmmohearing@usda.gov”
The marquis proposal is the comprehensive package submitted by National Milk Producers Federation (NMPF) that set into motion the Secretary’s call for other proposals. The NMPF package has five proposals, previously reported in Farmshine through various articles since the October stakeholders meeting hosted by American Farm Bureau in Kansas City in October 2022.
Retired cooperative executive Calvin Covington is the lead on one of the five NMPF proposals, which seeks to update skim components to more accurately reflect the percentage of protein, nonfat solids and other solids in a hundredweight of milk today.
Covington said he also expects to testify on the NMPF proposal to raise Class I differentials with a new pricing surface map, something that has not been done since 2007-08, and the proposal to return the Class I base price ‘mover’ to the ‘higher of’. The current average plus 74 cents method has been in place since May of 2019, which produced unintended consequences and losses for dairy farmers.
In a phone interview Tuesday, June 20, Covington explained that after more than a year of task force meetings and discussions via NMPF with its members and their farmer members, “We’ve gotten this far, and we have got a consensus,” he said of the NMPF package.
In addition to updating skim components and Class I differentials and changing the Class I ‘mover’ back to the ‘higher of,’ the NMPF package includes a proposal to modestly update make allowances and to discontinue the barrel cheese price in the Class III protein formula while allowing 45-day forward-priced nonfat dry milk and dry whey to be included in the formula price survey instead of the current 30-day forward-price limit.
“It took a year, and that’s pretty good, to have coast-to-coast consensus on five major proposals,” said Covington. “Then you also read the Farm Bureau’s proposal and there’s pretty good consensus there too.”
Central to both the NMPF package and AFBF package of proposals is strong support for returning the Class I mover formula back to the previous ‘higher of’ method.
(Farmers have had a cumulative net loss of nearly $950 million, equivalent to losing 53 cents on every hundredweight of milk shipped for Class I use for the past 51 months or 15 cents per hundredweight on the FMMO blend price for all milk across all 51 months — since the change to ‘average of’ was made in May 2019 via the 2018 Farm Bill. In fact, the July 2023 Class I mover was announced June 22, 2023 at $17.32, which is a whopping $1.02 below the $18.34 it would have been under the ‘higher of’ method.)
AFBF supports NMPF’s proposal to restore the Class I mover to the ‘higher of’ Class III or IV, to drop the barrel cheese price from the Class III component and price calculation, to update component values into Class III and IV formulas, and to update Class I differentials, but notes this should be done through careful review where changes are based on a transparent record.
AFBF chief economist Roger Cryan stated that AFBF will defer to NMPF for substantiation on the Class I mover change, but if by any chance NMPF would back away from this proposal, Farm Bureau wants it kept on the table and will defend it.
On adjustment to Class III and IV product make allowances, AFBF supports this under the same logic as the NMPF proposal, but states that “such adjustment cannot be fairly undertaken except in using the data from a mandatory and audited USDA survey of, at least, those plants participating in the National Dairy Product Sales Report (NDPSR) survey.”
The difference is NMPF says it will seek mandatory surveys through legislation, whereas AFBF sees USDA as already having the authority to do this.
AFBF’s package includes some “new” proposals as well. One would add 640-pound block cheese to the Class III component and price formula and the NDPSR survey and another would add unsalted butter to the butterfat and protein calculation and the NDPSR survey.
AFBF includes a proposal to update the Class II differential to $1.56 to account for current drying costs and to adjust formula product yields and include an adjustment to the ‘make allowances’ for cooperatives and plants that “balance the market.”
The AFBF package also cites “universal milk check transparency requirements” regarding clarity to be shared on producer milk checks regarding pooled volume, Order value and actual payment for pooled and nonpooled milk.
AFBF seeks a seasonal Class I differential adjustment to “address seasonal differences in supply and demand.”
The most notably divergent AFBF proposal is one that seeks to eliminate the advanced pricing of Class I milk and components and the advanced pricing of Class II skim milk and components. It would base both on the 4-week “announced” Class III and IV components and prices instead of the 2-week “advanced” pricing factors. The advanced factors are calculated for a given month during the first two weeks of the previous month and have been part of FMMO pricing for decades.
Edge Dairy Farmer Cooperative, representing farmers in nine Midwest states shipping to 34 processors also proposes ending advanced pricing of Class I.
MIG is made up of seven companies — Anderson Erickson Dairy, Aurora Organic Dairy, Danone North America, Fairlife, HP Hood, Organic Valley/ CROPP Cooperative, and Shamrock Foods.
They want to REDUCE Class I differentials, whereas NMPF and AFBF support updates that increase them.
MIG companies want to establish Class I differentials that remove the “Grade A compensation” portion that has been built into all Class I differentials from the beginning, as well as removing the “market balancing compensation.”
Together, these removals would account for the $1.60 per hundredweight base differential that all FMMOs receive. As explained in the pre-hearing session, this would have the net effect of reducing Class I differentials (and producer pay prices) by $1.60 per hundredweight across all FMMOs.
In their justification, MIG writes that it is “far past time for the base Class I differential to be reconsidered in light of market changes, including the exploding growth of dairy beverage alternatives… and the exponential growth of non-fluid milk products often sold in the export market.”
(In this reporter’s analysis and opinion, reducing Class I differentials instead of raising them, ignores the fact that every Class I fluid milk processor – including the aseptic, ultrapasteurized, organic, ultrafiltered and other ‘specialty’ fluid milks – are already getting more than $3.00 per hundredweight embedded as a processor credit in the Class I base price mover by virtue of the cumulative sum of all product make allowances on the Class III and/or IV pricing factors used to establish that mover, but since they don’t make Class III and IV product, they don’t incur these costs. Now they want $1.60 more, plus “assembly” and other credits?)
The MIG also proposes exempting processors of Class I organic milk from paying into FMMO pools as long as they show they pay their producers at least the minimum FMMO price. There are a few other guard rails to this.
They also want to receive “assembly credits,” specialty credits, and a higher shrink credit (forgetting that they already get make allowance credits that don’t even apply to them).
Citing the “unequivocal decline in Class I sales,” the MIG sets the stage with its package of proposals to transition further away from pricing mechanisms that support local fresh milk in favor of aseptic, extended shelf-life milks and specialty products. Some of the companies in the MIG are making dairy beverages that are not even Class I, and several are getting big into plant-based and other non-milk alternatives and blends. (Is that a conflict of interest?)
USDA AMS also accepted further information on the prior petition by the International Dairy Foods Association (IDFA) and Wisconsin Cheese Makers Association (WCMA) to update make allowances. With this additional information, their petitions are back on the table and are based on voluntary cost surveys.
The IDFA alternative is described as using the current simple average of the Class III and IV advance pricing factors to set the base Class I price, and floor the adjuster at the current 74 cents — while allowing that adjuster to increase if a two-year look-back shows it was deficient vs. the higher of. This is a complex two-years back “making producers whole” in the two-years forward with the adjuster always being floored to go no lower than 74 cents even if it turns out that this method benefited farmers vs. the ‘higher of.’
The IDFA Class I proposal contains several pages of justification for the averaging method built around “preserving price hedging and risk management” for processors, particularly those in the ‘value-added’ category,” such as ultrafiltered and aseptic Class I milk products.
But it doesn’t end there…
National All Jersey (NAJ) brought forward its proposal, explained by Erick Metzger. “One mirrors NMPF’s proposal to update skim component factors in the Class III and IV formulas, except we want to see it be a simple annual update based on the previous year’s average, with an appropriate lag time to address risk management tools instead of being based on a three-year average,” he said.
In addition, NAJ proposes that FMMOs 5, 6, 7 and 131 (the Southeastern Orders and Arizona) become multiple component pricing (MCP) Orders instead of pricing on a fat/skim basis.
NAJ also proposes Class I payment requirements to be based on MCP pricing instead of skim / butterfat in all FMMOs, nationally.
“We are proposing uniform pricing across all orders — both on how processors pay for components and how producers are paid for components,” said Metzger. “Extensive updates are needed to Orders 5, 6, 7 and 131, and the needed Order language already exists in the other Orders.”
The NAJ proposal notes that Class I should be paid on actual solids, instead of valuing the skim on a skim basis. “In our proposal, it would be valued or priced on actual skim components,” he said.
What this means is if a dairy farm’s actual components processed (in Class I) were below the standard components in the Class III or IV formulas, the processor obligation would be less; and if the farm’s skim components are greater than the standard, then the obligation of Class I processors to the pool would be more. In short, accounting for actual skim components in the NAJ proposal, would replace the current pricing of Class I skim on a pounds of skim basis.
Select Milk Producers cooperative submitted proposals to update product yields to reflect “actual farm-to-plant shrink,” to update the butterfat recovery factor and to update nonfat solids yields. According to their own limited 5-year-average analysis the three proposals combined would net 13 cents/cwt on the Class III price and 42 cents/cwt on the Class IV price, but they’ve requested more data from USDA AMS to analyze — if their proposals are accepted for a hearing.
For its part, Edge Cooperative states in a cover letter to its proposals that a hearing should occur after the farm bill. “There is no imminent crisis that would present a compelling reason to initiate a hearing before the next farm bill is enacted,” the proposal states.
In the farm bill, Edge seeks a mandatory cost of processing survey before make allowance updates could be heard. Edge also seeks legislative language to expand flexibility to base individual FMMOs around something other than uniform pricing, to be determined on an Order by Order basis. This “flexibility” was explained by Lucas Sjostrom and Marin Bozic at the Farm Bureau stakeholders meeting in Kansas City last October.
However, Farm Bureau’s package of proposals asserts that there is no reason to hold off on a hearing while waiting for a farm bill, and indeed seeks the fastest resolution to the Class I ‘mover’ issue. Furthermore, Congress previously mandated timelines that don’t allow “waiting” once proposals are received by USDA. This process is in motion, unless Secretary Vilsack refuses a hearing on any of the proposals.
AFBF, in fact, cited areas of the Agricultural Agreement Act that give USDA authority to do mandatory cost surveys, without further legislation, because the Secretary has discretion to require any reporting deemed necessary from FMMO participating plants.
On the Class I ‘mover, Edge proposes two options, either a Class III-plus option if the ‘advanced pricing’ is retained or if the ‘higher of’ option is used, then to base it on final 4-week announced skim milk prices each month. This option would effectively end the 2-week advanced pricing factors and advance pricing of the Class I ‘mover,’ which has also been proposed by AFBF.
The Edge proposals include a request to align make allowance changes so that they don’t impact ‘risk management tools’ and a proposal to add Order formulation language about the information handlers shall furnish to producers with the intent of “transparency in producer milk checks.”
The California Dairy Campaign’s proposal asks USDA to extend the proposal deadline and to add mozzarella to the Class III component and price formula and the NDPSR survey. They also want consideration of “alternative pricing formulas that guarantee dairy farmers are paid according to current market rates.”
The California proposal includes a National Farmers Union (NFU) Dairy Policy Reform Special Order of Business that was passed at the 2023 NFU Convention in San Francisco. It states opposition to the call for a federal milk marketing order hearing, noting that, “If a hearing is granted, it is essential that any modifications to the federal order minimum pricing formulas take into account the volume and value of all dairy products, particularly high-moisture cheeses such as mozzarella.”
DPA also proposes a supply-balancing feature, whereby milk handlers notify farms at least 7 days prior to milk disposal action, stating the baseline production needs, how much to reduce production, and for how long, with farmers making this reduction by dumping (or not producing) this milk.
In effect, the DPA proposal includes a processor-led supply management program, not a government intervention. But to do it, the FMMOs would be the arbiter, and therefore all Orders would have to be amended to require 100% mandatory participation and pooling of all U.S. milk. Something like that may require legislation since a producer referendum bloc-voted by cooperatives could vote it down, and it’s unclear how unregulated areas would be included since states like Idaho already voted the FMMOs out.
Currently, only Class I milk handlers are required to participate in FMMOs within marketing areas that have FMMOs. Participation is voluntary for most Class II, III and IV processors. Over the past three years, roughly 60% of total U.S. milk production has been pooled on FMMOs.
Using the Northeast as an example of a multiple component pricing Federal Milk Marketing Order that still has significant Class I utilization, Dr. Chris Wolf showed how long-term trends and other factors have reduced the Class I utilization and Class I revenue from 50% in 2000 to 34% in 2021 in FMMO 1. The most dramatic part of this decline occurred after 2010 — leaving not enough money to go around with less Class I value in the pool. FMMOs were structured for Class I fluid markets not for the dairy product and export markets where growth is occurring today. Screen capture from Center for Dairy Excellence Protecting Your Profits webinar with CDE’s Zach Myers and his guest Dr. Chris Wolf, Cornell University dairy economist.
By Sherry Bunting
WASHINGTON – There are irons in two fires when it comes to federal milk pricing and dairy policy. One is to do modernization through the Federal Milk Marketing Order (FMMO) hearing petition process. The other is to make some adjustments or seek authorizing language through the dairy title of the 2023 Farm Bill.
On the farm bill front, the May 12 CBO baseline score shows this could be the first trillion-dollar farm bill. Food assistance programs, like SNAP, are eating into the capacity to do other things, say top-level staff for the Senate Ag Committee.
For dairy and livestock, the Dairy Margin Coverage (DMC) baseline now includes $1 billion in additional outlays projected over the 10-years, while livestock disaster outlays have doubled – even without making any changes in these programs that some are suggesting.
Still, farmers and organizations that represent them are seeking some expansion for the DMC, livestock disaster, and other programs and safety nets, and some are seeking language to instruct the Secretary to do hearings on the Class I ‘mover’, or to expand the flexibility of the scope of a hearing, or to require mandatory reporting germaine to things like raising make allowances.
The jury is out on whether a farm bill gets done by September 2023 after the May 12 baseline was announced by CBO in the current political environment, but members of the House and Senate Ag Committees and their chairpersons are gathering information in earnest toward that goal.
On the FMMO hearing front, as previously reported in Farmshine, the USDA responded April 28 to the March 30 petitions from two processor organizations by asking for more information instead of granting or denying a hearing on their make allowance update request.
The two petitions from International Dairy Foods Association (IDFA) and Wisconsin Cheese Makers Association (WCMA) both requested a hearing focused exclusively on updating the ‘make allowances’, which are processor credits that are subtracted from the wholesale end-product prices used to derive farm level milk class and component prices.
Make allowances were last updated in 2008 using 2006 plant cost data.
Four days later on May 2, the National Milk Producers Federation (NMPF) submitted its petition seeking an FMMO hearing on a range of national amendments.
NMPF is petitioning USDA for a hearing on these five items:
1. Increase make allowances in the component price formulas to the following levels: Butter $0.21 per pound, Nonfat dry milk $0.21 per pound, Cheese $0.24 per pound, Dry Whey $0.23 per pound
2. Discontinue use of barrel cheese in the protein component price formula
3. Return to the “higher-of” Class I mover
4. Update the milk component factors for protein, other solids, and nonfat solids in the Class III and Class IV skim milk price formulas
5. Update the Class I differential pricing surface throughout the U.S.
Not noted within this list is a point that NMPF’s board approved on the legislative front, and that is to seek language in the 2023 farm bill directing USDA to do periodic mandatory and audited plant cost surveys instead of voluntary surveys for future hearings on make allowances.
The American Farm Bureau Federation took a positive approach in their response letter to USDA, showing support for the fact that NMPF’s petition is comprehensive and includes areas of strong consensus among farmers such as returning the Class I mover to the ‘higher of.’
However, AFBF president Zippy Duvall also points out in the response letter that the Secretary of Agriculture already has the authority under the Agricultural Marketing Agreement Act to require processors to provide information relevant to FMMO pricing. This could include mandatory surveys of plant cost data when used to determine the processor credit, or make allowance, in the pricing formulas.
It is Farm Bureau’s position that make allowances should only be updated based on mandatory and audited plant cost surveys.
This leaves a bit of a loophole in the discussion about how to acquire the data to make current or future updates. The Secretary may have the authority to require data from plants that participate in FMMOs. However, it is unclear if the Secretary has this authority to require cost data from plants that do not participate in the FMMOs.
The end-product pricing formulas are based on wholesale prices that are collected mandatorily by USDA AMS on a weekly basis through the Livestock Mandatory Reporting Act on only those products that are used in FMMO formulas. This includes butter, nonfat dry milk, dry whey and 40-lb block and 500-lb barrel cheddar cheese.
The USDA AMS weekly National Dairy Product Sales Report surveys 168 plants for this price data. Therefore, if make allowances are updated as processor credits against those prices, then all 168 plants should have to report their costs, and only the costs that pertain to those specific products, whether or not they participate in FMMOs. In a recent voluntary cost survey, more than 70% of those plants did not report their cost data.
During a Center for Dairy Excellence Protect Your Profits zoom call recently, risk management educator Zach Myers had as his guest Cornell dairy economist Dr. Chris Wolf to talk about the FMMO reform process and background from an economist’s perspective.
Dr. Wolf gave some important and relevant background and statistics.
The FMMOs have been around for 85 years and were created because of disorderly milk marketing conditions. Their primary function is to make markets function “smoothly” with a second stated objective to provide price stability.
“If we were to re-do them today, I would say price adequacy should be addressed,” Wolf opined, noting that “we have times that the milk prices are very stable, but not very adequate.”
Other stated objectives of FMMOs are to assure adequate and wholesome supplies of fluid milk and equitable pricing to farmers.
“These things are still important today,” Wolf suggests, adding that the auditing, certification and a certain level of market information that is provided by the FMMOs benefits all participants and contributes to the public good.
He explained that FMMOs are changing.
“The primary sources of dissatisfaction with FMMOs in recent years arise because there is not enough money to go around, and some of this is related to the longer-term trends (in Class I sales),” Wolf explains.
He showed that while per capita dairy consumption has been increasing roughly three pounds per person per year, the decline in Class I fluid milk is the underlying factor.
“It really is startling how much of that decline (in Class I) in most areas really happened since 2010,” Wolf illustrated with graphs.
Not only did per-capita fluid milk sales decline more rapidly since 2010 than the already long-term decline charted since 1980, but population growth in the U.S. also stalled — so the total Class I sales have been hit with a double-whammy.
“This relates back to where the value is in the Orders, with most of the decline in the past 20 years occurring in that second half, — since 2010,” he explains.
(The Healthy Hunger Free Kids Act of 2010 was the precursor to USDA removing whole and 2% unflavored and flavored milk from schools and requiring flavored milk to be fat-free. Today, USDA has a proposed rule that could eliminate flavored milk until grade 9 as reported previously in Farmshine).
Because Class I has to participate in FMMOs, the FMMOs were “intentionally structured” in a way that the Class I revenue has always tended to be the highest class price because the FMMOs are in place to structure the fluid milk market, and so Class I accounted for at least 50% of the pool revenue – until 2010.
“We finished 2021 at 34% (down from 50%),” Wolf notes. “So there’s not enough money to go around with less (Class I) value in there.”
What changed? Wolf notes some of the long-term trends.
“First, exports are now 18% of U.S. milk solids production when it used to be that the U.S. exported about 5%… Milk beverage consumption is down while cheese, butter and yogurt are all up. We are still importing 4 to 5%, but as a large net-exporter now,” he says, “The U.S. is basing bulk commodity product prices off the world market. This introduces more outlet for milk but brings back the issues that come with international price-setting, overall,” he explains.
Another change, according to Wolf, is the level of consolidation at every level of the supply chain.
Wolf went over some of the make allowance data based on existing voluntary surveys as well as a prior California state order audited survey. He showed there is a wide range in costs between older and smaller plants vs. larger and newer plants. When determining where to set make allowances – as an ‘average’ or at a percentile of this wide range — there are regional impacts to consider, he suggests.
Wolf also took webinar attendees through the steps of a hearing that can take at least a year or more to complete and he dug into the make allowances from an economic perspective and some of the other pieces of potential reform. Over the next few weeks, we’ll continue to examine them in this series.
Class I is at a tipping point, will future FMMO strategies strengthen or exploit it?
“Probably some of you have never recently met an independently owned fluid milk bottler. We are the only prisoners in the Federal Order system. Everybody else can opt in or opt out. Even now… our cooperative competitors don’t have to pay their member producers a minimum price — but we do. I just ask that you take into consideration not just what we can get from Class I … We are on a 13-year losing streak that fluid milk consumption has declined on a total basis. We are at a tipping point,” said Farm Bureau member Chuck Turner, Turner Dairy Farms, a third generation independent milk bottler near Pittsburgh, Pa.
By Sherry Bunting, Farmshine, October 28, 2022
KANSAS CITY, Mo. — The precarious future of Class I fluid milk was an underlying concern expressed in different ways at the AFBF Federal Milk Pricing Forum in Kansas City recently. Some have written off the future of fresh fluid milk and have turned sights elsewhere. Others recognize federal orders don’t fulfill their purpose when fresh fluid milk doesn’t get to where the people are. And then there’s the wedge product — aseptic milk — in the mix as some changes have already been made to promote investment in it.
Since the federal orders are based on regulation of Class I fluid milk, its future is most definitely at the core of the Federal Milk Marketing Order (FMMO) discussion.
A critical point made by panelists is that more money is needed to get fresh milk to consumers in high population areas. Also mentioned was the restoration of higher over-order premiums to farmers in milk-deficit areas to keep these areas from becoming even more deficit.
But at the same time, Class I sales are declining relative to a growing dairy pie of other class products, and the flurry of fluid milk plant closures near population areas has caused further disruption.
On day three of the forum in Kansas City, Phil Plourd of Ever.Ag attributed most of the fluid milk sales decline to the fact that “milk lost its best friend – cereal.” When asked, he did acknowledge that about one-third of the problem facing fluid milk is rooted in the low-fat school milk requirement. He also pointed out how the entire food industry is changing, and he warned about the lab-created dairy proteins made in fermentation tanks that can be ‘turned on and off.’
Bottom line is the growth markets are in other products, he said. The declining fluid milk sector can no longer shoulder all of the responsibility for the federal order system.
He showed a bar-graph depicting the decline in the share of total U.S. production participating in federal or state revenue sharing pools. Using estimates of California’s pre-federal order mandatory state order, the percentage of U.S. milk production that was pooled exceeded 80% in 2018. In November of 2018, California became a federal order. Pooled volume vs. total production fell to just over 70% in 2019, the first year the new Class I mover formula was implemented. In 2020, during the pandemic, pooled volume fell to just over 60% and ticked a few points lower to 60% in 2021.
Several panelists, including Calvin Covington, confirmed that cooperatives, especially DFA, own the majority of the fluid milk plants in the U.S. today. This evolution has only increased with plant closures over the past 18 months, and cooperatives have payment and pooling flexibilities not enjoyed by proprietary plants.
As the Class I sector consolidates to roughly 80% owned by cooperatives and the balance owned by grocery chains and independents, there is another problem with federal orders that is easily overlooked. Who is it regulating? It does not regulate what cooperatives pay their members, therefore, it is regulating a declining number of participants in a growing global industry.
A milk bottler from Pennsylvania used the open-microphone between panels to address this 800-pound gorilla in the room full of consensus-builders doing their level-best to ignore it.
“I am sort of an ‘odd duck’ here. Probably some of you have never recently met an independently owned fluid milk bottler. We are the only prisoners in the Federal Order system,” said Chuck Turner, a long-time Farm Bureau member and third-generation milk bottler from Pittsburgh.
“Everybody else can opt in or opt out. Even now, with recent developments, our cooperative competitors don’t have to pay their member producers a minimum price — but we do,” he confirmed.
Turner asked the room of consensus-builders to “take into consideration not just what we can get from Class I — but let’s think more about what we need to do to sell it. We are on a 13-year losing streak with Class I — 13 years that fluid milk consumption has declined on a total basis. We are at a tipping point,” said Turner.
While half of the forum’s table groupings agreed Class I differentials need to be increased, others wondered how much more money can be extracted from Class I without killing it?
Joe Wright, former president of Southeast Milk Inc., laid out the problem as a “downward spiral” — making it more difficult to attract milk to populated areas in the Southeast. He said it started with the Dean and Borden bankruptcies and continues with more plant closings announced every few months.
In the Southeast, said Wright, it’s to the point where school kids won’t get fresh milk in some areas because no one will bring it.
He noted that the over-order premiums in Florida have decreased by $1.50 per hundredweight. Some 30 years ago, it was $3.00. “We don’t have that now,” said Wright, noting this makes it difficult for farms to continue producing milk for the Class I market in the face of encroaching subdivisions and other pressures to sell.
“There are 9 million people just from Miami to Orlando,” said Wright. “But if we don’t do something soon, we’ll have no dairy farms left in Florida. Do we want the answer to be a push to aseptic milk? Total milk consumption was stable until 2010. That’s when the government gave us low-fat, low-taste milk in schools. Now, we’re going to start them with low-fat, low-taste, aseptic milk? That is going to kill fluid milk.”
He also noted that fluid milk sales are not helped when dairy shelves are empty, showing slide after slide of empty Walmart dairy cases in the same town in Florida in December – three years straight (pre-Covid, during Covid, and post-Covid). When he asked attendees if they have seen this in their own areas, many hands were raised.
He pointed out that when the fresh milk is completely missing on store shelves, it is the aseptic or ESL milk – and plant-based alternatives – that are available. This has a cumulative effect on fresh fluid milk sales.
Again, the topic of aseptic, shelf stable, warehoused milk was brought up with feelings of ambivalence as milk producers are both drawn to it as a hedging mechanism to even-out the supply and demand swings in areas like the Southeast, but on the other hand offended by the prospect that this product can be considered by bottling retailers like Kroger as an innovative “value added” growth category, while the original fresh fluid milk is treated like the Cinderella sister – a low-margin commodity non-growth category.
As more aseptic packaging comes on line, and as schools go without milk and stores short customers on the availability of fresh milk, a transition is being signaled toward packaged milk that is capable of moving farther without refrigeration cost — from anywhere to anywhere – right along with Coke or Pepsi for that matter.
“How do we fix the empty case syndrome that has gotten worse over the years? It’s all about being accountable,” said Wright, giving some history on how this was handled in the past and voicing his hope that having the Dean plants under DFA and Prairie Farms ownership could help.
“Can they push back on Walmart on stocking? I don’t know. There has to be margin in that relationship, but these are correctable problems that affect milk sales,” he said.
For its part, Kroger also closed a plant last year that was running half-full, according to Mike Brown, senior VP of Kroger’s dairy supply chain.
Milk bottling is consolidating rapidly to run the remaining plants at or above capacity to capitalize on throughput and improve margin.
“The reality,” says Wright, “is we are seeing a downward spiral, and milk is not always available where the people are. The question is, what are we going to do about it?”
Brown noted that the Class I mover formula change, which was an agreement by IDFA and NMPF in the 2018 farm bill, was intended to make fluid milk pricing “more predictable.” This was deemed necessary to attract investment to make fluid milk “more durable and transportable.”
In short, the Class I change was done to attract investment in expensive aseptic packaging to make shelf-stable milk and milk-based high protein beverages.
Going forward, said Brown: “Risk management is important and especially for specialty products such as extended shelf-life and aseptic milk, which are growing more than the plant-based beverages for Kroger. We have to be sure we nurture these new products because they are value-added growth markets for fluid milk.”
On the other hand, farmers in Kansas City voiced their concern for what happens to fresh fluid milk, that it matters for consumers and it matters for their dairy farms, and it also matters for the continuation of the federal orders.
Aseptic milk is experiencing growth, but why? Is necessity the mother of invention or is the investment driving the necessity.
After all, it is the regional and perishable nature of fresh fluid milk that led to the development of the federal orders in the 1930s. Aseptically-packaged and warehoused milk is not fresh enough — and may not be local enough — to be the product that helps extend the viability of the federal orders.
KANSAS CITY, Mo. — It was intense, productive, enlightening, and at times a bit emotional. And, yes, there was consensus on some key points during the American Farm Bureau Federation (AFBF) Federal Milk Marketing Order (FMMO) Forum in Kansas City last weekend (Oct. 14-16).
The event was a first of its kind meeting of the minds from across the dairy landscape, involving mostly dairy farmers, but also other industry stakeholders. It was planned by a 12-member committee representing state Farm Bureaus from coast-to-coast, working with AFBF economist Danny Munch.
Farm Bureau president Zippy Duvall kicked things off Friday afternoon, urging attendees to get something done for the future of the dairy industry, to stay cool, leave friendly, and set a pattern for continuing conversations.
“We have the people in this room who I hope can come up with guiding principles,” said Duvall, noting that a meeting like this is something he has dreamed about for years, even prayed for. He talked about his background as a former dairy farmer and assured attendees that milk pricing is a topic he is very interested in.
He challenged the group to come at it with “an open mind. The answers are sitting in this room, not on Capitol Hill. There are some geniuses in this room, people who really understand this system,” said Duvall.
“We all have ideas, and we can lend an ear to other ideas. We learn a lot if we listen to each other,” he said, noting a few of the existing Farm Bureau dairy policy principles: that FMMOs should be market oriented, with better price discovery. They should be fair and transparent, and farmers should be able to understand and compare milk checks.
Hearings not legislation
Duvall noted AFBF agrees with NMPF that future FMMO changes should go through the normal USDA hearing process, not through Congressional legislation. By Sunday, this seemed to be a point of consensus, along with the recognition that FMMOs need updating, but they are still vital for farmers and the industry.
On the Class I ‘mover,’ specifically, Munch noted Farm Bureau already adopted the recommendation through its county, state and national grassroots process to return to the ‘higher of’ — plus 74 cents. The addition of the 74 cents is to make up for the unlimited losses incurred over the past four years.
For NMPF’s part, chief economist Peter Vitaliano and consultant Jim Sleper laid out a series of updates the economic committee’s task force is recommending to the NMPF board, which will vote at the annual meeting at the end of October.
These recommendations include going back to the simple ‘higher of’ for the Class I ‘mover,’ updating make allowances and yield factors, doing a pricing-surface study to update Class I differentials, making changes in the end-product pricing survey to allow dry whey price reporting of sales up to 45 days earlier, not 30 days, and eliminating the 500-pound barrel cheese sales from the Class III cheese price formula to base it only on the block cheese.
Intense, informative, valuable
The three days were intense, covering a lot of information, and were shepherded by expert panels and ‘cat herder in chief’ Roger Cryan, AFBF’s chief economist since October 2021.
Munch served as the emcee — akin to the ghost of milk pricing Past (Friday), Present (Saturday) and Future (Sunday). He introduced the various panels and provided economic snapshots and questions for the 25 breakout tables to discuss, decide and deliver.
Meeting organizers reshuffled the deck of 200 attendees from 36 states and representing nearly 150 state and national producer organizations, Farm Bureau chapters, regulatory agencies, farms, co-ops, processors, financial and risk management firms, and university extension educators.
Attendees were assigned tables with a number on the back of each name tag. The goal was to mix the table-groupings for varied geographic and industry perspectives. Each table was equipped with its own large flip tablet mounted on an easel.
According to Munch, Farm Bureau will scan and collate the information from all of the large tablets and issue a preliminary report to attendees followed by a public report later this year.
On Sunday, the open microphone was lively and most tables reported from their flip tablets. Overwhelmingly, attendees said they found value in the meeting and appreciated the platform. They reported a desire to keep the conversations going, to do this again, not just every 20 years, and not just in response to a problem, but to be forward-looking with the many challenges on the dairy horizon.
Platform for next big issue
For example, Gretl Schlatter, an Ohio dairy producer on the board of American Dairy Coalition (ADC) noted that only Class I milk is mandated to participate in FMMOs, and that today, the FMMOs are weakened with only 60% of U.S. milk production participating in the revenue-sharing pools.
“Where will we be in five years? We do not want to give up on fluid milk – our nutrition powerhouse,” she said. “The issue now is federal milk pricing but the next one coming — fast — is the sustainability benchmarks, the climate scores. We need to keep meeting like this as an industry, keep talking to each other, and get ready for the next big thing affecting our farms and family businesses.”
This was touched upon by Duvall and others, but Cryan reminded everyone that, “Federal Orders are complicated enough without adding the sustainability discussion to it.”
Duvall reminded attendees that this meeting was Farm Bureau’s response to the words of Ag Secretary Tom Vilsack last year, when he said there would be no USDA hearing until the dairy industry reaches some “consensus” on solutions.
This set into motion an already dairy-active Farm Bureau that had formed its own task force, responding to grassroots dairy policy coming up from the county and state levels to national through AFBF’s grassroots process.
In fact, NMPF’s Vitaliano, noted that, “having Roger Cryan at Farm Bureau makes it easier to do this,” to partner on formulating dairy policy because of his background. Prior to coming to Farm Bureau a year ago, Cryan was an economist for NMPF and then for USDA AMS Dairy Programs.
The first hour of the first day included a recorded message from Secretary Vilsack and an in-person presentation by Gloria Montano Green, USDA deputy undersecretary for Farm Production and Conservation.
They encouraged attendees to work together and told them what the Biden-Harris administration has done and is doing for dairy. Primarily, they went through a list of funding and assistance, including the improved Dairy Margin Coverage, the PMVAP payments, Dairy Revenue Protection, Livestock Gross Margin, dairy innovation hub grants and the recent funding for conservation and climate projects that includes 17 funded pilots involving dairy.
They told attendees that the dairy industry is “far ahead” on climate and conservation because it has been involved in these discussions and is already mapping that landscape.
Dana Coale, deputy administrator of USDA AMS Dairy Programs, took attendees through the FMMO parameters. She engaged with the largely dairy farmer crowd in a frank discussion of what Federal Orders can and cannot do. The headline here is that this current time period before a hearing is a time when she and her staff can talk freely and give opinions. Once a hearing process begins, she and her staff are subject to restrictions on ex parte communications.
Consensus to go back to ‘higher of’ formula
If there was one FMMO “fix” that achieved a clear consensus and was given priority, it was support for going back to the Class I ‘mover’ formula using the ‘higher of’ Class III or IV skim price instead of the current average plus 74 cents method that was changed in the 2018 farm bill.
Since implementation in May 2019 through October 2022, the new method will have cost dairy farmers $868 million in net reduced Class I revenue, which further erodes the mandatory Class I contribution to the uniform pricing among the 11 Federal Milk Marketing Orders (FMMO), setting off a domino effect that has led to massive de-pooling of milk from FMMOs and decreased Federal Order participation.
Pa. Farm Bureau presiden Rick Ebert (left), moderated the first panel Friday afternoon (l-r) Dana Coale, deputy administrator USDA AMS Dairy Programs; Calvin Covington, CEO emeritus, Southeast Milk; Anja Raudabaugh, CEO Western United Dairies. After this panel, during the first open-microphone and roundtable breakout, attendees were urged not to leave their flip tablets blank. “Groups with blank boards will have to drink the almond juice in the back,” said AFBF economist Danny Munch, taking note of the hotel offering and to have real milk on-site — provided Saturday and Sunday by Hiland Dairy.
During his presentation Friday, retired Southeast Milk CEO, Calvin Covington, said dairy farmers lost $69 million in revenue for the first 8 months of post-Covid 2022, alone. That figure will rise to an estimated $200 million when September and October Class I milk pounds are tallied.
Noting NMPF’s task force recommends the board approve petitioning USDA to go back to the ‘higher of,’ Vitaliano cited “asymmetric risk” as the reason.
This risk scenario was also explained by others. ADC’s Schlatter, for example, noted the current averaging formula “caps the upside at 74 cents, but the downside is unlimited.”
Vitaliano noted that whenever there is a ‘black swan’ event or new and different market factors, this downside risk becomes unacceptable for farmers, and he indicated these market events that create wide spreads in manufacturing classes are likely to continue into the future.
Dr. Marin Bozic, University of Minnesota assistant professor of applied economics, observed the way this downside ‘basis’ risk becomes unmanageable via new and traditional risk management tools. In his futuristic talk on Sunday, producers asked questions, to which he responded that, “Yes, farmers show me that they can’t use the Dairy Revenue Protection because of this basis risk.”
Bozic is also founder and CEO of Bozic LLC developing and maintaining the intellectual property for risk management programs like DRP.
He also spoke about the concerns of the Midwest as FMMO participation declines.
Presenting his own ideas and separately the ideas of Edge Dairy Farmer Cooperativ, Bozic said Edge is seeking a consensus to support two or three lines in the upcoming farm bill to simply “enable” FMMO hearings to introduce flexibility on an Order by Order basis, so that uniform benefits can be shared instead of a uniform price. Flexibility, they believe, would enable new ‘uniform benefits’ discussion that can help maintain or encourage FMMO participation in marketing areas with low Class I utilization.
Early in the Class I formula loss scenario of 2020-21, Edge had suggested a new Class III-plus formula to determine the ‘mover.’ Bozic said that “the idea of returning to the ‘higher of’ is not a deal breaker for Edge in the short-term.”
Even Mike Brown, senior supply chain manager for Kroger, unofficially indicated IDFA “could be open to the idea” of reverting back to that previous ‘higher of’ formula. As dairy supply chain manager on everything from Kroger’s milk plants to its new dairy beverages, cheese procurement, and so forth, Brown was asked if the averaging formula allowed him to ‘hedge’ fluid milk to manage risk as a processor.
The answer? Not really. Brown said there are ways for processors to manage risk under the ‘higher of’ formula also, but that they haven’t done any hedging under the averaging formula with fresh fluid milk – and very little risk management with their new aseptically packaged, shelf-stable milks and high protein drinks.
Incidentally, he said, the aseptic, ultrafiltered, shelf-stable dairy beverage category “is growing faster than plant-based” in their retail sales.
This exchange and other discussions suggested the averaging formula may have been geared more toward price stability that would encourage processors to invest in expensive aseptic, ultrafiltered and shelf-stable milk-based beverage technologies that result in a storable product needing risk management.
Fresh fluid milk is already advance-priced and quite perishable with a fast turnaround. Aseptic, ultrafiltered and shelf-stable products, on the other hand, can be packaged under one set of raw milk pricing conditions and sold to retail or consumers up to nine months later under another set of raw milk pricing conditions.
Frankly, it appears that the consumer-packaged goods companies (CPGs) may be driving such shifts, just as we heard from Phil Plourde of Blimling/Ever.Ag that CPGs are “all-in” on the climate scoring — the next big thing on the dairy challenge list.
Tacking de-pooling – regional or national?
Attendees came back to the specific concern about de-pooling, which Vitaliano and Cryan both described as an issue to be handled regionally and not through a national hearing.
This did not seem to satisfy some who raised the concern. Toward the conclusion Sunday, Cryan explained it this way:
“De-pooling is a national issue in principle but a regional issue in detail. Every region will have different ideas, needs and situations. If there is consensus (on pooling rules) in a region, then changes could move forward quickly,” he said.
Make allowances are sticky wicket
Attendees appeared to agree that make allowances should be addressed or evaluated through a hearing, but ideas on how to handle this sticky-wicket varied.
Attendees questioned panelists, pointing out that if a farmer’s profit margin on milk is only around $1.00 per hundredweight, then raising make allowances an estimated $1.00 per hundredweight is going to be a tough pill to swallow.
Vitaliano said NMPF is commissioning an economic study with their go-to third-party economist Scott Brown at University of Missouri to show the actual milk check impact of raising make allowances that are embedded into the end-product pricing formulas for the four main products: cheddar, butter, nonfat dry milk and dry whey.
He said the discussions about make allowances as a cost to farmers are “purely arithmetic” but that the “true impact” is not a straight math calculation. Instead, he said, when make allowances are set appropriately, dairy producers ultimately benefit, so in his opinion, it’s not a penny for penny subtraction.
Several other panelists and attendees observed that processors and cooperatives have been creating their own ‘make allowances’ through assessments, loss of premiums, and other milk check adjustments.
The Saturday afternoon panel of (l-r) Kevin Krentz, Peter Vitaliano, Chris Herlache, and Roger Cryan dove into Class III and IV pricing topics including make allowance formulations and structures.
Vitaliano stressed that when make allowances are set properly, the industry is stronger and better able to compensate producers. Initially, he said, raising make allowances would have a negative impact on expansion, which in turn would have a positive impact on producer prices.
When asked if raising make allowances would mean lost premiums would return to farmer milk checks, he responded by saying “that depends, and it won’t happen right away.”
In other words, raising make allowances will be painful in the short term, but in the long-term (to paraphrase) that pain leads to gain.
Some panelists and attendees referenced an idea of “phasing in” a future raise in make allowances.
Others wondered why it is necessary with the amount of innovation happening in the 15 years since they were last raised as processors make a wider variety of dairy products – not just those bulk items that are surveyed for end-product pricing formulas.
One idea suggested by a Wisconsin dairy producer was to tie make allowance increases to plant size — much the same way that dairy farmers are only assisted up to a production cap of 5 million annual milk pounds. Cryan said he heard a similar proposal previously to use a graduated scale for make allowance increases according to plant size and presumably age.
This is the crux of the make allowance issue because the new state of the art plants produce many types of products, both commodity and value-added; whereas some of the smaller and older plants that are still vital to the dairy industry are more apt to specialize in producing a bulk commodity with a more limited foray into value-added non-surveyed products.
Modified bloc voting?
While there appeared to be consensus that changes to the FMMOs should be done by USDA petition through the administrative hearing process, not through Congressional legislation, some of the discussion at tables and the open-microphone noted the importance of a producer vote after hearings and USDA final decisions. Many felt farmers should have an individual vote on FMMO changes.
Currently, cooperatives bloc vote for their members to assure that FMMOs are not ended inadvertently by lack of producer interest in following-through on a vote.
One compromise suggested by Bozic was to have a preliminary non-binding vote by individual producers, followed by the binding vote done in its usual way.
This, he said, would at least increase accountability and transparency in the FMMO voting process and bring producer engagement into the FMMO hearing process. To be continued
WASHINGTON — Against the backdrop of declining fluid milk sales, declining Federal Milk Marketing Order (FMMO) participation, coinciding with the accelerated pace of plant mergers, acquisitions and closures in the fluid milk sector, farm bill milk pricing reform discussions are bubbling up.
The two main issues are the negative impact from the Class I price formula change in the last farm bill, and how to ‘fix it,’ as well as how to handle or update processor ‘make allowances’ that are embedded within the Class III and IV price formulas.
Other issues are also surfacing regarding the pricing, marketing, and contracting of milk within and outside of FMMOs as historical pricing relationships become more dysfunctional — in part because of the Class I change.
The change in the Class I price mover formula was made in the 2018 farm bill and implemented in May 2019. It has cost dairy farmers an estimated $132 million in lost revenue so far in 2022 — increasing the accumulated net loss to $824 million over these 41 months that the new average-plus-74-cents method has replaced 19 years of using the vetted ‘higher of’ formula.
The change was made by Congress in the last farm bill in the belief that this averaging method would allow processors, retailers and non-traditional milk beverage companies to manage their price risk through hedging while expecting the change to be revenue-neutral to farmers. No hearings or referendums were conducted for this change.
Instead of being revenue-neutral for farmers, the new method has significantly shaved off the tops of the price peaks (graph) and only minimally softened the depth of the price valleys, while returning net lower proceeds to farmers and disrupting pricing relationships to cause further farm mailbox milk check losses in reduced or negative producer price differentials (PPD), reduced FMMO participation (de-pooling) as well as disruption in the way purchased price risk management tools perform against these losses.
In 2022, we are seeing this Class I ‘averaging’ method produce even more concerning results. It is now undervaluing Class I in a way that increases the depth of the valley the milk markets have entered in the past few months (graph), and as the Class IV milk price turned substantially higher this week against a flat-to-lower Class III price, the extent of the market improvement will be shaved in the blend price by the impact on Class I from what is now a $2 to $5 gap between Class III and Class IV milk futures through at least November.
During the height of the Covid pandemic in 2020, the most glaring flaw in the Class I formula change was revealed. Tracking the gains and losses over these 41 months, it’s easy to see the problem. This new formula puts a 74-cents-per-cwt ceiling on how much farmers can benefit from the change, but it fails to put a floor on how much farmers can lose from the change.
The bottomless pit was sorely tested in the second half of 2020, when the Class III and IV prices diverged by as much as $10, creating Class I value losses under the new formula as high as $5.00/cwt.
The bottomless pit is being tested again in 2022. The most recent Class I mover announcements for August and September are undervalued by $1.04 and $1.69, respectively, as Class IV and III have diverged by as much as $4 this year.
In fact, 6 of the first 9 months of 2022 have had a lower Class I milk price as compared to the previous formula. The September 2022 advance Class I mover announced at $23.82 last week would have been $25.31 under the previous ‘higher of’ formula.
This is the largest loss in value between the two methods since December 2020, when pandemic disruptions and government cheese purchases were blamed for the poor functionality of the new Class I formula.
No such blame can be attributed for the 2022 mover price failure that will have cost farmers $132 million in the first 9 months of 2022 on Class I value, alone, as well as leading to further impacts from reduced or negative PPDs and de-pooling.
The graph tells the story. The pandemic was blamed for 2020’s largest annual formula-based loss of $733 million. This came out to an average loss of $1.68/cwt on all Class I milk shipped in 2020.
These losses continued into the first half of 2021, followed by six months of gains. In 2021, the net gain for the year was $35 million, or 8 cents/cwt., making only a small dent in recovering those prior losses.
Gains from the averaging formula were expected to continue into 2022, but instead, Class IV diverged higher than Class III in most months by more than the $1.48 threshold. Only 2 months in 2022 have shown modest Class I mover gains under the new formula, with the other 7 months racking up increasingly significant value losses – a situation that is expected to continue at least until November, based on current futures markets.
Bottomline, the months of limited gains are not capable of making up for the months of limitless loss, and now the hole is being dug deeper.
True, USDA made pandemic volatility payments to account for some of the 2020 FMMO class price relationship losses. Those payments were calculated by AMS staff working with milk co-ops and handlers using FMMO payment data.
However, USDA only intended to cover up to $350 million of what are now $824 million in cumulative losses attributed directly to the formula change.
Furthermore, USDA capped the amount of compensation an individual farm could receive, even though there was no cap on the amount the new formula may have cost that farm, especially if it led to reduced or negative PPDs, de-pooling, and as a result, negatively impacted the performance price risk management tools the farm may have purchased.
The estimated $824 million net loss over 41 months equates to an estimated average of 58 cents/cwt loss on every hundredweight of Class I milk shipped in those 41 months.
Using the national average FMMO Class I utilization of 28%, this value loss translates to an average loss to the blend price of 16 cents/cwt for all milk shipped over the 41 months, but some FMMOs have seen steeper impacts where Class I utilization is greater.
This 16-cent average impact on blend price may not sound like much, but over a 41-month period it has hit mailbox milk prices in large chunks of losses and smaller pieces of gains, which impact cash flow and performance of risk management in a domino effect.
The 2022 divergence has been different from 2020 because this year it is Class IV that has been higher than Class III. During the pandemic, it was the other way around.
Because cheese milk is such a driver of dairy sales nationwide, the FMMO class and component pricing is set up so that protein is paid to farmers in the first advance check based on the higher method for valuation of protein in Class III. Meanwhile, other class processors pay into the pool using a lower protein valuation method, so the differences are adjusted based on utilization in the second monthly milk check.
This means when Class III is substantially higher than Class IV, as was the case in 2020-21, there is even more incentive for manufacturers to de-pool milk out of FMMOs compared to when Class IV is higher than Class III.
The PPD, in fact, is defined mathematically as Class III price minus the FMMO statistical uniform blend. Usually that number is positive. In the last half of 2020 and first half of 2021, it was negative for all 7 multiple component pricing FMMOs, while the 4 fat/skim Orders saw skim price eroded by the variance.
Now, the situation is different because Class III has been the lowest priced class in all but one month so far in 2022. The milk being de-pooled — significantly in some orders and less so in others — is the higher-priced Class II and IV milk. The Class II price has surpassed the Class I mover in every settled month of 2022 so far — January through July — and the Class IV price also surpassed the Class I mover in 2 of those 7 months.
‘We need to figure outa way to get farmers’ voices incorporated into this discussion’
Table I reflects a decade of change in FMMO participation as total U.S. milk production grew 13.3% from 2011 to 2021, and the percentage of milk pooled on FMMOs fell from 82% in 2011 to 60.5% in 2021. California became an FMMO in 2018 after previously being a state order, so California’s production is not included in the 2011 pooling comparison so the pooling percentages are relative to production in FMMO and unregulated regions. Class I pounds as a percent of total production fell from 28.7% in 2011 to 18.6% in 2021. Figures for 2021 are shown both ways, including and excluding California to compare to 10 years ago when the number one dairy state had its own state order with different pooling and classification rules and incomplete data, but the percent of change is nonetheless eye-opening. Chart compiled by S. Bunting
By Sherry Bunting, published in Farmshine, Feb. 18 and 25, 2022
GREEN BAY, Wis. — Do dairy farmers want to save the baby, save the bathwater, change the flow of the bathwater, or tighten the plug on the drain before the bathwater drains to the point of taking baby with it?
That’s a brutal take after 90 minutes and a lot of information, starting with the basics and hearing perspectives and questions during the American Dairy Coalition’s Future of Federal Milk Pricing Forum on Feb. 15.
It was a first step in what ADC sees as a continuing conversation and effort to engage dairy farmers to lead the process. They said the next forum will be in March.
Geared specifically for dairy farmers, the forum attracted 160 participants from across the country, representing every element of the dairy industry — including dairy farmers.
The virtual format was moderated by Dave Natzke, markets and policy editor with Progressive Dairy magazine. Featured presenters were Calvin Covington, retired co-op COO with 45 years of experience in federal and state marketing orders; Frank Doll, a third generation Illinois dairy farmer involved in American Farm Bureau’s dairy policy committee, and Mike McCully, industry consultant on the IDFA dairy ingredients board and economic policy committee.
Included were comments presented by attendees, who pre-registered for three-minute slots. Others typed into the queue.
“This is complicated, and many people say it can’t be fixed, but we have a great amount of expertise and value here. We covered a lot,” said Laurie Fischer, CEO of ADC at the end of the forum. “We can’t just let this drop. We need to continue to move forward.”
“We heard a lot of good information that has everyone’s wheels turning,” added ADC president Walt Moore of Walmoore Holsteins, Chester County, Pa. He encouraged producers to reach out and engage to tackle the hard topics.
The goal of this initial forum was to inform dairy producers on the Federal Milk Marketing Orders (FMMO) and pricing process to become engaged and have a greater voice in guiding future policies.
For its part, American Farm Bureau Federation spent the past couple years going through a similar working group with policy recommendations coming from states to national and back to states.
Several commenters concurred with the position of ADC, Farm Bureau and other organizations that Class I pricing should return to the ‘higher of’ method until future policies can go through what could be a long hearing process of potential revision for the future.
In fact, one eye opener during the Forum was Doll’s confirmation that Farm Bureau policy now includes support for going back to the ‘higher of’ — plus adding 74 cents — in the calculation of the Class I mover price, while remaining open to other ideas.
Doll said consensus was hard to find in the Farm Bureau working group of 13 members from across the country due to regional differences in the makeup of processing. But general recommendations found agreement, including the reference to Class I as well as modified bloc voting where co-ops can vote for their members on Federal Orders, but farmers can cast their own votes and be encouraged to do so.
Several attendees cited the need for a vehicle for producers to have real input without fear of retribution, that farmers should collectively ask questions of their cooperatives, seek better representation and together, hold their cooperatives accountable to represent their interests.
“We need to figure out a way to get farmers’ voices incorporated into this discussion. I hear from producers all the time, but there is fear of retribution, the threat that your milk is not going to get picked up. If you are on a board and speak up, you’re not there very long,” said Kim Bremmer, representing Venture Co-op in Wisconsin, a third-party ‘testing co-op’ qualified by USDA.
She addressed bloc voting, saying: “What’s the point of having a hearing if producers can’t vote? We don’t have great representation from some of the groups that say they represent us.”
Bottomline, said Bremmer: “We have to address how to get more of the producer voice and not just the processor voice — because they’re not the same.”
She asked: “Is it a conflict of interest if you’re a processor and you’re marketing milk and you’re also advocating for producers? I think that’s an important question that needs to be answered. We need to stay engaged in this and be able to ask the tough questions and demand some answers.”
ADC’s Fischer said the organization wants to work with farmers and their state and national organizations to provide a vehicle to bring farmers together and compose a list of pricing policy items to explore further with experts.
One clear change in the dairy industry formed the crux of the discussion: The growth of milk production in the U.S. — in concert with growing export sales and declining fluid milk sales — put export sales volume above Class I volume as a percentage of total milk solids in 2021.
McCully described this as “a seismic change.”
Covington confirmed that Class I sales — as a percentage of total milk production — fell below 20% in 2021. The percentage of Class I milk within the 137 billion pounds pooled on 11 FMMOs in 2021 was about 30%.
Contrary to the widely held belief that FMMOs regulate a majority of the milk, they simply do not. Covington confirmed that the 137 billion pounds of milk pooled on 11 FMMOs in 2021 represents only about 60% of U.S. milk production.
The FMMOs aren’t designed for this direction that the dairy industry is going toward global markets, according to McCully.
He said the world will look to the U.S. as the “go-to market,” claiming New Zealand and the EU are maxed out. He described the “white gallon jug” as being the most prime example of a low-margin commodity and predicted ‘value-added’ products will return more dollars to farmers in the future. These are recurrent themes heard from speakers at winter meetings this year.
(Author’s note: In contrast, current industry-wide discussion on the ‘sustainability’ side is for a ‘stable’ U.S. cattle herd to be an indicator of dairy’s climate neutrality. If exports grow, and the U.S. herd remains ‘stable’, then export milk will have to come from growth in output per cow and displacement of Class I production. One can see how geographic camps can set up, since fresh fluid milk sales are vital to the viability of dairy farms in areas outside of the earmarked growth areas for dairy manufacturing in the Central U.S. — the question is how to bridge it.)
At the same time, dragging feet doesn’t seem to be much of an option.
If dairy policy remains ‘status quo,’ leaving the FMMOs ‘as-is,’ they could eventually cover less and less milk and potentially collapse, according to McCully.
Covington also addressed this, noting that FMMOs “were designed for fluid milk, but today, fluid milk is a minority use. People used to drink their milk, now they are eating their milk.”
McCully noted the need for dairy innovation. He said make allowances have facilitated large-scale commodity plant construction supplied by large-scale farms, suggesting it is these built-in make allowance ‘margins’ that favor commodity production and deter innovation.
“If end-product pricing continues, the make allowances will have to be raised,” he said, citing a new make allowance study “fresh off the press.”
In 2019, USDA commissioned Dr. Mark Stephenson, dairy economist at University of Wisconsin-Madison, to do the study. Stephenson recently announced it is complete and will soon be released by USDA. McCully’s glimpse at the report shows make allowance calculations to be “significantly higher” than the amounts embedded currently in end-product pricing formulas.
Western Pennsylvania dairy nutritionist Harry Stugart offered his concise, data-driven argument that the make allowances be removed from the formula for the ‘advance’ Class I mover price because these make allowances do not pertain to fluid milk. In January 2022, he said they amounted to $2.67 per hundredweight.
Another crucial part of the discussion was how FMMOs actually work and what they do, besides pricing.
Covington gave attendees a primer of key points to think about as discussions move forward. What he shared may be old news to some, but it’s surprising how many people do not know these facts:
— FMMOs are not required by law, they are simply “enabled” to exist by law. This means producers vote to have them (California in 2018) or to terminate them (Idaho 2004).
— Only Class I fluid milk plants are required to be regulated under FMMOs.
— Class II, III and IV plants participate voluntarily, and they tend to do so “when it’s economically feasible.” Rules of participation vary from Order to Order.
— FMMOs establish other things besides minimum pricing for regulated plants. This includes setting payment terms, providing market information and market services such as testing and auditing.
— The last FMMO reform (2000) was complicated and took four years. It was a combination of legislation (1995 Farm Bill) and an administrative rulemaking process.
— Today, there are four classes of milk, but that was not always the case.
— Today, the Class I mover (base price), as well as the Class II, III and IV prices are established to be the same in all FMMOs, but in the past different FMMOs had different mechanisms.
— Cooperatives are not required to pay FMMO minimum prices even if they own regulated Class I plants because cooperatives are viewed by the FMMOs as one big producer and can make their own decisions about distributing the revenue received to their farmer-members.
— Today, over half of the Class I fluid milk plants in the U.S. are either owned by cooperatives or by large retail supermarkets. Over the past 60 years of consolidation, FMMOs have gone from regulating 2250 fluid milk plants in 1960 to just 225 in 2021.
— Cooperatives balance the Class I market at a cost. Excess milk can go to unregulated buyers at a price that is several dollars below the minimum price. Some co-ops run their own balancing plants. These costs can result in paying farmers below minimum price.
“Milk pricing should return a fair cost to producers, processors and retailers. A chain is only as strong as its weakest link,” said Sherry Bunting, speaking on behalf of the Grassroots PA Dairy Advisory Committee. She also highlighted the Whole Milk for Healthy Kids Act, H.R. 1861, explaining how support for this legislation is essential — no matter how milk is priced.
“In the process of working on this legislation, our (Grassroots PA) committee has identified other concerns. It is hard for producers to advocate when even such a simple and good thing as whole milk in schools is rebuked,” said Bunting. “Farmers hear from leaders and inspectors: ‘If we sell whole milk in schools, do you think we can just stop making cheese and other products?’ Or ‘All you are doing is disrupting markets and creating a butterfat shortage.’ Or ‘Be careful what you wish for.’ These are veiled threats.”
Bunting highlighted the need for greater competition, accountability, transparency and timeliness of price reporting.
“Dairy farmers have farms to run, cows to care for, and they become paralyzed by the complexity and lack of transparency in the system and their milk checks. They become overwhelmed and unconfident, even fearing retribution,” she said.
“We have members with attorneys that cannot interpret their milk checks. That has to stop,” said Bremmer. “Why wouldn’t processors want to show farmers what they are paying them? What is the reason? To have attorneys and others looking at it and they can’t figure it out, that’s a real problem. We think they’re probably re-blending some things to make another ‘make allowance’. We know these things are happening all across the United States.”
Payment terms are critical in this conversation. Even the best-made plans for risk management mean nothing if farmers don’t receive timely and consistent payments for their milk due to the high capital costs and cash flow needs of running a dairy farm.
One commenter said farmers want their income to come from consumers, not from the federal government. He wondered why Federal Milk Marketing Orders (FMMOs) are even needed to guarantee payment.
“Why? So you get paid,” replied panelist Covington. “The FMMOs all establish dates when advance and final payments are made. Having been a co-op manager working with fluid milk plants, I can’t emphasize enough how important this is.”
He also pointed out the important auditing, weights and measures, and market information the FMMOs provide.
McCully said these other services provided by FMMOs are “something we need more of going forward. We need less (price) regulation and more (market) information,” he added. “What’s not working is the milk pricing.”
Here’s where the crux comes into play: The FMMOs are not set up to regulate a global product market, and the industry has set its sights on exporting even more. This is leading the dairy industry to look at how other countries price milk as it relates to the U.S. pricing system and its ability to “be globally competitive.”
As the percentage of Class I sales have declined in relation to growth of U.S. milk production over the past decade, the percentage of milk pooled on FMMOs has also declined from 82% in 2011 to 60% in 2021 (See Table I).
Covington explained how pooling plays out within the FMMO system: “A regulated plant is required to pay its direct shippers and any co-op supplying milk a minimum blend or uniform price. Each Order takes the revenue from each class at the minimum price and pulls it together into one pool to come up with the uniform price.”
He said Class I differentials “have two purposes, to move milk to fluid use and to gain additional revenue for dairy farmers.” They range from $1.60/cwt in the extreme northern U.S. to $6.00/cwt in Miami, Florida and are added to the base Class I mover price.
The regulated Class I plants pay the difference between the uniform price and the Class I minimum price into the FMMO. Other class plants voluntarily participate to take a draw from the FMMO to add to what they pay their producers. That’s how it has worked most of the time – until now.
Diminished Class I sales as a percentage of total milk flip this switch, and the 2018 Farm Bill change to averaging Class III and IV skim plus 74 cents — instead of the ‘higher of’ — along with the advance pricing element, have increased the de-pooling pressure on this system, especially during times of volatility.
When asked about wide price inversions that occurred in some months over the past two years, both Covington and McCully observed the impact on bottlers paying above minimum prices to attract milk away from then higher-value Class III.
In thinking about the future, Covington reminded attendees of the past. He said at one time some Orders had individual handler pools — not marketwide pools — a nod to the idea of how FMMOs could continue to regulate Class I, if handlers in the other classes lose interest in participation.
Back when California was a state order, virtually all milk was pooled. Plants had to make decisions about pooling annually by January 1.
McCully contended that this scenario led to dumping of milk and inefficient transport to other areas. According to his analysis, the idea of making the pooling rules more restrictive and uniform across all FMMOs would lead processors to completely leave the system, and they can do that because their participation is voluntary, except for Class I.
Risk management was on the mind of several commenters, including Doll. He pointed out how the ‘holes’ in the Class I pricing change were exposed by the pandemic volatility. (Significant losses to Class I value are occurring again in the February and March 2022 Class I price.)
Joining Doll as a fellow Illinois dairy farmer was Bryan Henrichs. He said the class price inversions during the pandemic left many farmers on the losing end of what they thought were ‘safe’ $18 Class III forward contracts. The up to $9 negative PPDs kept them from achieving that price when the Class III price exceeded the contract level, but the farmer didn’t receive that price in the milk check — a double whammy.
Henrichs and others noted that milk should be priced competitively and simplified. Henrichs mentioned the idea of pricing milk at one price — no matter what it is used for — allowing market participants, including farmers, to manage risk and trade location basis, like for corn.
Arden Tewksbury’s comments from Progressive Agriculture Organization based in Meshoppen, Pennsylvania were presented by Carol Sullivan — highlighting the need for cost of production in the pricing equation, along with a realistic supply management program.
Annual FMMO pooling decisions (instead of in and out), and his longtime support for whole milk in schools were other key points offered by Tewksbury.
One attendee stated that if processors are looking to raise their ‘make allowances,’ why not add a ‘make allowance’ for producers?
On cost of production, McCully pointed out that the range is wide between a 50,000-cow dairy in western Kansas and a 40-cow dairy in northern Vermont, for example. He said interstate movement of milk and the fact that FMMO participation is voluntary for over 80% of the milk outside of Class I creates issues for using a blanket national average cost of production.
McCully said ‘cost-plus’ contracts are being used today by some processors and producers, but this is only for milk sold outside of the FMMO system.
As confirmed by Covington, 40% of the U.S. milk supply was priced outside of the FMMOs in 2021. He said this could increase as Class I becomes a smaller slice of the growing pie, especially in areas of the country where Class I is already quite small.
Ag Moos 