Tag Archives: FMMO

Signal? What signal? Is anyone looking at the actual calendar and real costs?

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(Excerpts from Sherry Bunting’s Milk Market Moos column in the Apr. 25 and May 2 Farmshine. Get the full Farmshine delivered weekly at a low subscription rate at farmshine.net)

The current dairy trade is ignoring the calendar composition on key reports — adding to bearish sentiment that has forced key dairy commodity prices lower and pushed mailbox milk prices below year ago, despite earlier 2025 forecasts had suggested a raise this year for dairy farmers.

Cheese inventory was down 4% year-on-year (YoY) at the end of March, according to USDA’s April 24 Cold Storage Report. The percentage of the YoY deficits did shrink from January to February and February to March, so some in the trade believe this means stocks are building, and that this trend will worsen as plants ramp up newly commissioned capacity as the year progresses.

But the trade is ignoring the calendar composition. Daily production of cheese actually increased (leap-year-adjusted) during the first quarter of 2025, making this small erosion in the March margin of YoY deficit less worrisome in its reality.

Let’s look at the February Dairy Products Report released on April 3. It stated to the trade that cheese production was lower YoY. But this statistic did not adjust for the extra leap day on the February 2024 calendar. When we adjust the February figures to reflect the extra day of processing last year, we see a much different picture.

The leap-year-adjusted total cheese production for February was UP (not down) 1.3% YoY. American-type cheese production in February was UP 2.2% YoY. And the leap-year-adjusted production of fresh Italian cheeses (made to order) was UP 3% YoY. Despite heavier cheese production, we still had an inventory deficit in February and again in March. We won’t see March cheese production totals until the USDA releases them on May 6.

Bottomline, the leap-year-adjusted numbers show: U.S. manufacturers — in reality — are making more cheese YoY and storing less cheese YoY.

Let’s look at butter. Stocks were up 4% YoY at the end of March. This compares to a 17% overage reported at the end of February, which had one less day to eat it and sell it vs. year ago. Still, the March stockpile was the second largest March inventory in three decades.

But again, let’s review the calendar! The 2025 Easter and Passover holidays were much later than normal this year — occurring past the mid-point of April. How much holiday butter was moved after the March inventory report? We’d wager on this! USDA Dairy Market News mentioned heavy retail featuring of butter and cheese in its weekly reports for weeks ending April 4, 11 and 18. We will reserve judgement on butter sales and inventory until the March production totals are reported on May 6 and end of April inventory figures are released on May 23.

The butter trade, meanwhile, has reacted bearishly to the YoY comparisons without considering calendar composition factors. Today’s wholesale butter pricing on the CME spot market shows U.S. butter can be bought by domestic and international buyers at a substantial 40 to 45% discount compared with the uptrending Global Dairy Trade indexes. Was that severe discount necessary to move it? Or was it speculative and opportunistic?

Meanwhile, farmers will pay the piper (Fig. 1) while processors bemoan the slow response of dairy farmers to what they describe as “a market signal for milk production growth.”

Really? Maybe try checking the batteries on those lights believed to be lit in the Bat Signal. By no means are producers flooding the market with milk, and yet here we are with the 2025 milk price forecast lowered nearly $2 from the January WASDE to the April WASDE.

Meanwhile, processors wonder why dairy farmers are making so many beef crosses instead of dairy heifers, which is keeping a lid on milk growth by large throughput dairies to fill new processing expansions. Dairy farmers began managing their heifer inventories with beef crosses in 2015. Ten years later, American Farm Bureau economists estimate 72% of dairies are doing it as beef semen sales to dairies have jumped from indicating over 111,000 beef-on-dairy calves in 2015 to 3.2 million in 2024.

The real all-cost profit margin on that beef-on-dairy wet calf is larger than the margin on the milk from its dam all year. It’s math.

U.S. dairy trade paradigm shift underway

Several market factors are converging simultaneously: 1) The new tariff uncertainty; 2) The dairy trade’s preparation for new FMMO formula rules on June 1st; 3) Historic foreign investment in U.S. dairy processing growth with sights set on growing international sales as low-cost-producer; and 4) U.S. dairy product prices are at steep discounts below the Global Dairy Trade (GDT).

U.S. dairy has gone from running trade deficits on a value and volume basis before 2007 to running significant trade surpluses, especially from 2014 to 2022. In 2023-24, dairy exports flattened alongside growth in dairy imports from 2021 to 2024. On a volume basis, U.S. dairy exports represented 16% of U.S. milk production on a milk solids equivalent (MSE) basis for 2023 and 2024. This is four times the volume of imports, which grew to 4.2% MSE in 2024. Tariffs, a weaker U.S. dollar, and discounted U.S. product prices should lower U.S. dairy imports in 2025.

On the export side, the dairy trade paradigm has shifted to exporting higher-value products like cheese, and doing so as low-cost producer. 2024 saw record volumes of exported cheese (+17%) and butter (+7%). This continued into 2025 with Jan-Feb cheese export volume up 7% YoY, butter up a whopping 236%.

In its Apr. 18 weekly report, USDA Dairy Market News stated: “Demand for butter from international buyers is strong.” No surprise, considering U.S. butter at $2.32/lb is discounted 45% at $1.16/lb below the global butter price index of $3.48/lb (Fig. 3). U.S. cheese is attracting international interest at a nearly 30% discount as U.S. 40-lb block cheddar ($1.76/lb) undersells the global index ($2.32/lb) by 55 cents per pound (Fig. 2).

Meanwhile, the GDT index on whole milk powder (WMP) was higher for the past few sessions and the global pulse market in between pegged WMP at its highest price level in three years.

These global market trends would normally boost U.S. dairy markets. Not so today. The undercurrent of drilling down the price to be low-cost-producer of high-value overseas sales categories began last summer and has been exacerbated in Q1 2025 by the threat of retaliatory tariffs. At these discounts, plenty of U.S. product can move offshore, tariff or no tariff. If the market suppression has been in vain, meaning no retaliatory tariffs from trading partners for cheese, and in relation to domestic retail prices that may or may not come down — someone stands to make a lot of money, and it won’t be the farmers.

March & Feb. milk production up 0.9%

USDA’s March Milk Production Report on Apr. 22 tallied 19.8 bil. lbs, up 0.9% year-on-year (YoY). Feb. was revised higher, up 0.9% also (leap-year-adjusted). Milk output per cow grew by 0.3% YoY in March, and U.S. dairy farms milked 57,000 more cows YoY.

No. 3 Texas added 45,000 head, with milk up 9.4% YoY. For the first time in 4 years of major losses in production and cow numbers, neighboring New Mexico reported 2000 more cows making 1.5% more milk. South Dakota added 9000 cows and 5.1% more milk. No. 4 Idaho milked 29,000 more cows making 4.3% more milk. Kansas added 8000 cows with 4.4% more milk. No. 1 California continued lagging, down 2.1% as bird flu continues, though it is diminishing. No. 2 Wisconsin was up 0.1%, with 5,000 fewer cows. In the Mideast, 2000 more cows were milked, collectively, with Michigan’s milk up 1.3%, while Indiana and Ohio both gained 0.8%.

In the East, No. 4 New York increased production 1.3% with no added cows. No. 8 Pennsylvania as well as Virginia had milk production equal to a year ago, and both milked 1000 fewer cows. Vermont’s output grew 0.5% with 2000 fewer cows. Georgia grew by 4.1%, without adding cows. Florida declined 3.6% with 5000 fewer cows.

Even with two consistent back-to-back gains just shy of 1% in U.S. milk production, growth is still around half the annualized average growth curve that the U.S. dairy industry was on pre-Covid. Milk production growth, post-Covid — whether by cow numbers, output per cow or even the big jump in component levels — still lags the overall pre-Covid growth curve of 1.8% per year.

This was explored recently in a Milk Production webinar by National Milk Producers Federation in conjunction with Dairy Management Inc and McCully Consulting. They looked at the future for milk growth to support capital investments in processing.

Noted was the fact that planned growth in dairy processing tends to locate where milk growth is concentrated. From 2015 through 2024, milk production grew 8% nationwide, but was mostly concentrated in the Southwest, Idaho, and the Upper Midwest (including Michigan, Ohio, Indiana). Of course, Texas was tops, up 65% over the past decade. South Dakota was up 110% but represents less new volume than the Texas gain.

Webinar leaders circled western New York as a subset growth area, pushing the No. 4 state up 14% over the decade, whereas pretty much of the rest of the eastern seaboard was down, including Pennsylvania off by 9% since 2015. Georgia gained 20% trading off for its neighbor Florida, down 21%.

Questions come to mind in these Eastern numbers:

What role did the base programs play? They were installed by most co-ops and some processors and tended to focus on subduing (or even reducing!) production growth on the coasts vs. the interior. They were prevalent over the past decade, until fairly recently.

Industry leaders in the milk production webinar insist the market is signaling for more milk, but producer response has been slow. They said 1 to 2% milk solids equiv. growth via components has helped some, but not enough.

How strong is that market signal for more milk, when dairies are diversifying or exiting? Input costs and milk check deductions have increased over the past decade. The DMC milk-over-feed margin does not tell the whole story. Dairy farmers don’t get a “make allowance” for rising energy, labor, and insurance costs.

Will the 5 to 7 cents/lb increase in make (take) allowances, effective June 1st, dampen what processors describe as their ‘market signal for milk growth’? With the 2025 milk price and DMC margin forecasts already sliding lower, a 5-cents/lb increase in the “make” (take) for cheese translates to about 50 cents off a hundredweight of Class III milk, the nearly 7 cents/lb ‘make’ on dry whey and the interplay of butterfat impacts bump the total Class III ‘take’ to almost $1.00/cwt.

Does THAT signal scream: “More milk please?!” Maybe, if milk check bonuses return and deductions disappear.

(Even if processors bring back milk check bonuses and reduce or erase milk check deductions once they receive the higher take-allowances, how will those milk check adjustments be targeted in terms of dairy farm location, size, type, and/or incorporation of certain ‘sustainability’ technology. We’ll see.)

USDA to complete producer vote before new administration comes to town

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Final FMMO rule adds more to make allowances, shortens delay on composition updates, restores higher-of, keeps controversial ESL adjuster.

By Sherry Bunting, Farmshine, Nov. 15, 2024

WASHINGTON, D.C. – The USDA released on Nov. 12 the Secretary’s nearly 400-page final decision on the Federal Milk Marketing Order (FMMO) price formula changes, with a few changes from the July ruling.

USDA rejected comments seeking to forestall the make allowance increases or to reduce their size. All make allowances are further raised in the final rule vs. preliminary rule by a fraction of a penny for marketing costs. Also, USDA has added more than a penny per pound to its earlier decision on the nonfat dry milk make allowance. These are milk check deductions that are embedded in the class and component formulas.

USDA also plans to stick with its earlier decision to introduce a rolling adjuster for extended shelf life (ESL) milk, which creates essentially two-movers for Class I that was not part of the hearing scope. The Department further defined ESL milk by processing method to be all milk using ultra-pasteurization, not just relying on the shelf life designation of 60 days or more.

The broad range of changes in the proposed final rule are the result of the national hearing and rulemaking process that began in 2023. It will be made final for implementation after dairy producers vote to approve these changes in the Order-by-Order referendum that will be completed before the new administration takes office on January 20th.

USDA AMS will mail voting ballots to eligible producers and qualified cooperative associations — which may bloc-vote on behalf of their eligible members — after the final rule is published soon in the Federal Register. Ballots must be returned with a postmark of December 31, 2024 or earlier and be received by the Department by January 15, 2025 in order to be counted.

Not all producers in a Federal Order will be eligible to vote. Only producers with milk pooled on a Federal Order in the month of January 2024 are eligible to vote in that Federal Order.

A ‘yes’ vote accepts all parts of the final rule. A ‘no’ vote rejects the changes but also rejects the continuation of that Order. Any of the 11 Federal Orders that does not meet the two-thirds majority requirement for acceptance of these changes will be terminated. The two-thirds majority is calculated among eligible producers in the Order who return a ballot.

USDA AMS will host three public webinars to further inform stakeholders of the changes and referendum process on Nov. 19 and Nov. 25 at 11:00 a.m. ET and Nov. 21 at 3:00 p.m. ET. A link to access the webinars will be provided at the AMS hearing website along with supplementary educational documents. 

Using its backward-looking analysis of applying the changes to actual 2019-23 pool test data, the combined net benefit for all 11 Federal Orders of all the changes in the final rule is estimated at +$0.26 per hundredweight. However, an average does not tell the full story, and it does not include the positive orderly marketing impact of restoring the higher-of method for calculating the Class I base price mover.

USDA’s Table 5 above is the backward-looking static analysis of the weighted Statistical Uniform Price (SUP) – at actual pool component test – showing net benefits for the following Orders: Appalachian +$1.90 per hundredweight, Southeast +$1.80, Florida +$1.43, Central U.S. +$0.52, Mideast +$0.50, Northeast +$0.35, Southwest +$0.07. 

Table 5 shows net-negative impact for California -$0.27, Upper Midwest -$0.13, Arizona -$0.11, and Pacific Northwest -$0.05.

However, this analysis does not factor-in the positive impact of restoring the higher-of method for calculating Class I. The Orders showing net negative impacts above have more liberal policies for jumping in and out of FMMO pools. Since USDA did not quantify the benefit of its restoration of the higher-of method for the Class I mover, it’s important to note that this can soften the blow. 

According to experts consulted by Farmshine on this matter, the potential average benefit for the same 2019-23 period of orderly marketing under the higher-of method in a low-Class-I FMMO like the Upper Midwest is 7 to 10 cents per hundredweight.

More importantly, the orderly marketing restored by this part of the final rule has a protective effect on the month-to-month hits taken by pooled producers from opportunistic depooling and negative PPDs. Why? Because the higher-of method — used for two decades, before the legislative change in 2019 — encourages functional class price relationships that promote orderly marketing.

In short, producers should realize that the restoration of the higher-of reduces the prevalence of very large negative PPDs that can disrupt performance of their risk management tools and treat pooled producers inequitably during black swan events and times of major market imbalances — like have been experienced over the past five years under the average-of method. This is a benefit that is difficult to quantify, but is contained in this decision nonetheless.

On the positive side for dairy farmers, the USDA will also shorten the delay from 12 months to six months for implementing the updated skim milk composition factors. These updates are shown above, which witnesses testified would raise Class I prices in all Federal Orders by an estimated 70 cents per hundredweight (based on 2022 data), while also increasing the manufacturing class prices in the four fat/skim Orders.

Raising the skim component standards helps bring the Class I, III, and IV in alignment, reduces the frequency of negative PPDs, and reduces the incentives for depooling that undermine orderly marketing.

The manufacturing class prices in the other seven Orders that use multiple component pricing are already paid on actual components, not by standardized levels.

Standardized butterfat composition at 3.5% will not be updated in this decision because this is a paper number that does not affect how producers are actually paid. Each pooled producer’s individual minimum price in all Federal Orders is already based on their actual butterfat test for pounds shipped.

The updates to county-by-county Class I location differentials were also tweaked in places, compared with the July preliminary decision, and the base differential for all counties at $1.60 per hundredweight remains in place.

Butterfat recovery within class and component formulas will be updated from 90% to 91%. Several proposals had requested a larger increase.

The Secretary’s final decision on the Class I base price mover remains unchanged from July.

USDA will restore the higher-of formula, which had been changed to an average-of formula in the 2018 farm bill. USDA is also sticking with the ESL adjuster, creating what is essentially a two-mover system for fluid milk.

Processors will separately report sales of conventionally processed (HTST) and ultra-pasteurized (ESL) fluid milk product sales each month. The higher-of method will set the base price mover, and USDA will apply the new ESL adjuster to the sales of ultra-pasteurized milk to determine their final pool obligation.

The ESL adjuster represents the difference between the higher-of vs. the average-of the Class III and IV advance pricing factors over a 24-month period with a 12-month lag. USDA states that it sees this adjuster “stabilizing” the difference between HTST and ESL over time.

USDA also rejected comments that had raised competitive concerns, stating: “The record does not contain evidence to support the implication that manufacturers of dairy products, the majority of which do not manufacture ESL products, would make business decisions to gain an advantage in the fluid market where they do compete.”

On the negative side for dairy farmers, the large increases in processor make allowance credits were made a bit larger, not reduced, after the 60-day public comment period.

USDA relied on the voluntary surveys of processor costs that were presented at the hearing as customary data sources from past make allowance adjustments. While USDA did not fully meet the requests of International Dairy Foods Association (IDFA) and Wisconsin Cheesemakers Association (WCMA), it does recommend much larger make allowances than what National Milk Producers Federation (NMPF) had proposed.

Make allowances represent the costs of converting raw milk into the four manufactured dairy products surveyed by USDA. They are embedded in the pricing formulas, not line items on a milk check, and they aggregate to an impact of 75 cents to $1.00 per hundredweight — depending on product mix and Class utilization.

USDA responded to processor comments about marketing costs, adding $0.0015/lb to its previously proposed processor make allowance credits for cheese, butter, nonfat dry milk, and dry whey. USDA also responded favorably to the processors’ request to adjust the nonfat dry milk make allowance to be more than a penny per pound higher than previously proposed.

The final decision will raise the make allowances on the four products used in class and component pricing – per pound — as follows:

Cheddar cheese will be increased from the current make allowance of $0.2003 to $0.2519 per pound; dry whey from $0.1991 to $0.2668; butter from $0.1715 to $0.2272, and nonfat dry milk from $0.1678 to $0.2393.

In its rationale, USDA stated that NMPF member-cooperative-processors supported the NMPF proposal as “a more balanced approach” to consider impacts on producers and processors. However, they also testified that the smaller increases proposed by NMPF “did not cover their costs.”

This put USDA in the position of having to rely only on the cost data provided by IDFA and WCMA because NMPF offered no cost data to support their smaller proposal. USDA said it rejected consideration of the impact on dairy farmers because the Agricultural Marketing Agreement Act does not include producer profitability as a factor for the Secretary’s consideration on this matter.

USDA chose not to wait for the mandatory and audited cost of processing survey that Congress is expected to authorize and require USDA to utilize in the future. This language is included in all versions of the new farm bill and is reportedly supported by NMPF, IDFA and American Farm Bureau Federation (AFBF).

The final rule also removes 500-pound barrel cheese prices from the protein and Class III formulas, meaning only 40-pound block Cheddar price surveys will be used going forward. USDA rejected proposals that sought to add 640-pound block Cheddar, bulk mozzarella cheese, and unsalted butter to the pricing survey.

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What’s the future for fluid milk?

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Fluid milk sales are up, Whole Milk for Healthy Kids Act is moving. Meanwhile industry globalists put big bets on ESL, shelf-stable, with favor from Vilsack  

By Sherry Bunting, Farmshine, October 18, 2024

EAST EARL, Pa. — Protein is all the rage right now, and consumers are turning back to real milk as they realize its natural high quality protein benefits. Year-to-date fluid milk sales continue to outpace year ago, and that’s good news. Here are some key factors in the future of fluid milk in the U.S.

Fluid milk sales up!

July’s total packaged fluid milk sales more than recovered the June slump — in a big way, and August looks promising too.

USDA estimated packaged fluid milk sales at 3.4 billion pounds in July, up 4.3% year-on-year (YOY). This amplifies the pivotal year-to-date trend above year ago for the first time in decades (except the 2020 pandemic year).

Specifically, USDA’s Estimated Fluid Milk Product Sales Report for July, released in late September, noted conventional fluid milk sales total 3.7% higher YOY, with organic up 11.7%.

Conventional unflavored whole milk sales were up 4.7% YOY in July, while organic whole milk sales were up 17.1%.

Flavored whole milk sales were mixed because these sales rely upon what processors are willing to make and offer on store shelves, not necessarily reflecting what consumers want to buy. When fewer packages of whole flavored milk are offered, the full potential of sales are restrained.

Year-to-date (YTD) sales of all fluid milk products for the first seven months of 2024, at 24.7 billion pounds, are up 0.7% YOY, adjusted for Leap Year. Of this, YTD conventional whole milk sales for the first seven months of 2024, at 8.8 billion pounds, are up 2.1% and organic whole milk sales at 914 million pounds are up 12.6%.

The August report to be released in the coming weeks is shaping up similarly. August Class I utilization pounds reported last week by USDA are up 1.1% YOY and 1.1% YTD (Jan-Aug).

Making more fat, importing it too?

Meanwhile, the monthly World Agricultural Supply and Demand Estimates (WASDE) released Oct. 9 reduced its milk price forecasts for the rest of 2024 and into 2025, expecting Class III prices to fall from September highs as cheese price declines are expected to more than offset the higher whey prices.

This report is looking at all the major new cheese capacity coming online in the next 12 months, which is expected to saturate the cheese market to drive prices lower so that U.S. cheese makers can be globally competitive and continue exporting record amounts of cheese.

But is the milk available to do this? Likely not without robbing from Classes I, II and IV channels. Still, the WASDE forecasts lower Class IV prices also due to the abruptly declining butter price being only partially offset by the higher nonfat dry milk prices.

In short, dairy farms are making higher-fat milk, and the food industry is importing more milkfat, especially in the form of whole milk powder. WMP imports have been up by a record amount YOY in each of the past four years, especially 2024.

Restoring whole milk choice for kids!

Now would be a particularly good time for whole milk choice to be restored in our nation’s schools since we apparently have too much milkfat and not enough skim. Given this scenario, how can anyone in this industry still believe the whole milk in schools would hurt the industry’s ability to make enough butter and cheese. 

Unless it is excess butter and cheese that is needed to push prices down in order to continue beating record exports at reduced prices paid to farmers. 

Getting whole milk choice into schools would help. IDFA has been touting the Whole Milk for Healthy Kids Act. NMPF says they are on board too. This means the industry is united, right?

What are the chances that GT Thompson’s bill to bring whole milk choice back to schools will finally make it all the way to the President’s desk?

For starters, it passed the House by an overwhelming bipartisan majority last December. The Senate bill, S. 1957, has 11 Republicans, one Independent and five Democrats signed on, including notable Democrats such as Amy Klobuchar of Minnesota, Peter Welch of Vermont, Kirsten Gillibrand of New York, and John Fetterman of Pennsylvania who chairs the Senate Ag Subcommittee on Nutrition. 

The main sponsor is Republican Senator Roger Marshall of Kansas, a doctor. States represented are Pennsylvania, Vermont, Wisconsin, Idaho, New York, Iowa, Ohio, Indiana, Tennessee, Maine, and Mississippi.

In fact, Pennsylvania now has both Senators signed on. Senator Bob Casey Jr. (D-Pa.) is late to the party, but he has finally signed on as a cosponsor of S. 1957 on Sept. 19. It’s nice to see both senatorial milk jugs filled on the map for the Keystone State, but the bill needs more cosigners to fend off the blockade by Senate Ag chairwoman Debbie Stabenow (D-Mich.).

GT has included the Whole Milk for Healthy Kids Act in the House Ag Committee-passed farm bill. Word from Washington over the past few weeks is that a new farm bill is expected to get done after the elections in the lame duck session, and that GT will fight to keep the Whole Milk for Healthy Kids Act in the bill. Let’s hope so.

USDA: two movers for Class I?

Also related to Class I fluid milk sales, the dairy industry awaits a final decision on USDA’s proposed changes to federal milk pricing formulas, which includes a surprise for fluid milk: splitting the baby and adding a fifth class of milk in the form of two Class I mover announcements each month. 

The hearing record is woefully inadequate. No proposal. No evidence. No testimony. No analysis. No parameters. No definition. Even USDA’s own static analysis shows these two movers would be as much as $1 or more apart in any given month.

Fresh, conventionally processed (HTST) milk would go back to being priced by the the higher of the Class III or IV advance pricing factors to determine the Class I skim milk base price portion of the mover. 

However, milk used to make extended shelf life (ESL) fluid milk products, defined only as “good for 60 days or more,” would continue to be priced using the average of these two pricing factors, plus-or-minus a rolling adjuster of the difference between the higher-of and average-of for 24 months, with a 12-month lag.

With two movers, fluid milk costs could be different for plants in the same location based on shelf life, with no clear definition for the new class, nor parameters established to qualify. Could we see label changes to move between movers?

Processors will know the rolling adjuster 12 months in advance, due to the “lag.” They will know the two advance-priced calculations (higher-of and average-of) a month in advance. They will have it charted in an algorithm no doubt and make decisions accordingly.

Farmers, on the other hand, will find out how their milk was used and priced two weeks after all their milk for the month was shipped. Those milk checks will be even less transparent than they are now.

Big bets on ESL, shelf stable

The dairy checkoff has openly identified ESL, especially shelf stable aseptically packaged milk, as its “new milk beverage platform,” using dairy farmer funds to research and promote it and to study and show how consumers can be “taught” to accept it.

The whole deal is driven by the net-zero sustainability targets. So, follow the money.

Dr. Michael Dykes of IDFA, at the Georgia Dairy Conference in January 2024, told dairy producers that “this is the direction we (processors) are moving… to get to some economies of scale and bring margin back to the business.”

He said the planned new fluid milk processing capacity investments are largely ultra-filtered, aseptic, and ESL — 10 of the 11 new fluid plants on the IDFA map he displayed are ESL. Some will also make ultrafiltered milk, and some will make plant-based beverages also.

Meanwhile, the linchpin of regional dairy systems is conventionally pasteurized (HTST) fluid milk, prized as the freshest, least processed, most regionally local food at the supermarket.

To be sure, this two-mover proposal fits the climate and export goals set forth by the current Ag Secretary Tom Vilsack when he was working as the highest paid dairy checkoff executive in between the Obama and Biden administrations. 

The pathway to rapidly consolidate the dairy industry to meet those goals is to tilt the table against fresh fluid milk, something he already put a big dent in when removing whole milk from schools.

They decided thou shalt drink low-fat milk and like it. Apparently, they are equally convinced about ESL / shelf stable milk as the way of the future and will continue using mandatory farmer checkoff funds to figure out how to get consumers to like that too.

Just this week, the food writer for The Atlantic did a piece on shelf-stable milk, calling it “a miracle of food science” and lamenting in her Op-Ed that it’s a product “Americans just can’t learn to love.”

Author Ellen Cushing took jabs at America’s preference for fresh natural milk from a global perspective, without a thought for the local dairy farms and regional food systems that are tied to fresh milk. She states that by worldwide standards, other countries have gone shelf-stable milk, which she describes as “one of the world’s most consumed, most convenient and least wasteful types of dairy.”

Processors are making big bets on consumer conversion to ESL and shelf-stable.  There are cards to play in every hand. TO BE CONTINUED!

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There is NO basis for two Class I movers in FMMO recommended decision!

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AUTHOR’S NOTE: Who’s the wizard behind the curtain on USDA’s last-minute milk pricing surprise, the splitting of the Class I baby to favor ESL? Vilsack, of course, with a little help from his checkoff cronies at Midwest Dairy and DMI — masquerading as ‘dairy farmers.’

By Sherry Bunting

USDA’s recommended decision on Federal Milk Marketing Order Class I (fluid milk) formulas brought a big surprise getting very little attention. That surprise: “splitting the Class I baby” and adding what constitutes a “fifth Class” of milk — TWO Class I movers announced each month.

ZERO proposals to divide Class I into a two-mover system were aired at the national hearing. Even USDA’s analysis shows the two movers would differ by as much as $1 apart — or more — in any given month.

The hearing record is woefully inadequate, indeed completely void of testimony for a second Class I mover. No proposal. No evidence. No testimony. No analysis. No parameters. No definition.

What does this surprise two-mover decision mean? 

Fresh, conventionally processed (HTST) milk would go back to being priced by the prior method, using the higher of the Class III or IV advance pricing factors to determine the Class I skim milk base price portion of the mover. 

On the other hand, milk used to make extended shelf life (ESL) fluid milk products, defined only as “good for 60 days or more,” would continue to be priced using the average of these two pricing factors, plus-or-minus a rolling adjuster of the difference between the higher-of and average-of for 24 months, with a 12-month lag.

Confused yet? 

The industry is calling this surprise two-mover twist ‘innovative’ and ‘creative’, even ‘brilliant.’ But let’s hold the horses a moment. 

With two movers, fluid milk costs could be different for plants in the same location based on shelf life. Could processors change the label to move between the movers and pay whichever mover was lower? Who knows? There is no clear definition for the new class, and the parameters to qualify are non-existent.

ESL processors will know the rolling adjuster 12 months in advance, due to the “lag.” They will know the two advance-priced movers a month in advance. They will have it charted in an algorithm no doubt, and make decisions accordingly.

Dairy farmers, on the other hand, will find out how their milk was used and priced two weeks after all their milk for the month was trucked off the farm. If the two-price Class I system becomes law, dairy producers’ milk checks will be even less transparent than they are now!

Not only does the USDA hearing record and decision fail to clearly define ESL, the industry doesn’t even have an exact and generally-accepted definition or standard for ESL.

ESL is both a loose and specific term.

Generally speaking, ESL is a term covering a broad range of products — ranging from UHT (ultra high temperature) or ultra pasteurization, aseptic packaging, to the inclusion of a process that combines microfiltration, skim separation, and indirect heating (in stages). These processes yield what is more specifically referred to as ESL fresh milk with a longer shelf life in refrigeration, but is not shelf-stable.

What’s at the root here?

Dairy checkoff personnel have openly identified ESL — especially shelf stable aseptically packaged milk — as its “new milk beverage platform.” Dairy farmers’ promotion funds are being used to research and promote ESL milk, as well as studying and showing how consumers can be “taught” to accept it.

For the past few years, the four research centers supported by the checkoff have been drilling into milk’s elements to sift, sort, and test different combinations to reinvent milk as new beverages.

In 2023, North Carolina State researcher Dr. MaryAnne Drake —speaking at the 2023 Georgia Dairy Conference — talked about this “new milk beverage platform. We are after a shelf-stable milk that tastes great and meets our consumer’s sensory needs and our industry’s sustainability needs,” she said.

Bingo. Dairy checkoff funds for ESL are being driven by the net-zero sustainability targets. And now USDA’s federal milk order changes are proposing to lower dairy farmers’ Class I income and/or competitively favor, and in a way subsidize, ESL processors over fresh HTST fluid milk processors. Follow the money.

Dr. Michael Dykes of IDFA, at the Georgia Dairy Conference in January 2024, told dairy producers that “this is the direction we (processors) are moving… to get to some economies of scale and bring margin back to the business.” He said the planned new fluid milk processing capacity investments are largely ultra-filtered, aseptic, and ESL — 10 of the 11 new fluid plants on the IDFA map he displayed are ESL. Some will also make ultrafiltered milk and plant-based beverages too.

The linchpin to regional dairy systems and markets for milk from farms that fit USDA’s description of small businesses is the processing of fresh, conventionally pasteurized (HTST) fluid milk.

Meanwhile, dairy checkoff overseers, in cahoots with processors, are making big bets that consumers will embrace the obvious conversion underway to the consolidating shelf stable ESL milk, emboldened by the average-of pricing that has failed farmers miserably over the past five years and is now part of the proposed two-price Class I system mysteriously added to the USDA recommended decision when a two-price Class I system was never noticed as part of the hearing scope.

In the recommended decision, USDA notes that ESL currently represents 8 to 10% of total fluid milk sales but does not present the full picture of how the industry began aggressively converting to ESL since 2019 when Class I average-of was implemented. More of these accelerated investments will become operational in 2024-26.

Before we know it, the industry will have converted to ESL, and dairy farmers will once again experience disorderly marketing, depooling, and the basis risk of the mysterious average-of mover.

Dairy farmers have seen this movie before. 

In 2018, the average-of method — which changed how the Class I base was calculated — was portrayed by National Milk and the IDFA as “revenue neutral.” But at the recent national milk order hearing, testimony revealed that farmers experienced Class I revenue losses totaling nearly $1.25 billion from May 2019 through July 2024… and other impacts. 

Disorderly markets via the ‘average-of’ continue to result in losses and disrupt performance of risk management tools that fail to protect farmers against the intervals of extreme basis risk.

Proponents say the proposed rolling 36-to-13-month ESL adjuster on the second mover in USDA’s decision provides compensation to farmers for the difference between average-of and higher-of. However, that occurs gradually — over time — with a lagged interval. If tight milk supplies boost commodity prices and drive up all classes of milk, then dairy farmers’ incomes will at least partially lag years behind real-time markets!

ESL processors like Nestle and fairlife testified that the average-of method over the past five years allowed them to use Class III and IV hedges on the CME to offer flat 9- to-12-month pricing to wholesale customers and increase their sales. Nice to know the big corporations made money on that inequitable Class I pricing system.

Would a two-mover system ultimately reduce farmers’ access to milk markets in some regions and diminish the food security of those consumers? Watch the impact of a new, unregulated ESL plant now being built in Idaho!

Many legitimate questions lack answers

Milk is commonly prized as the freshest, least processed, most regionally local food at the supermarket. Will the USDA recommended decision accelerate consolidation and a reduction in fresh fluid milk availability for consumers?

Has USDA considered the purpose of the FMMO system is to promote orderly marketing and the adequate supply of fresh fluid milk? Will consumers accept the taste of the not-so-fresh ESL, or migrate faster to other beverages if fresh fluid milk is less available to them?

How will the two-mover system impact dairy farms located outside of the industry’s very specific identified growth centers? 

Will this perpetuate the wide divergence between Classes III and IV that has been an issue since 2019, further punishing dairy farmers with disorderly marketing and opportunistic depooling?

Who knows? The hearing failed to define, examine, or obtain evidence on any such questions… or any other questions that the hearing process is meant to be open to because this decision falls outside of the hearing scope!

Vilsack strikes again?

This proposal — a price break favoring ESL milk — fits the climate and export goals set forth by Ag-Secretary-then-DMI-executive-then-Secretary-again, Tom Vilsack. The pathway to rapidly consolidate the dairy industry to meet those goals is to tilt the table against fresh fluid milk. This is something Vilsack already put a big dent in by removing whole milk from schools.

It’s like one well respected veterinarian in the industry observed recently in conversation: “Someone decided: Thou shalt drink low-fat milk and like it.”

That “someone” is apparently equally convinced that the industry shall move to ESL and aseptic milk processing… while using dairy farmers’ checkoff funds to figure out how to get consumers to like that too.

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USDA recommends changes to milk pricing formulas and other Milk Market Moos

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By Sherry Bunting, Milk Market Moos column in Farmshine, July 5, 2024 (with updates)

USDA issued a 332-page recommended decision on July 1 for changes to pricing formulas in all 11 Federal Milk Marketing Orders, which was later published in the Federal Register July 15.

The bottom line is a mixed bag of positives, negatives, and questions requiring further study.

USDA AMS professionals did yeoman’s work with the 49 hearing days across five months of proceedings on 21 proposals, yielding 500 exhibits; more than 12,000 pages of transcripts of testimony from farmers, cooperatives, processors and others, along with cross-examination; and over 30 post hearing briefs and correspondence.

Once the draft decision is officially published in the Federal Register in the coming weeks, the 60-day public comment period begins, followed by 60 days of USDA evaluation of the feedback, followed by a final rule, followed by a producer referendum.

According to the FAQ section at the USDA AMS national hearing website, only producers who are pooled in the selected representative month in each Federal Order will be eligible to vote. Each of the 11 Orders votes separately.

If two-thirds of those eligible dairy farmers OR two-thirds of the pooled volume they represent in an Order vote “yes,” then that Order continues, as amended. If neither two-thirds threshold is met, then that Order is terminated. *AMS answered our question on the two-thirds determination that it is determined by the number of eligible (pooled) producers who actually participate in the vote, stating: “If a producer receives a ballot but does not return it, the producer is not included in either the numerator or the denominator of the two-thirds calculation.”

Here’s what’s in the USDA recommended decision package:

1) Milk Composition Factors: USDA recommends updating the milk composition factors to 3.3% true protein, 6.0% other solids, and 9.3% nonfat solids. This would mainly affect Class I in all Orders and the other Class prices in the fat/skim priced Orders.

2) Surveyed Commodity Products: The recommendation here is to remove the 500-pound barrel cheese prices from the Dairy Product Mandatory Reporting Program survey and rely solely on the 40-pound block cheddar cheese price to determine the monthly average cheese price used in the Class III and protein formulas. National Milk Producers Federation (NMPF) proposed this and International Dairy Foods Association (IDFA) opposed it. American Farm Bureau Federation (AFBF) had proposed adding unsalted butter and 640-lb block cheddar to the survey, and California Dairy Campaign had proposed adding bulk mozzarella. Neither of these proposals were included in USDA’s recommended decision.

AFBF chief economist Roger Cryan discussed this recently on Farm Bureau Newsline, where he also talked about USDA decision not to include AFBF’s proposal to raise the Class II differential.

3) Class III and Class IV Formula Factors: USDA chose to recommend make allowance increases that fall in between the lower increase proposed by NMPF and the higher increase proposed by IDFA and Wisconsin Cheesemakers. The USDA recommendation is to raise these manufacturing allowances from current levels to these new levels: Cheese: $0.2504; Butter: $0.2257; NFDM: $0.2268; and Dry Whey: $0.2653. The recommended decision also proposes updating the butterfat recovery factor to 91%.

By our calculations, the proposed make allowance increase would equate to roughly an additional 80 cents per hundredweight deduction from milk checks embedded in the pricing formulas. Current make allowances total up to about $2.75 to $3.60 per hundredweight, depending on product mix. New make allowances would total up to about $3.25 to $4.50 per hundredweight, depending on product mix.

AFBF economist Danny Munch was interviewed by Brownfield Ag on July 2, noting the increase is 5 to 7 cents per pound. “When we loop that into a per-hundredweight value, that means farmers will be seeing 75 cents to 87 cents less per hundredweight on their milk checks because of the increased make allowance.” He says the data used for the make allowances was based on voluntary cost of production surveys. 

Farm Bureau president Zippy Duvall did not mince words: “We strongly believe make allowances should not be changed without a mandatory, audited survey of processors’ costs. Our dairy farmers deserve fairness in their milk checks and transparency in the formula, but the milk marketing order system can’t deliver that unless make allowances are based on accurate and unbiased data,” he said in an AFBF news release.

American Dairy Coalition CEO Laurie Fischer also weighed in: “We are disappointed that USDA has proposed higher make allowance credits for processors, which are — in effect — deductions from farmer milk checks that are embedded within the pricing formulas. The industry does not yet have mandatory, audited cost surveys, and there is no connection between increased processor credits and a transparent, adequate price paid to farmers,” she said in an ADC news release, adding that these two elements have been key policy priorities for ADC since January of 2022.

4) Class I differentials: USDA recommends updating Class I differential values to reflect the increased cost of servicing the Class I market. The base differential for all counties stays at $1.60, and the county-specific Class I differentials are specified in the decision at levels higher than they are currently, but by less than the increases that had been proposed by NMPF.

5) Base Class I Skim Milk Price: USDA recommends going back to the higher-of the advanced Class III or Class IV skim milk prices to set the Class I mover each month. However, the Department did not go with Farm Bureau’s request to do this on an emergency expedited basis.

And, here’s where it gets tricky, the higher-of method would only apply to fresh fluid milk, while adopting a rolling monthly adjuster that incorporates the average-of for milk that is used to make extended shelf life (ESL) fluid products, including shelf-stable milk.

This means ESL milk would be priced differently from conventional fresh fluid milk within the same Class I category. A simple averaging method would be used as part of this special ESL adjuster, which would incorporate a 24-month rolling average (with a 12-month lag) of the difference between the higher-of minus the average-of, which is added to the current month simple average-of, and then the current month higher-of is subtracted from that sum. This adjuster could be either a positive or negative number.

In fact, we’ve learned that this ESL adjuster, using months 13 through 36 counting backward from the implementation date, would allow milk for ESL products to recoup, over time, some of the very large prior losses experienced by all dairy farmers during the average-of method that has been in place since May 2019. Because a simple average is used for the adjuster calculation, without the 74 cents, more would be recouped than the actual loss difference experienced under the years of the average plus 74 cents method. On the other hand, the rolling adjuster look back will include months in which a smaller make allowance was in effect than could be the case in the future if USDA’s make allowance recommendation becomes final.

Meanwhile, producers of milk bottled as ‘regular’ fresh fluid milk would start right out of the implementation gate at the higher-of and recoup zero prior loss endured under the current form of average-of, and be subjected to the higher make allowance, which is built into the advance pricing factors. (More on this feature of the USDA recommended decision in a future article.)

In its ‘notice to trade,’ USDA states that the ESL adjuster was developed to “provide for better price equity for ESL products whose marketing characteristics are distinct from other Class I products.”

Meanwhile, in his July 3rd CEO’s Corner, NMPF’s Gregg Doud appears to embrace what is essentially a fifth milk class given the different pricing methods proposed in the recommended decision for Class I — depending on shelf-life classification.

Doud writes: “Recognizing the need to restore orderly milk marketing, USDA decided to go back to the higher-of, with an accommodation for extended shelf-life milk, thus granting NMPF’s request for the vast majority of U.S. fluid milk. USDA’s solution is, frankly, as innovative as it is fair – a classic case of two sides not getting all that everyone wanted, but everyone getting what they most needed.”

Splitting the baby was not part of any hearing proposal that we could find; apparently processors made their case with USDA as to needing the average-of method (with calculated adjuster) to sell ESL milk products deemed the new milk beverage platform.

During the national hearing in Carmel, Indiana, representatives from Nestle, a major maker of ESL fluid milk products, said their sales increased once the average-of method was implemented in May 2019 through legislative language in the 2018 farm bill. They testified that they could manage risk when providing 9 to 12 month future pricing on shelf-stable fluid products to foodservice and convenience stores. They lamented that losing the average-of would hurt their sales.

Representatives for fairlife testified that forward pricing of their ESL products was critical to their ability to grow sales and that losing the average-of would impact future plans, including the size of the new plant being planned for New York State and other expansions elsewhere in the future.

However, since this bifurcation of Class I was not a proposal subject to vetting, no one had the opportunity to present evidence on future impacts.

Public comments on the recommended proposals will be accepted for 60 calendar days after the decision is published in the Federal Register. Comments should be submitted at the Federal eRulemaking portal: http://www.regulations.gov or the Office of the Hearing Clerk, U.S. Department of Agriculture, 1400 Independence Ave., SW, Stop 9203, Room 1031, Washington, DC 20250-9203; Fax: (844) 325-6940.

OTHER MOOS — July 3, 2024

Milk futures swap trends: Cl. IV up, III down

Class III milk futures moved lower this week especially on August and Sept. 2024 contracts; while Class IV milk futures were higher on 2024 contracts, steady to firm for 2025. On Tues., July 2, Class III milk futures for the next 12 months averaged $19.28, down 24 cents from the previous Wednesday. The 12-month lass IV milk futures average was $21.19, up 14 cents. This put the spread between Class IV over III at nearly $2.00 per cwt.

Block cheese, whey higher

Pre-holiday trade was firm to higher with little volume moved on most products. But nonfat dry milk lost ground, and the 500-lb barrel cheese trade was active at lower prices.
The 40-lb block Cheddar price was pegged at $1.90/lb on Tues., July 2, up 2 cents from the previous Wednesday, with just 2 loads trading the first 2 days. The 500-lb barrel cheese market lost 2 cents, pegged at $1.88/lb Tuesday with 12 loads trading the first two days. (Update gained it back July 3 at $1.9025/lb with 2 loads trading). Dry whey gained a half-penny on the week at 49 cents/lb; one load traded.

Butter higher, powder weak

The butter market saw no trades the first two days this week. By Tues., July 2, the daily CME spot price was pegged nearly a nickel higher at $3.1375/lb. Grade A nonfat dry milk lost a penny and a half at $1.17/lb Tuesday with 4 loads changing hands. (Update, NFDM up July 3 at $1.18/lb, 2 loads traded)

May All-Milk $22.00, DMC margin $10.52

USDA announced the All-Milk price for May at $22.00, up $1.50 from April and $2.90 higher than a year ago. The national average fat test was 4.17, up 0.02 from the previous month and up 0.11 from a year ago. The Pennsylvania All-Milk price for May, at $22.50, was just 70 cents higher than for April, and fat test fell by 0.10 from April to May.

USDA announced the May Dairy Margin Coverage (DMC) margin at $10.52/cwt, up 92 cents from April and up a whopping $5.69 per cwt from the May margin a year ago. This is the third consecutive month in which no DMC margin payments were triggered as the margin remains above the highest coverage level of $9.50/cwt. The $1.50/cwt gain in the national average All-Milk price in May outpaced the 58 cents/cwt increase in feed cost.

H5N1 detections fall to 57 in just 7 states

As of July 2, 2024, the confirmed cases of H5N1 in dairy cows decreased to 57 herds in now just 7 states as South Dakota moved past the 30-day window and off the active map. Colorado has the most detections at 23 in the past 30 days, 27 cumulatively since April 25. This has created some questions as it represents 20 to 25% of the 110 herds in the 13th largest milk-producing state. Colorado is followed by Iowa (12), Idaho (9), Minnesota (6), Texas (5), while Michigan’s previously high numbers over 25 have dropped to one, and Wyoming still has just one. Michigan and Wyoming will be past their 30 days on July 7 and 12, respectively, if no new detections are confirmed.

MILK MARKET MOOS – Bad news in this week’s mailbox, but better views ahead!

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By Sherry Bunting, Portions reprinted from the May 10, 2024 column with a few preview notes for the May 17 weekly Milk Market Moos, available exclusively in Farmshine Newspaper

This week’s settlement checks for April milk are hard hit by the record-low protein price of $0.83/lb and the $4 to $5 spread of Class IV over III that continues to depress the Class I price via the ‘average of’ method — resulting in depooling of higher value manufacturing milk. But the good news is the cheese markets have sustained a 5-week rally that has been heating up, pushing Class III milk futures higher, while tight supplies of nonfat dry milk moved briskly at higher prices to keep Class IV forging ahead too.

First the bad news: April FO blend prices are mixed with component-pricing lower, Fat/skim-pricing generally higher

The record-low April protein price of 83 cents/lb and second lowest Class III price of the year pushed the Federal Order (FO) blend prices 25 to 45 cents lower in six of the seven FOs that use Multiple Component Pricing (MCP). The Northeast, was off just 9 cents, given the fact that processors still pooled some milk used for higher value Class II and IV products, although not as much. De-pooling of Class II and IV milk was heavier in other MCP FOs due to the whopping $5 spread between Class II and IV ($20.23 and $20.11) over Class III ($15.50) and the fact that Class II and IV were $1.00 higher than the Class I ‘mover.’

The wide spread pushed the Class I ‘mover’ price $1.00 lower using the ‘average of’ calculation than it would have been under the previous ‘higher of’ method. The May Class I mover price is even more disadvantaged — down $1.73 vs. ‘higher of’ — based on the advance pricing factors at the beginning of April before the CME cheese market rally begins filtering its way into USDA weekly surveys and FO formulas.

Three of the four fat/skim priced FOs — Florida, Southeast and Appalachian — have April blends that are mostly 20 cents higher than March. Fat/skim priced FOs benefitted from the butterfat price at $3.33/lb and a solids nonfat (skim) price at 97 cents/lb that was 14 cents higher than the protein price. This is the first time such an inversion has occurred.

Meanwhile, the fat/skim-priced Arizona FO (131) saw its April uniform price fall by 19 cents due to Class II and IV depooling, which increased the negative effect of a higher Class III utilization percentage.

The uniform price in the three southeastern region FOs (5, 6 and 7) would have netted an additional 70 to 80 cents per cwt — if Class I had been priced via the ‘higher of.’ The Mideast (FO 33) would have netted 40 cents per cwt more; the Northeast, Central, and Southwest (FOs 1, 32 and 126) 29 to 30 cents; California and Pacific Northwest (FOs 51 and 124) 20 cents; Upper Midwest (FO 30) 6 cents. All MCP FOs would have benefitted from better alignment keeping more of the higher-valued Class II and IV milk in the FO revenue sharing pools. It’s hard to say whether or how much of the windfall profits of depooling are consequently shared with dairy farmers shipping the milk.

Once again, the Upper Midwest (FO 30) had the rock-bottom uniform price of $15.95 at 3.5% butterfat, with over 92% of the utilization being Class III. If the ‘higher of’ had been used for pricing Class I, the pounds of Class II and IV utilization would likely be greater, which may have contributed to a more positive uniform blend price while yielding a little more than a nickel of additional Class I contribution. Instead, the blend price included less than 2% Class II and IV, and just over 6% Class I.

The FO 30 market administrator saw fit to send a reminder letter to handlers in March that they must show separately how milk payments were calculated for producers having both pooled and depooled milk to ensure the pooled milk was paid at the FO minimum price. Even 100% pooled producers have been seeing ‘milk check gymnastics’ such as underpayment of the FO minimum for ‘other solids’, and then using the producer’s protein premium to make up the difference in order to achieve the regulated gross minimum.

According to USDA AMS, Federal Milk Marketing Orders with multiple component pricing, use individual component values to determine the minimum gross value due to producers. The FMMOs’ primary function is to ensure that the gross payment to the producer is at least equal to the minimum payment for their pooled milk. Enforcement of individual component values may be pursued by FMMOs to prevent handler deception and maintain transparency. In FMMOs where it is common to pool only a portion of a producer’s milk, proprietary handlers are required to send statements to producers indicating the separate amounts paid for pooled and non-pooled milk.

The April 2024 uniform prices and PPDs were announced May 12 through 14 as follow (+/- change from month ago):

Now the good news! What’s UP with Class III?

For 18 months, Class III has been the underdog in milk pricing, especially rough for dairy producers in the Upper Midwest struggling under the brunt of FMMO 30 blend prices built mainly on Class III.

In fact, the April protein price hit a record low, announced May 1st at 83 cents/lb, which is 14 cents below the 97 cents/lb price for solids nonfat. This inversion has never happened before, according to our search of class and component pricing archives.

The butterfat price for April is quadruple the protein price at $3.33, creating additional divergence issues in multiple component pricing orders.

Meanwhile, the Class III milk futures haven’t offered much of a breakeven price to spend money protecting with hedges or DRP…

Until now…

Class III milk futures continued higher — skyrocketing limit-up for nearby contracts Wed., May 8, putting the exclamation point on five straight week of gains that have added $3 per hundredweight to the remaining 2024 contract months, going from the $16s and low $17s to the $19s and $20s, with 2025 contracts well into the $18s. This is the first time the Class III milk futures board has seen a $20 mark in over 18 months.

Class IV futures also made solid 20- to 30-cent gains charting over $20 and $21 across the board.

If the current Class III rally goes too far, too fast in the near-term, we could see negative PPDs in some Federal Orders in June for May’s milk because the May Class I advance base price mover was already announced in mid-April, and includes the much lower advance pricing factors of the (Class III) cheese and whey markets during the first two weeks of April.

The ‘average of’ method disadvantaged the May Class I mover by $1.73/cwt, which will undoubtedly be a factor for milk pooling / depooling decisions at the end of this month as Class I, at a base price of $18.46, will likely be rock-bottom lowest class for May, except where location differentials are high enough to boost it.

$20 finally appears on Class III futures board (June), Spot cheese hits highest price in over a year.

On Wed., May 8 the Class III milk futures for the next 12 months (May24 through Apr25) averaged $19.04, up 54 cents from the previous Wednesday. Class IV milk futures averaged $20.86, up 22 cents from the prior Wednesday.

The milk futures rally is driven by the upward momentum in CME daily spot cheese markets, reaching levels May 8 that are 50 to 55 cents per pound higher than six weeks ago.

The 40-lb block Cheddar price roared 11 1/2 cents higher to $1.95/lb in a single trading session Wed., May 8, gaining 20 cents/lb on the week, and hitting the highest level since last fall, with a single load trading. For 500-lb barrel cheese, at $1.90/lb, the gain was a dime on the week, and the highest price in over a year, with zero loads trading.

(Spoiler alert, the spot price for 500-lb barrel cheese skyrocketed well north of $2 on Tues., May 14 with a single load trading at $2.06. Conversely, Tuesday’s trading session on 40-lb block Cheddar started out moving a load as high as $2.00/lb, which would have been a 2-cent gain for the day. However, after the dust settled on the brisk trading session that moved a whopping 14 loads of blocks in a few short minutes, the market was pegged at the lowest load price of $1.93/lb — down 5 cents from the day before. A bid came in at $1.92 and was ignored after such an abnormally large clearance of blocks for a single session. More on this in the May 17 Farmshine.)

All other dairy commodity prices were higher Wed., May 8, with no trades changing hands. Dry whey gained a penny at 38 1/2 cents/lb (where it continued trading on Tues., May 14 with 2 loads changing hands). May 8th Butter was up 2 cents at $3.02/lb (but traded 16 loads at $3.00/lb Tues., May 14 and 1 load at $2.99/lb, which was a 3-cent loss since the low price is the peg for the day). Nonfat dry milk (NFDM) was up a penny at $1.13/lb on May 8 (and gained 3 1/2 cents more on May 14 at $1.1650/lb with an incredible 26 loads moving in a single session’s narrow $1.16 to $1.1650/lb range).

Dairy farmers will not see these gains in their milk checks until June, if the trend is sustained.

In the face of lower overall dairy exports, analysts tout the record volume of cheese exports in March, which were no-doubt prompted by the cut-rate January through April pricing that doesn’t pay bills on the dairy farm.

We have to go back to 2019 to find a 4-month Jan-April average Class III milk price that was lower than the first four months of 2024. We have to go back to the Covid shutdown in 2020 to find an April Class III milk price that was lower than April 2024. But even then, protein held up at $2.48/lb, not the 83 cents per pound that USDA announced for April settlement.

The difference this time is that fat is so much higher (quadruple the protein price at $3.33/lb for April). This essentially pulls a credit out of protein as an adjustment in fat values for cheese vs. butter. This is a seldom-discussed and little understood function of FMMO multiple component pricing, and another downfall of the many months of wide Class IV over III divergence.

Better views ahead… Higher Class I sales and record-high made-to-order fresh mozzarella production compete with stored product output for reduced milk supply

While the rear-view mirror shows the rough road traveled, the view ahead is improving for Class III milk and the beleaguered record-low protein price. Milk production is down. Packaged Class I fluid milk sales are UP. Processors are making record amounts of fresh (made to order) mozzarella cheese, causing Cheddar production to slow. Meanwhile, Class IV product supplies are tight. (One reason overall U.S. dairy exports were down is that inventories and production of milk powder is down!)

The most recent USDA Dairy Products Report showed Cheddar cheese production down 3.3% year-over-year (YOY) in March, with all American style cheeses down 2.9%. A positive this year that was missing last spring and summer is the draw for milk to make Italian cheeses.

Mozzarella production set records in March, up 6.8% YOY, but those products are not price-surveyed, nor are they included in the FMMO Class III pricing formula.

In addition to Cheddar cheese, the Class III price is also made up of dry whey sales via the ‘other solids’ component. Whey production for both human and animal use is accelerating as inventories of value-added whey protein concentrate (WPC) and whey protein isolates (WPI) were more than 40% below year ago at the end of March, despite March WPC production being up 1% for human use and up 40% for animal use; WPI up 73% YOY.

Dry whey is the commodity used in the FMMO Class III pricing formula with production up 2.4% for human use and 19.2% for animal use in March.

On the Class IV side, butter production was up 1.5% YOY in March with inventories up 2%.

As for powders: Whole milk powder (WMP) production was down 14.6% with inventory 36.3% lower YOY; Skim milk powder (SMP), typically made for export orders, was down 41.7%; and Nonfat dry milk (NFDM) output was down 7.9% YOY in March with inventories off 20.3%.

On the flip side, milk protein concentrate (MPC) production was the contrarian — up a whopping 38.5% YOY in March. MPCs are often used to bump cheese yields higher per hundredweight of raw milk.

These factors beg questions: Why were Class III milk prices for the first four months of 2024 at 5-year lows and protein at a record-low 83 cents per pound for April? Was it the plan to crush Q-1 2024 spot cheese and Class III milk prices to generate record cheese export volumes in March? Are cheesemakers using some of that big increase in MPC production to make more cheese from each cwt of raw milk? Are bioengineered fermentation yeast proteins that are marketed in trade publications as ‘dairy protein analogs’ diluting the supply and demand equation fractionally?

Global picture improving

The global picture is also improving. New Zealand tallied a lower output for the season, and recent reports show stable to lower milk output in EU countries.

In the Global Dairy Trade (GDT) biweekly internet auction Tues., May 7, the all products index was up 1.8% over the previous auction on April 16. This includes a whopping 8% increase in the GDT price index for bulk Cheddar sales contracted out through November, plus a 2.3% increase in bulk Mozzarella sales for July.

In fact, GDT Cheddar contracts for June were up 6.5% in Tuesday’s auction; July up 3.9%; August and September had no sales. October and November contracts were up 11.2 and 12.5%, respectively, compared with three weeks ago.

Seeds of doubt being sown, Part III: Will it reduce butterfat supply and impact industry’s cheese-focused future?

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By Sherry Bunting, Farmshine, March 1, 2024

EAST EARL, Pa. — As seeds of doubt are being sown internally within the dairy industry about whole milk in schools, we have discussed Confusion (will it help milk prices?) and Consternation (unfounded fear about what will processors do with ‘all that skim?’)

This week, we look at the third C: ‘Competition’: If schoolchildren are offered whole milk, will it significantly impact butterfat supplies, raise butter prices, and compete with the industry’s cheap milk cheese-focused future?

Every winter conference for the past few years has had at least one speaker telling dairy farmers that fluid milk sales are declining because Americans are eating more of their milk instead of drinking it. 

Fair enough. Cheese is the future, and the industry wants to make more of it. Lots more of it. So much more cheese, in fact, that inventory is growing. Analysts at conferences put up slides with the words “Export or perish!” in large font. 

Yes, U.S. Dairy wants to export more cheese, including mozzarella. U.S. Dairy wants to export more butter and cream products. U.S. Dairy wants to export more of the higher-value products. (And we want to sell more cream to the upscale coffee houses and downscale McCafe drinks we adults get to choose while junior sips a paltry half-pint of fat-free chocolate milk, sugar water, in the back seat. What’s wrong with us?)

This map shows the over $7 billion in new processing coming online between now and 2026. “There’s a lot of cheese on this map,” said IDFA CEO Michael Dykes, presenting at the Georgia Dairy Conference. This slide has also been popping up in other industry conference speaker powerpoint decks this meeting season. IDFA data

The industry also wants to take milk down to its molecular level – to turn the jug of milk into ingredients at the start — to make new function-targeted products for the beverage space outside of Class I parameters within an increasingly Class III dominated processing infrastructure.

Toward that end, new processing capacity won’t convert milk to traditional products, leaving elements to be marketed as ingredients. Instead, these new state-of-the-art cheese and ingredient plants start by taking milk apart to the ingredients-level to be used in making health beverages, bars, and other products, as well as to make cheese. 

At the Georgia Dairy Conference in January, IDFA CEO Michael Dykes mentioned IDFA’s support for the Whole Milk for Healthy Kids Act, giving attendees a QR code to weigh-in with their Senators. 

Later in his presentation, he noted that a shift to more fat in school milk would make a 3% impact on the butter supply.

“I’m a believer that the markets work, when you take it one place, you make a difference and change it someplace else. Those are the things we can work through,” said Dykes.

So, we reached out to Calvin Covington, a former cooperative CEO who is intimately familiar with component pricing as it became part of the Federal Milk Marketing Order (FMMO) system over 20 years ago. We asked his thoughts on how increasing fat in the school milk supply would impact butter. 

“Increased Cheddar cheese production has used millions and millions of pounds of butterfat. No one complains about this. Doesn’t the dairy industry want to increase demand for all milk components?” he replied and sent forth his own calculations, providing a spreadsheet showing his estimates of milk used in schools and the additional fat that would be needed for all of that milk to go completely to 3.25% (whole) milk.

Covington ran the numbers, moving methodically through assumptions on Table 1 to conclude the impact of shifting from a school milk fat percentage of 0.5% (half fat-free and half 1%) all the way to 3.25% (whole milk) would have a small impact on the butterfat supply — raising the school milk’s usage of butterfat from 0.25% of total butterfat production at the current national average fat test of 4.11% to being 1.47% of total butterfat production at the average 4.11% fat test.

Using the identified assumptions, Table 1 shows estimates on school milk volume and use of butterfat under today’s fat-free and 1% low-fat milk requirement compared with a scenario in which all school milk pounds were at 3.25% fat as standardized whole milk. Provided by Calvin Covington

He estimates public schools use 9.72% of all fluid milk, and for the purpose of the spreadsheet exercise, he assumed that half of those school milk sales are currently fat-free and half are 1%. If that is the case, then going to 3.25% (whole) milk for all pounds of school milk sales, the additional fat that would be needed is almost 114 million pounds, he reports.

“This should be a non-issue,” Covington concludes, using estimates that are based on all of those school milk pounds moving to 3.25% fat. 

The more likely scenario, however, is that schools would implement a more gradual increase in fat percentage. If it mirrored the national average for fluid milk sales at 2% fat, the increase would be smaller initially. Using Covington’s chart and assumptions, the additional fat that would be needed if school milk fat content averaged 2% is closer to 84 million pounds, going from using 0.25% of total fat production to 0.9% of total fat production.

Not all schools will choose to offer all milk at 3.25%. Some may offer 2% milk, which has also been banned since 2010 and would be given regulatory relief under the Whole Milk for Healthy Kids Act. 

Even if 3.25% fat milk is universally offered, some schoolchildren will continue to choose low-fat milk, as they did in the Pennsylvania trial, where the preference was 3 to 1 for whole 3.25% over low-fat 1%.

While a potentially higher fat content in school milk is being scrutinized for its impact on butter and butterfat, the impact of aggressive increases in cheese production is ignored. This speaks a bit to industry priorities.

“As butter and cheese consumption increase, processors do not argue against the increase because utilizing more fat would increase the fat price,” Covington observes, wondering why anyone would be concerned about the impact on butterfat supply if children get to choose whole milk while not being concerned about the impact on butterfat supply in any other sector.

“An increase in fluid milk sales, in schools, or anywhere, benefits all dairy farmers. With all things being equal, it would shift milk from Class III and IV to Class I, which is a (normally) higher milk price,” Covington explains. “If Class III or IV need more milk to replace the loss to Class I, more money would need to be paid by Class III and IV milk buyers, again, helping dairy farmers.”

So, what is the current status of butterfat production and usage? 

The national butterfat average is 4.11%. A decade ago, it was 3.69. From 2011 to 2022, total butterfat pounds produced on farms in the U.S. grew by 2 billion pounds from 7.3 billion to 9.3 billion. That’s a butterfat volume response to a price signaling demand.

Where’s it all going? Around 20% goes to butter production, 8% to ice cream and frozen desserts, 10% in fluid milk sales, and close to 50% is used in cheese production. And then there is this growing market for cream used in coffee drinks.

Meanwhile, dairy producers out West report receiving a letter from a large cheese plant, putting in a new base program at 1.5% over base. 

Another producer in an unregulated state in the West reported receiving a letter from his cheese plant stating they will reduce the butterfat multiple in their cheese milk payment, beginning April 1. The reason, according to the letter, is the farms are making too much butterfat, and the plant is having to buy condensed solids (skim) to pair with the additional fat or sell the extra fat as excess sweet cream at a loss.

During the FMMO hearing, fluid milk bottlers complained that the higher fat and component levels in milk today are more costly for them to deal with, that they must move the excess cream at a loss, and they have to clean the separator more often because of ‘sludge’ buildup. (I kid you not, one witness called it ‘sludge.’)

Processors have petitioned USDA with multiple proposals to get regulated minimum prices down to their definition of a ‘market clearing’ level that then allows them to add market premiums to attract new milk. Read that sentence again.

Who would be paying those premiums to grow milk supply? Not the processors. It would be revenue coming out of the regulated minimum price benchmarks for all farmers, including farmers that are not growing, to then get added back in by the processors wherever they want to direct growth.

Cheap milk is the name of the game, while at the same time, dairy farmers are being challenged to grow to meet the future ‘demand gap’ to fill $7 billion in new processing investments that will become operational over the next few years.

Dairy analysts tell how milk production expansion to meet this investment will not be as easy to do and will take longer than in the past because of the shortage in replacement heifers. 

We’re at a standoff, so to speak. 

Dairy producers have bred beef-on-dairy to bring margin back to their farms after 10 years of dairy margin compression. This strategy has been a good hedge against overproduction of milk in the era of sexed-semen, and it has helped protect farm balance sheets by reinforcing the value of the cattle as collateral.

So, what tool will be used now to drive consolidation and growth in dairy? Dykes told Georgia producers that, “Sustainability will be one of the biggest drivers of consolidation we’ve seen in a generation. Why? Because it’s going to take investment, and it’s going to take scale. We need to figure it out, to measure it, verify it, account for it, not double count it. We’re going to need investments to make sure we have the infrastructure.”

He said sustainability will become the gateway for exports where countries have mandates and carbon taxes for purchased ag products.

So, here we are back at the question about milk supply, butterfat supply, skim supply and school milk. Wouldn’t whole milk sales to schools offer a much-needed tug on the demand side to help shift some milk away from this runaway, market-depressing, buildup of excess cheese production that elicits the powerpoint headline: ‘Export or perish?’ 

Just think, if the fluid milk sales to schools increased as they did in the Pennsylvania trial by 52%, or even half that, by 25% as more kids choose milk instead of refusing it, market principles could work — gaining something in one place to affect it someplace else. 

Meanwhile, the industry can do some soul-searching and adapting amid the double-speak. If more milk, fat and components are needed, then farmers need to be able to make a living milking cows and producing fat and components.

Is the problem not enough milk? Or too much milk? Not enough fat? Or too much fat? Not enough skim? Or too much skim? Or is the problem rooted in making sure milk can be bought cheap and that farmers are forced to find revenue in other ways, such as carbon monitoring?

Let’s get it straight please.

On the horizon, we see: Checkoff-funded fluid milk innovations for new beverages that identify and separate specific milk molecules for specific benefits (sleep drinks, energy drinks, immune function drinks, specific protein type drinks)? More on that in Milk Molecules Initiative Part I and Part II

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USDA FMMO hearing resumes, Dr. Stephenson testifies for MIG proposal to end $1.60 Class I base differential

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USDA’s cross examination reveals possible flaw in simulator model result

By Sherry Bunting, Farmshine, Jan. 19, 2024

CARMEL, Ind. — Shadow pricing, demand elasticity, commoditized loss of prior incentives, balancing cost, give-up cost, base differential, uniform differential, market-clearing price…

These terms ruled the day when the USDA National Hearing on Federal Milk Marketing Order (FMMO) proposals resumed in Carmel, Indiana this week after a more than four-week recess.

The hearing began in late August. It did not conclude by Fri., Jan. 19, so it will again recess until Jan. 29. 

American Farm Bureau estimates that another 270 days of post-hearing processes must follow before a USDA decision could be implemented, and even this is subject to proposals that seek a 15-month delay between decision and implementation due to potential impacts on CME futures-based risk management tools, such as Dairy Revenue Protection (DRP).

This is far from over, and hanging in the balance is the Class I price calculation, now based on an averaging method, under which farmers have lost more than $1.02 billion since May 2019 vs. the previous ‘higher of’.

Testimony Tues., Jan. 16 included Dr. Mark Stephenson, retired UW-Madison dairy economist on behalf of Milk Innovation Group (MIG), made up of ‘innovative’ and branded fluid milk processors, including fairlife, HP Hood, Anderson-Erickson, Danone North America, Shamrock, Organic Valley, Aurora Organic, and Pennsylvania’s own Turner Dairy Farms.

Dr. Stephenson delivered his bombshell for MIG that was based on analysis he did using 2016 data in a simulator model, from which he made “certain discoveries.”

First, Stephenson suggested that fluid milk is shifting to become price-elastic vs. the long-held belief that fluid milk sales are price-inelastic. This was followed up by fluid milk processor representatives showing post-Covid fluid milk sales volumes declined as prices rose.

Stephenson cautioned USDA to refrain from setting regulated prices too high, saying this would reduce returns to producers by reducing total fluid milk sales. 

This suggestion was challenged in cross examination. In fact, AFBF chief economist Dr. Roger Cryan noted the FMMO focus on fluid milk was originally partly predicated on its “public good” as a food staple, almost akin to a “public utility.”

In cross examination on Jan. 17, Stephenson also revealed he was paid by MIG to analyze the $1.60 base differential, and his work began before MIG finalized its proposal to remove the $1.60 per cwt. base differential all the way down to zero for all Class I milk, nationwide.

Currently, the $1.60 base differential is built uniformly into the Class I price for every regulated county across all FMMOs. The varied location differentials are added to the base differential and spread across the revenue-sharing pools.

Stephenson used the U.S. Dairy Sector Simulator Model (USDSS) to develop a map as though a “milk-dictator” could efficiently “move milk to its highest global use” through various constraints. 

In the marginal value map result, Stephenson said the U.S. average value of the differences was minus-38 cents, indicating on a national average, it is more valuable (cost saving) to the model to have milk in a cheese plant than in a fluid plant in most counties. The range goes from somewhat more than $2 per cwt more favorable to a cheese plant (in red) to somewhat more than $2 per cwt more favorable to a fluid plant (in green) in the Southeast. From this “potent revelation,” Dr. Stephenson concludes that, “The model result bolsters the argument to not dilute the value of the $1.60 into the pool if that value represents a balancing cost for fluid and an opportunity cost (give-up) for manufacturing plants. Rather, require the fluid plants to pay the $1.60, but let the fluid plants pay that directly to the farms, cooperatives or manufacturing plants who supply the milk” to the fluid plant.

The map showed the incremental differences in ‘Class I minus Class III “shadow pricing,” across the country.

These marginal value differences, said Stephenson, reflect the opportunity costs of getting manufacturing plants to give up milk to fluid plants in the Central U.S., where milk production exceeds population vs. the cost to balance fluid milk markets in the East, particularly the Southeast, as well as in California and southern Nevada, where population exceeds milk production.

It was the questioning from USDA AMS administrator Erin Taylor on the ‘shadow pricing’ figures in various anchor cities that prompted Stephenson to concede: “You may have caught a major flaw in what I have done here, so I would want to look at this more carefully.”

Yes, he will be back to address such questions when the ever-lengthening hearing resumes on January 29.

Notwithstanding exposure of a possible flaw in the simulator analysis, Stephenson said the ‘market-clearing’ price is the target to aim at, and the system of setting regulated minimum prices “should err on the side of being too-low instead of too-high.”

He said processors will pay premiums in the breach of a ‘too-low’ minimum price, but there are few options for processors to deal with a ‘too-high’ minimum price — other than to opt out of regulation for manufacturing plants (de-pool), but that fluid milk plants have no ability to opt out. They are required to remain regulated by FMMOs.

“Manufacturing is by far the largest use of milk in our dairy industry,” he said, noting that Class I fluid use at 18% of total U.S. milk production (regulated and unregulated). Therefore, he said, manufacturing use should no longer be treated in the FMMO system as “the trailing spouse in the marriage.”

On MIG’s behalf, he introduced a new way of looking at the marginal value between Class III and Class I, and a mechanical change that could be made in how the $1.60 base differential is paid as needed directly to producers, cooperatives and plants that actually supply milk to Class I plants, instead of being paid to the FMMO pools.

The $1.60 became a uniform part of the Class I price in the 1999 Order Reform. About 40 cents of this $1.60 was included to represent the cost of farmers transitioning from Grade B to Grade A. The rest represents ‘give up’ costs from manufacturing to Class I and balancing costs to serve the fluid market.

Stephenson backed up MIG’s assertion that farmers don’t need any of this $1.60 base differential because virtually all milk produced today is now Grade A. During cross examination, NMPF attorneys brought up the cost farmers have to maintain Grade A status. Don’t their costs count here?

Undeterred, Stephenson suggested that these costs are accounted for in the classified pricing since all milk for all uses is Grade A, today. He said that USDA uses ‘minimum pricing’ as a tool so that the regulated price leaves space for voluntary premiums that processors can pay to “incentivize something else.”

“Being chronically above the market-clearing price creates a surplus product, which the market can’t clear,” said Stephenson. “Our dairy markets have always walked on a knife’s edge. Being plus or minus 1% on milk supplies can cause some pretty big swings in prices as the markets do attempt to clear that.”

As for removing the $1.60 uniform price differential either from the price or the pool, Stephenson said it is like “other premiums” that have become “commoditized.” 

He likened it to the rbST premium and milk quality premiums, saying those premiums have also become “commoditized.” 

For example, when farmers were first asked to give up rbST and sign pledges, a premium was offered. Now, that premium is not paid, he said, because the practice of abandoning rbST is now “commoditized.” 

Likewise, said Stephenson: “Milk quality (low SCC) has improved so much that those premiums are not there anymore. They have also become commoditized.”

So, the better dairy farmers get, the more their incentive premiums — and even big chunks of their regulated minimum price — are at risk to be cannibalized by milk buyers because the farmers have now done what they’ve been incentivized to do, so they don’t need to be paid to do it.

MIG also seeks to stop NMPF’s proposal to tweak and raise location differentials across the Class I surface map, putting on the stand some of their members to show how unfair competition arises between independent bottlers and cooperatively owned fluid milk plants in the same region.

For his part, Stephenson noted the concept of pulling the $1.60 base differential out of the pool may discourage non-productive distant pooling.

This week was certainly eye-opening as MIG is all about the processor costs with zero regard for producer costs. They even put an HP Hood representative on the stand who included the $120 million recently announced for expanding the Extended Shelf Life (ESL) plant in Batavia, NY as a “balancing cost,” that somehow justifies giving back the base differential to processors even though processors can pass their costs on to consumers, whereas farmers cannot. 

Under cross examination, Hood’s representative admitted that plant-based beverages are also bottled in those so-called ESL ‘milk balancing’ facilities, along with premium products like Lactaid.

Meanwhile farmers continue to incur costs associated with a whole host of improvements that were at one time incentivized. It appears the processors expect farmers to forgo being paid for those costs simply “because everyone’s doing it” and incentives are no longer needed.

The idea here is to deflate regulated minimum prices as much as possible in search of the elusive and not-well-defined Holy Grail: the market-clearing price. 

Processors want cheaper milk, and they’ve got multiple proposals to accomplish that. They want to deflate the regulated minimum milk price to free up their ability to pay premiums for “something else.”

In fact, in his testimony, Stephenson admitted that as these costs and premiums are “commoditized,” space is freed up to “pay premiums for something else.”

What is the “something else” that processors will pay to incentivize after they potentially succeed in reducing the regulated minimum price in multiple ways through multiple proposals?

Are climate premiums the next thing coming once the milk price is deflated far enough? Will USDA buy what MIG and IDFA are selling?

Stay tuned.

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Understanding the factors as action on FMMO ‘modernization’ unfolds

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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.

The Center for Dairy Excellence Protecting Your Profits webinar with Zach Myers and Dr. Chris Wolf can be heard as a podcast at https://www.centerfordairyexcellence.org/pyp/ or viewed on YouTube at https://www.youtube.com/watch?v=YEMDA4iWyNw

Net loss to farmers now $824 mil. over 41 months as change to Class I formula costs farmers $132 mil. so far in 2022

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By Sherry Bunting, Farmshine, August 26, 2022

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. 

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