Tag Archives: FMMO hearing

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

Posted on by
Reply

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.

AFBF seeks ‘whisper of hope’ in request for USDA emergency decision on Class I mover

Posted on by
Reply

Farm Bureau economist Danny Munch closes FMMO hearing Jan. 30, 2024 with emergency request for USDA to return Class I ‘mover’ formula to ‘higher of’


By Sherry Bunting, Farmshine, Feb. 2, 2024

CARMEL, Ind. – Over 5 months and 500 exhibits have gone by in the nearly 50 hearing days since the long-awaited national hearing on Federal Milk Marketing Order modifications began Aug. 23, 2023. It ended Tuesday, Jan. 30th with a last-minute witness bringing forward American Farm Bureau’s request for an emergency decision by the USDA Secretary to restore the ‘higher of’ method for calculating the skim portion of the Class I ‘mover’ price.

This hearing went on longer than expected, and the implementation of any final decisions from a multitude of proposals in various areas of FMMO milk pricing are at least 12 to 18 months away under ordinary post-hearing processes, hence the AFBF request for emergency decision-making on the Class I mover to go back to the higher of.

“If USDA would implement this on an emergency basis, it helps with the confidence and perception piece of it. So, if there is a whisper of hope, to see that there will be a positive outcome coming soon, an optimistic change that is coming that fuels them. Do they see things getting better? Or are things going to stay the way they are? ” said AFBF economist Danny Munch while being cross-examined after reading into evidence the letter signed by Sam Kieffer, AFBF vice president of public policy.

The letter stressed that FMMO reform is in step 5 of a 12-step process and a long way from a final rule. Meanwhile, the change in the Class I mover formula was intended to be revenue neutral to farmers, but farmers have lost over $1 billion in 56 months of implementation. This does not even include further losses from depooling of manufacturing milk when the Class I fluid milk price has been out of alignment in FMMO revenue-sharing pools.

“The comprehensive process of amending federal orders, though important, means dairy farmers remain stuck with current pricing regulations until USDA publishes a final rule,” Kieffer wrote in the letter Munch read into evidence. “The current Class I mover was a well-intentioned policy misstep that has reduced dairy farmers’ checks, with little relief in sight. Emergency implementation of the ‘higher-of’ Class I mover formula will help buffer against persistent losses associated with mistaken and outdated policies that have left dairy farmers struggling to make ends meet.”

Munch noted that members re-affirmed going back to the ‘higher of’ calculation in policy meetings during the AFBF National Convention last week, and they voted to make it a priority of urgency.

“Dairy farmers are facing closure. A lot of our members are facing the hard decision about whether to sell their cattle or not. That’s a little window into what our members mentioned last week,” said Munch.

The other reality that is setting in is the fact that large losses are mounting quickly again. The Class IV over III divergence is quite wide – ranging $3 to $4.00 per hundredweight – and the futures markets show it could be above the $1.48 per cwt threshold through the end of 2024.

Farmshine’s Market Moos columnist Sherry Bunting has updated the graph showing how the supposedly revenue-neutral change from the ‘higher of’ to an averaging formula for the Class I mover May 2019 through March 2024 will have reduced Class I value in farm milk checks over 59 months of implementation. This graph of cumulative and year-to-year losses does not include additional losses many farmers have incurred when manufacturing class milk is out of alignment with Class I, and is depooled, with the revenue excluded from the FMMO pools and benchmarks.

In fact, the Class I mover prices announced for January and February 2024 could produce well over $80 million in losses in just the first two months of 2024 once the pounds of Class I milk are sold and counted.

Munch also took the opportunity to remind everyone that when AFBF held the dairy stakeholders forum in Kansas City in October 2022, returning the Class I mover calculation to the ‘higher of’ was the main item that got consensus from every table in the room.

When the difference between the manufacturing classes exceeds $1.48 per cwt, then pooled producers receive less money for their milk under the averaging formula compared with the previous ‘higher of’ formula. When the difference between Class III and IV is $3.48, for example, that lowers the Class I price by $1.00 per cwt. In an FMMO with 75% Class I utilization, that’s a 75-cent loss on all of the milk, not just Class I. In an FMMO with 25% Class I utilization, that’s a 25-cent loss on all of the milk.

Even members of Congress have been doing the math and have talked about putting reversion language in the Farm Bill. They are aware of their role in putting what they were told was a “revenue neutral” change into the 2018 Farm Bill that IDFA and NMPF at the time agreed upon, while adding language that USDA could hold a hearing in two years to vet it for the future. 

We are now nearly five years into this change, and it is just one piece of the hearing that just concluded, which included many proposed modifications from milk composition and price surveys, to make allowances and differentials.

Without emergency decision-making by USDA on the Class I mover piece, any potential changes from this hearing are a good 12 to 18 months away, depending on how the post-hearing processes move along, from post-hearing briefs due April 1st to rebuttles, draft decisions, comment periods, referendums, final decisions, and there are proposals that have asked for further delays after the process plays out to avoid “affecting” exchange-traded risk management instruments. 

Dairy farmers are just looking for some relief and transparency for the future, according to Munch. 

Meanwhile, IDFA and Milk Innovation Group (MIG) have opposed returning to the ‘higher of’ and have proposed several averaging methods for the Class I mover that would continually look backward to compare and change adjusters to make up past losses gradually out into the future.

Farmers have testified that this doesn’t help if it takes two to three years to get that money back after they’ve already lost the farm.

What it boils down to on the Class I mover is the industry wants to move toward more fractionation of milk, more aseptic and shelf-stable beverages, and away from fresh fluid milk. These are the products that can sit in a warehouse for 9 months and for which processors testified they do 9-to-12-month pricing contracts largely with foodservice and convenience stores. Fresh fluid milk already has advance pricing that aligns with the turnaround of that product so hedging on the futures markets is not typically done, and averaging is not needed.

When asked whether AFBF has looked at how the spread may continue in the future to make the averaging formula a loser for farmers, he said Class IV will likely persist above Class III, and yes, they expect the spread to remain large.

Earlier testimony by processor witnesses blamed these Class I formula losses on Covid disruptions, food box programs and large government cheese purchases, but as Munch pointed out, the driver of these losses is something else. When Class IV is over III, we don’t see it in a negative PPD, but milk is depooled, and the full extent of the depooling losses are incurred by farmers, they just aren’t easily enumerated.

“In 2020, the losses (in Class I value, alone, without including the impact of depooling) were over $700 million. In December 2023, the losses crossed over $1.05 billion as they have continued to add up,” said Munch. “The financial detriment is not solely due to a ‘black swan’ event. Some of our farmers were waiting to see if it showed markets shifting. Now, years later, this is still an issue.

“That’s another reason why we are asking for an emergency decision on this right now, and why it came up at our meeting at the convention last week,” Munch testified. “It was intended to be revenue neutral, but it has turned out not to be.”

During cross-examination, Munch also confirmed there hasn’t been much trust by producers to believe processors will replace the dollars they are asking to be removed from FMMO pricing by paying over-order premiums, instead.

“There is a lack of trust and not knowing where their price comes from. There has been a lot of concern about how their milk checks are calculated,” Munch related. “That’s one of the proposals that the American Farm Bureau put forward is more uniform, clear milk checks. There is a perception that things in milk checks have been manipulated. There is a perception of mistrust.

“If there are ways we can build back the trust, and if one of those ways that our farmers have targeted is switching back to the ‘higher of,’ then it’s easier for farmers to understand that calculation, and it has shown, in the most current of times, to be more advantageous to them.”

“It is my pleasure at 10:18 a.m. on 2024 January 30 to determine that this Hearing has ended,” said U.S. Administrative Law Judge Jill Clifton after 506 exhibits have been entered into evidence for and against 21 proposals in various areas of FMMO pricing modification during the 49 Hearing days that stretched over 5 months since its start on Aug. 23, 2023 in Carmel, Indiana. Screen captured from Hearing livefeed

-30-

Editorial: What was really behind ‘rockier road’ this summer? USDA revisions show fewer cows, less milk June-August

Posted on by
4

By Sherry Bunting, Farmshine, October 27, 2023

EAST EARL, Pa. — In the June 30 and July 7 editions of Farmshine, we covered the milk market conditions behind the drama that sent farm-level milk prices spiraling lower. The two-part “rockier road for milk prices” series explored factors and asked questions about a situation that was not making sense.

Farmshine readers will recall that we questioned dubious math on the huge milk price losses in farm milk checks – far beyond the predictions for modest declines – in the April through August period. 

We questioned the accuracy of government milk production reports and the USDA’s World Ag Supply and Demand Estimates that kept telling us there would be more milk cows on farms and that milk production would continue higher for the year because of… more cows.

We doubted this was possible given the semiannual cattle inventory reports over the past year showing static to shrinking milk cow numbers and major shrinkage in the number of dairy heifer replacements (down 2% in Jan. 1 inventory, down 3% in mid-year inventory, a drop of over 100,000 head!). We have reported the escalating dairy replacement cattle prices setting multi-year record highs that are bearing these inventory numbers out.

We asked: Where are all these cattle coming from?

The June and July two-part series also indicated the 51% increase in the volume of Whole Milk Powder (WMP) imports coming into the U.S. compared with a year earlier in the January through May period — the highest volume for that 5-month period since 2016. (WMP is basically dehydrated milk for use in making any product or reconstitution.)

We also consulted Calvin Covington for his read of the situation. He reported to us that his calculations showed a 15% cumulative increase in total milk solids imported January through April, and that this extra volume was equal to 63% of the year over year increase in ending stocks on a total solids basis.

Well, what do you know! On Thursday, October 19, USDA issued its monthly milk production report for September. The report also went back and revised downward the previously reported totals for milk production and cow numbers for April through August.

Lo, and behold, in June and July while markets crashed, U.S. farms milked 13,000 and 34,000, respectively, fewer cows than a year ago. The September Milk Production report has now gone back to shave around 0.1% off of several months of previously reported milk production, and it has revised milk cow numbers lower than previously reported as follows: The May revision added 1000 head vs. prior report, the June revision shaved 4000 head off the prior report, July’s revision shaved 11,000 head, and August 14,000 head.

How convenient that while the Milwaukee Sentinel and area news stations were reporting five weeks of milk dumping in the sewers during June and July, and USDA Dairy Market News was reporting six to eight weeks of spot milk loads selling at $10 to $11 under the abysmal Class III price as it hit multi-year lows, the USDA reports had been telling us we were milking more cows than a year earlier, and those cows were making more milk.

Prices had plunged by more than 37%, and no one was talking about the scale-back of mozzarella cheese production and the ramp up of whole milk powder imports.

Sure, they were talking about the softening of dairy exports, and maybe that’s the point. The industry had to get the U.S. price levels below global levels in a hurry to honor the global goals set by the national dairy checkoff under previous USDEC president Tom Vilsack to keep growing exports on a Net-Zero pathway to get to 20% of milk production on a solids basis.

We wrote with concern in June and July about how even those prior numbers did not make sense at those previously incorrect levels, how a tiny change such as milking 7000 more cows in May vs. year ago and a little more milk per cow through the period could result in prices falling this hard in June and July. We have even more questions as even those small supply-margin factors have now been edited by USDA to be lower than previously reported for the April through August period.

Cow numbers have always been a driver for milk prices. Now we know there was an average of 21,000 fewer cows milked in the June-July period. And, by July, there were actually 34,000 fewer cows on U.S. farms vs. year ago.

For the Q-3 July through September period, the revisions show an average of 33,000 fewer cows nationwide compared with the third-quarter of 2022. Maybe this will also be revised lower in the future — as it includes the number of milk cows on U.S. farms in September that is now said to be 9.37 million as a preliminary figure.

In the space of six months, U.S. total milk production has gone from running 1% above year ago in Q-1 to nearly 1% (0.7%) below year ago in Q-3. But within that difference lies a revision that begs big questions about what was really going on while prices were plunging.

According to the tables in the September milk production report, the reality of the situation in June and July — while milk prices hit rock bottom and milk was being dumped and sold for $10 to $11 under class — we were already milking 13,000 fewer cows in June compared with a year ago and a whopping 34,000 fewer cows in July vs. year ago, according to these revised numbers. Now, in September, we’re milking 36,000 fewer cows in the U.S. vs. year ago.

In fact, these revised reports show that milk cow numbers have fallen by 74,000 head from the March 2023 high-tide – an unrevised and supposed 9.444 million head — to the August revised number of 9.376 million head and the September preliminary 9.37 million.

Think about this for a moment. We had unprecedented sets of proposals for milk pricing formula changes flowing into USDA in April and May with USDA announcing in June that a hearing of 21 proposals in five categories of formula changes would begin August 23rd.

While this was staging, we saw milk pricing drama unfold.

How useful this drama was for processors during the first eight weeks of the USDA Federal Milk Marketing Order hearing that has now been postponed due to “scheduling conflicts” to pick up where it left off on Nov. 27. 

How convenient it was for processor representatives to be able to point to dumped milk, below-class spot milk prices and negative premiums as justification for their proposals to increase make allowances while attempting to block farm-friendly formula changes — all in the name of investments needed in capacity to handle “so much more milk!”

(A year earlier, Leprino CEO Mike Durkin warned Congress in a June 2022 Farm Bill hearing that, “The costs in the formula dramatically understate today’s cost of manufacturing and have resulted in distortions to the dairy manufacturing sector, which have constrained capacity to process producer milk,” he said, calling the situation “extremely urgent” and warning that immediate steps needed to be taken to “ensure adequate processing capacity remains.”)

Fast forward to the first eight weeks of the USDA FMMO hearing in Carmel, Indiana in August, September and October. We listened as large global processing representatives (especially Leprino) pontificated about how the make allowances are set too low, saying USDA is setting the milk prices too high. They pointed to all of the drama this summer as proof that farmers are suffering because processors can’t afford to invest or retain capacity to handle “all this extra milk.”

Now here we are, September milk production nationwide is down 0.2% from a year ago, product inventories are tight to adequate, prices have improved… but along the way the industry managed to shake out hundreds of dairy farms — large and small — that have liquidated during the steep downhill slide this summer that so few were prepared for, as no one had a clue it would be this bad given the tight number of milk cows and replacements steadily reported in inventory.

What was really behind the dairy cliff we just experienced, where even USDA Dairy Market News recently reported a significant number of herds milking 200 cows or less have recently liquidated in the Upper Midwest?

With record WMP imports, a pull-back in fresh Italian cheese production, and other elements behind the scenes… was the fall-out of a so-called milk surplus manufactured to prove a point? (Remember, Leprino’s Durkin warned that if make allowances aren’t raised, sufficient processing capacity may not remain. And take note that other Leprino representatives warned during the USDA FMMO hearing last month that they may not invest in U.S. processing capacity in the future, if make allowances are not raised and FMMO minimum prices lowered.)

Or was the fall-out this summer manufactured to fulfill the dairy checkoff’s goals for exports? You see, we are told there was excess product in Europe and New Zealand, and our overseas sales were softening, but still well above 2020 and about even with 2021. The industry is driven to get the deals to secure more global market each and every year, even if the means to those ends are detrimental to how we serve our domestic market in the future.

Given the pullback in mozzarella production during this “rockier road for milk prices”, we have to wonder about the testimony of Leprino representatives in the FMMO hearings. They have been doing the loudest complaining.

Leprino is also a major strategic partner with DMI and the organizations under that umbrella: USDEC, Innovation Center for U.S. Dairy, Net Zero Initiative, and on and on.

They want FMMO milk prices lowered, they said, so they can pay premiums again (?), and they believe you, the farmers, should help pay for their sustainability pledges within the make allowance formulas as a cost of doing business.

They likely want to free up capital out of the FMMO pricing levels to pay for Scope 3 emissions insets from RNG-project dairies to compete with other industries that can buy those renewable clean fuel credits as offsets.

They likely want to use your milk money to pay for concentrated manure-driven expansion in the Net Zero wheel-of-fortune pathway that has been constructed with your checkoff money.

They want FMMO make allowances high enough to cash flow plant capacity investments based on byproduct whey, while they make mozzarella cheese that is not surveyed, is not price-reported, and is not included in the end product pricing formulas for dairy farm milk checks.

-30-

Dairy farmers speak out about fair pricing, fear of retribution as FMMO hearing continues

Posted on by
1

By Sherry Bunting, Farmshine, October 13, 2023

CARMEL, Ind. — “Fear of retribution” has been mentioned by some of the dairy farmers who have testified at the federal milk pricing hearings over the past seven weeks in Carmel, Indiana.

“I cannot believe predatory milk pricing is happening in America,” said Brenda Cochran, a Tioga County, Pennsylvania dairy farmer.

Cochran was among the producers testifying Friday, Sept. 29. She, like others, stated they are speaking for thousands of other farmers who are “unrepresented and voiceless” because “they fear losing their milk market for speaking out.”

She said she dedicated her time to speak for them and to speak for “the memory of those farmers who have already lost their farms, their families, and, some of them, their lives because of this decades-long catastrophe of low milk prices.”

Cochran noted the “blindingly abstruse complexities” of federal milk pricing and the hearing process that “seem to presume the impacted farmers possess economics credentials at the PhD level.”

The room full of administrators, accountants, economists, and lawyers listened as she spoke virtually from home, saying that as an average dairy farmer, she finds it “impossible to comprehend the ‘dairy industry’ language.” She noted that “the ‘dairy industry’ is all anyone focuses on.

“There are some dairy farmers who believe milk pricing is deliberately made complicated to keep dairy farmers in the dark about how their milk is priced,” said Cochran. “Others believe the low milk prices are part of an effort to displace farmers from their land.”

She asked USDA to truly look at what this hearing can do “to fix broken milk-pricing formulas for the farmers.

“When was the last time U.S. dairy farmers were given a ‘cost of living’ adjustment?” she asked. “How are dairy farmers supposed to dig out from debt and cover basic farm and family living expenses if ‘make allowance increases’ for processors take more money away from the paltry milk checks that are also being drained by higher transportation charges and the incessant monetary hemorrhage of capricious ‘market adjustment fees’ that are never included in Dairy Margin Coverage (DMC) payments?”

Like others who have testified, Cochran pointed out: What is done to dairy farmers also decimates the rural communities that have been “laid waste by over 40 years of degrading milk prices.”

Last Friday, Oct. 6, John Painter, also of Tioga County, Pennsylvania, testified for Farm Bureau’s positions. He cited the loss of dairy farms and cow numbers in Pennsylvania. 

“While there are multiple factors leading dairy farmers to sell their herds, one of the main reasons is pricing. In Pennsylvania, our milk pricing is twice as complicated… but the outdated FMMOs certainly do not help,” said Painter.

“I can attest that farmers are leaving the dairy industry, especially Class I producers, simply because the money and labor just is not there. We have a chance to change that narrative by amending the FMMO system to meet the economic needs of our farmers,” he explained.

Painter noted that both the Pennsylvania Farm Bureau and the AFBF support NMPF’s proposal (13) to return to the ‘higher of’ calculation for the Class I ‘mover’ and to raise the Class I differentials as outlined by NMPF in proposal 19.

AFBF also does not want to see any increase in make allowances to processors without a mandatory and audited cost survey. The NMPF proposal would raise all four product make allowances to net a roughly 50 cents per hundredweight loss to farmers; whereas IDFA’s proposal would raise make allowances to net a roughly $1.25/cwt. loss to farmers. 

NMPF and IDFA reportedly support AFBF’s request that Congress in the farm bill authorize USDA to do mandatory audited FMMO cost surveys.

NMPF also includes yield composition factors and other pieces of their package of proposals to both ‘give’ and ‘take’ to get pricing alignments to better perform the FMMO pooling functions without negatively impacting farmers.

NMPF’s economist Peter Vitaliano admitted earlier in the hearing — with regard to the Class I change made legislatively to the averaging formula — they had previously supported it, but, he said: “The market taught us a very severe lesson.”

Painter noted the Class I mover change is top of mind for producers. Furthermore, he noted the Class I differentials under NMPF’s proposal 19, would add more positivity in all locations.

This stands in direct conflict with the Milk Innovation Group’s proposal to subtract $1.60 per hundredweight from the base Class I differential, to negatively affect every dairy farmer in every area. 

The Milk Innovation Group is made up of fluid processors that market value-added milk or milk-based beverages, including ultrafiltered, organic, aseptic and ESL.

This is the group that put several company CEOs on the stand to support keeping the “average of” method for calculating the Class I mover, but use a rolling adjuster or “adder” that is floored. 

The CEO of fairlife said the models show the MIG proposal on the Class I mover would benefit farmers longterm by $1.43/cwt. What wasn’t mentioned was the MIG proposal to subtract $1.60 from differentials at the same time.

Also not mentioned is the fact that when wide swings occur, they produce severe losses that lead to dairy farm exits, depooling of milk from FMMOs due to misaligned pricing, and disorderly marketing that disproportionately affects pooled producer that serve the Class I market, creating both individual and geographic impacts.

Another farmer testifying Friday, Oct. 6 was Mark McAfee, of Fresno County, California. As vice president of both the California Dairy Campaign and California Farmers Union, he has heard from organizations that few if any dairy farmers want to volunteer to testify due to “fear of retaliation by processors.

“Dairy farmers are scared and live in fear of processors and loss of contracts,” said McAfee.

Supporting the prior testimony of CDC’s Lynn McBride and Joaquin Contente on the addition of mozzarella cheese to the FMMO Class III pricing survey, McAfee explained why this is vital and why producers are so afraid to speak out on it.

Mozzarella (4.49 billion pounds produced and sold) is now much larger than cheddar cheese (3.96 billion pounds) in the U.S., but it is not used in the Class III formula, he explained.

“The moisture levels are much higher. If added to the pricing formula, farmers would be paid a much higher price. This is being ignored and overlooked,” said McAfee.

He said that adding mozzarella to the pricing survey could be a key to “structural price change (that) will return a substantial amount of value to farmers that are currently being paid $15/cwt., when breakeven is at least $23 to $27/cwt.”

Processors are dead-set against this, as was apparent in the testimony and cross examination of representatives for Leprino a few weeks ago. They bemoaned USDA whey make allowances as “too low.” They blamed USDA for upsetting the supply and demand scenario by setting farm milk class minimum prices “too high.”

They said they might not build any more plants (after the Lubbock plant that is currently under construction) nor invest in capacity in the U.S. in the future if this is not remedied.

USDA AMS’s Erin Taylor had questioned Leprino reps, asking if they build cheese plants to make whey or to make mozzarella cheese? She also asked if there are other factors that might lead to increased milk production — other than the processors’ contention that USDA has minimum prices set “too high.”

It’s clear from such exchanges that the largest global processors, like Leprino, want to cash flow plants on the make allowance of byproduct whey, leaving their unsurveyed mozzarella cheese as an area of unaccountable profit that another testifying farmer – Joaquine Contente also of California – said is made on the backs of farmers.

In an attempt to respond, Leprino reps said the whey and the cheese come out of the same hundredweight of milk. This seems to make clear the model of cash-flowing a plant on the whey make allowance, while the mozzarella remains unreported gravy, and none of its value translates back to the milk.

On the “too high” FMMO minimum milk prices provoking “too much production,” processor reps acknowledged there are other factors, which they would not name, but they kept pointing out the dumping of milk and the negative premiums, and sales of loads at $10 under Class III minimum this summer as “proof” that USDA sets FMMO minimum prices too high.

In essence, they walked right into the CDC point that milk pricing should match profitable growth with profitable demand.

(In a two-part series in June and July 2023, Farmshine reported that the record whole milk powder imports in the first half of 2023, and the proliferation of new manure-methane-driven dairy expansions together produced what was seen as a regional glut of milk this summer that drove everyone’s prices lower. Now, magically, there’s not enough milk and spot loads sell above minimum as global dairy supplies recede, and in the U.S. imports decline and whole herds have been sold to high beef and dairy replacement prices. An update of that report can be found at https://wp.me/p329u7-2N2)

McAfee launched into some root causes for where we are today. (More on that in the future.) 

He cited how processors are moving to more heavily processed milk beverages, but consumer research shows the public wants milk that is unfooled-around-with.

The availability and orderly marketing of fresh, unfooled-around-with milk is essentially why FMMOs exist. However, as a product, its benefits are not being promoted, nor are they naturally innovated, said McAfee.

The dairy innovation solution is always to do more processing, and this has created a bifurcation in how milk is priced. The more processed the milk, the more longterm the pricing; whereas fresh milk remains a month to month pass-through sale.

The checkoff push to ‘think beyond the jug’ or break the ‘jug habit’ has now created a pricing dilemma for the FMMOs.

-30-

Hearing looks at fluid milk pricing differences for fresh vs. ESL

Posted on by
Reply

By Sherry Bunting, Farmshine, October 6, 2023

CARMEL, Ind. – USDA’s federal milk pricing hearing continued into its 7th week on Wednesday, Oct. 4, and USDA announced another virtual farmer testimony session for Friday for Oct. 6, with the signup notice and link posted at the hearing website with just three days notice on Oct. 3.

Farmer testimony was heard virtually also on Friday, Sept. 29, including from two Pennsylvania producers and a third from the Keystone State testified in person on Tues., Oct. 3. More on their testimonies in a future edition.

Here are some observations as I’ve listened on and off over the past several weeks as the testimony and cross-examinations dug into this issue of the Class I mover formula.

As one can imagine, daily testimony from 8 to 5 with exhibits and cross-examination add up to a lot of material for USDA to parse through.

This is particularly daunting with the introduction of significant testimony about the CME futures, hedging, risk management and other such business management by farms and processors and how FMMO changes affect these practices.

Last week, Pittsburgh milk bottler Chuck Turner of Turner Dairy Farms testified in support of the Milk Innovation Group’s concept of modifying the current ‘average of’ method for calculating Class I to create a floor under which the add-on adjuster cannot fall below.

The fairlife CEO also testified about the MIG proposal for the Class I mover last week, explaining that fairlife relies on hedging so the company can offer 9 to 12 month pricing of extended shelf life fluid milk products to foodservice, institutional food buyers and convenience stores that purchase plant-based alternatives and other beverages with annual contracts.

He explained that if the Class I price goes back to the ‘higher of’, companies like fairlife and Nestle (also testified), and others will not be able to hedge that annual price without introducing increasingly volatile price risk to their businesses.

The Nestle rep noted that Nesquick sales increased since late 2019. That’s when they started offering buyers longer-term pricing because the Class I mover was changed to the averaging formula in 2019.

For his part, even Turner said hedging on the CME butter, powder and cheese markets might work to build a protected price for selling fresh fluid milk to schools and other buyers that want longer term pricing.

He was asked several questions about the role of the Pennsylvania Milk Marketing Board in his payment of farmers and competition in the state and region.

Here’s the problem: Grocery stores still largely receive fresh milk a few times a week direct-ship to stores.

On the other hand, the extended shelf life milk, aseptically packaged (shelf stable) milk, and various milk based innovations are shipped to a warehouse. They are not treated the same as fresh fluid milk from a pricing and supply standpoint.

Additionally, the foodservice, institutional, convenience stores, and schools want to know a price for 6 months, 9 months, one year. Bottlers say they can’t offer that if they can’t protect their risk.

So, to minimize risk for processors, the ‘average of’ formula for the Class I mover was put into legislative language in the 2018 Farm Bill with the acknowledgment that it could be changed in two years by a USDA hearing process like the one in Indiana the past six weeks.

That change ended up introducing significant risk to dairy farmers, who found their ability to hedge THEIR risk was jeopardized.

Just as there are two classes of Class I processors — fresh milk and ESL fluid products, there are two classes of dairy farmers. On the one hand, producers whose milk routinely goes to Class I fluid milk plants or pool distributing manufacturing plants cannot be depooled, but milk routinely going to manufactured dairy products can be depooled.

When manufacturing class prices are higher than the Class I mover, a ripple effect occurs that disrupts the class pricing alignments. When higher priced milk is depooled, the processors can keep that money, or pass it on to their own shippers — disrupting one of the functions of the FMMOs to have orderly marketing and uniform pricing.

As one market analyst noted in her testimony last week, it’s like the story of Goldilocks and the Three Bears. These alternate Class I mover proposals are complicated with rolling adjusters to be added to the averaging formula.

For the function of the FMMOs, the ‘just-right’ porridge is the ‘higher of’ for the Class I mover, many have testified.

Trouble is, some regions may see more processors leave the FMMOs if they can’t make it work for them, and the bifurcation in the Class I fluid milk market will leave some processors unable to adapt to long-term pricing for large institutional buyers.

Which way is fluid milk consumption heading? That may be the question to answer first.

In the Eastern U.S., one thing’s for sure, the current flat milk production is being soaked up by strong bottling demand, and the market is paying above class prices right now to get milk for other uses.

The Class I pricing question, along with the other proposals in the lengthy USDA hearing, are being looked at by USDA through the lens of the FMMO’s purpose, especially “orderly marketing.”

However, USDA has no concrete definition for orderly marketing. Will we see that intuitive definition change? What do farmers have to say about it?

For its part American Farm Bureau Federation has been orderly in its presentation of testimony. Economists Roger Cryan and Danny Munch have testified. Farm Bureau members have testified.

This week, Cryan testified on removing the “advance pricing” from the Class I and II formula as this function of using two weeks of product prices to determine four weeks of pricing the following month is another piece of the puzzle bringing more volatility into the equation that can lead to depooling.

However, processors say they want advance pricing, and they want long-term hedging too! They want it all!

According to AFBF data presented at the hearing, advanced pricing has disrupted the orderly marketing of milk and led to unfair marketing conditions for dairy farmers. This disruption is caused when the price of other classes of milk rises above the announced advanced price of Class I and Class II milk. A full explanation of advanced pricing is available via AFBF’s Market Intel.

AFBF supports several proposals by the National Milk Producers Federation, which would increase Class I prices, drop barrel cheese from the Class III price formula, and return to the “higher-of” Class I formula. AFBF also supported in testimony its proposals to add salted butter and 640-lb block cheese to the pricing survey.

The hearing website posts updates at https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing

Fluid milk processors say they can’t recoup higher protein value

Posted on by
1

NMPF, NAJ say higher solids worth more nutritionally, Seek FMMO updates to avoid misalignments and disorderly marketing

Calvin Covington (left) for Southeast Milk and Peter Vitaliano for National Milk Producers Federation testified on what the outdated skim milk component standards mean in terms of underpaying farmers and eroding producer price differentials (PPD), leading to disorderly marketing. This occurs because the skim portion of the milk that is utilized in manufactured products (Class III and IV) is paid per pound of actual protein, solids nonfat and other solids; whereas the skim portion of the milk bottled for fluid use (Class I) is paid on a per hundredweight basis using the outdated standard skim solids levels. The fat portion is not an issue because it is already paid per pound in milk class uses. Screen captures, hearing livestream

By Sherry Bunting, Farmshine, Sept. 8, 2023

CARMEL, Ind. – The national Federal Milk Marketing Order hearing completed two weeks of proceedings, so far, in Carmel, Indiana. The entire hearing is expected to last six to eight weeks, covering 21 proposals in five categories.

Picking up the livestream online, when possible, gives valuable insight into a changing dairy industry and how federal pricing proposals could update key pricing factors.

The first week dug into several proposals to update standard skim milk components to reflect today’s national averages in the skim portion of the Class I price. 

Here is a bite-sized piece of that multi-day tackle.

National Milk Producers Federation (NMPF) put forward several witnesses to show what the outdated component levels mean in terms of underpaying farmers, and how paying for the skim portion based on outdated component levels has eroded producer price differentials (PPD), leading to disorderly marketing.

IDFA’s attorney Steven Rosenbaum grilled NMPF economist Peter Vitaliano on this. He tried on seven attempts to establish that the fat/skim orders in the Southeast don’t have component levels as high as the national average, suggesting this change would “overpay” producers in some markets.

In his questioning, Rosenbaum stressed that fluid milk processors can’t recoup the updated skim component values if those components do not “fill more jugs.”

Vitaliano responded to say that protein beverages are a big deal to consumers, and some milk marketing is being done on a protein basis. Rosenbaum asked for a study showing how many fluid processors are actually doing this.

Attorneys for opposing parties kept going back to this theme that the skim solids should not be updated because the FMMOs are based on “minimum” pricing. They contend that processors can pay “premiums” for the extra value if they have a way of recouping the extra value by making more product or marketing what they make as more valuable.

Vitaliano disagreed, saying that even though many processors do not choose to market protein on the fluid milk label, “more protein makes fluid milk more valuable to consumers.”

Attorney Chip English went so far as to ask Calvin Covington on the stand: Why should my clients (Milk Innovation Group) have to pay more for the additional solids in the milk when they are removing some of those solids by removing the lactose?

“Consumers don’t want lactose,” English declared.

Covington, representing Southeast Milk and NMPF, responded to say: “I don’t know that to be true. It is unfair to suggest all.”

Bottomline, said Covington, raising standard skim solids to reflect the composition of milk today vs. 25 years ago adds money to the pool to assist with the PPD erosion so that Federal Orders can function as they were intended and so producers are paid for the value.

As English further questioned whether consumers even care about the higher skim solids and protein levels of milk today, Covington replied: “Skim milk solids have a value in Class I, or fluid milk. People don’t buy milk for colored water. The solids give it the nutritional value. That’s the reason they buy milk. That’s why FDA set minimum standards in some states. Why would you drink milk if not for the nutritional value?”

He also pointed out that the increase in solids nonfat over the past 20-plus years has improved the consistency of lower fat milk options. As noted previously, the milkfat is a separate discussion and is not included in this proposal because farmers are already paid per pound for their actual production of butterfat in all classes, including Class I.

Under cross examination, Covington explained that the Class I price in all Federal Orders pays for skim on a standardized per hundredweight basis and pays for fat on actual per pound basis. Meanwhile, the manufacturing classes pay for both skim and fat on a per pound of actual components basis. 

As skim component levels have risen in the milk, the alignment of Class I to the manufacturing classes narrows because of the differences in how the skim is paid for. When this happens, it becomes more difficult to attract milk to Class I markets. That’s one example of disorderly marketing. PPD erosion and depooling of more valuable manufacturing class milk is another example. 

Covington explained the impact of this misalignment on moving milk from surplus markets to deficit Class I markets, that the lower skim value becomes a disincentive.

Vitaliano explained the depooling issue as “creating disorderly marketing conditions also, and great unhappiness when one farm is paid a certain price and another handler pays a different price (in the same marketing area). That’s disorderly unhappiness for the Federal Order program,” he said.

He noted that the fundamental reason for pooling is to take the uses in a given area with different values to achieve marketwide pooling where producers in that Federal Milk Marketing Area are paid similarly, regardless of what class of product their milk goes into.

“This removes the incentive for any one group to undercut the marketwide price to get that higher price (for themselves),” he said. “The Orders create orderly marketing with a uniform price. Depooling undermines that fundamental purpose that is designed to create orderly marketing.”

Either way, whether indirectly paying to bring supplemental milk into Class I markets from markets with higher manufacturing use, or in the case of depooling, the dairy farmers end up paying for the fallout from this erosion of the PPD.

Since the beginning, even before 2000 Order Reform, figuring the Class I base milk price had to begin somewhere, according to Covington. Federal pricing has always used the manufacturing class values in determining that base fluid milk price.

The trouble today is that Class III and IV handlers pay farmers per pound of actual skim components in the milk they receive, while the Class I handlers pay per hundredweight based on an arbitrary outdated national average skim component standard. Thus, the “opportunity cost” of moving this now higher component milk to manufacturing classes that pay by the actual pound of protein, for example, instead of by the old standard average protein levels is not accounted for in the Class I price that still uses the old standard average levels.

Pressed again on how it makes sense to raise Class I prices by raising the component level of the skim to more adequately reflect the national average today, Covington said: “It adds to the nutrition, and I stand by that. In proposal one, the price will go up (estimated 63 cents per cwt or a nickel per gallon). I am comfortable charging that extra price to Class I processors.”

Attorney English, representing MIG, retorted that, “The handlers who buy milk and then by adding a neutralizing agent remove the lactose, they’re going to pay more for the milk that they then have to process to subtract the lactose.”

Covington responded that, “There are consumers who think about lactose. There are consumers who buy lactose-free products, yes, because it is on the shelf, but it’s not all consumers.”

On the higher protein, English asked Covington how Class I processors are supposed to monetize that protein in a label-less commodity, a commodity that is declining in its share of total milk utilization?

“We are still selling 45 billion pounds of packaged fluid milk (annually) in this country,” said Covington. “Consumers wouldn’t buy that 45 billion pounds if it wouldn’t have some nutrition.”

English argued that milk is sold as whole, 2%, 1% and non-fat. It is not sold by its protein, so isn’t it “so highly regulated in ways that alternatives are not that any increase in price hinders sales of fluid milk?”

Covington acknowledged that, “yes, it is regulated, but I’m not convinced that this proposal will hinder fluid milk sales. Again, (higher components) add to the nutrition and I stand by that.”

Opponents kept coming back to these value questions, while proponents focused on the price alignment issue and orderly marketing.

To link up with the hearing livestream 8 to 5 weekdays, to read testimony and exhibits, and to respond to the virtual farmer testimony invitations made every Monday for the following Friday, visit the Hearing Website at https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing

-30-

Rocky start for National FMMO hearing amid calls for broader scope, intense cross-examination on data, exhibits

Posted on by
3

By Sherry Bunting, Farmshine, August 23, 2023

CARMEL, Ind. — USDA’s much anticipated national public hearing of 21 proposals on amendments to uniform pricing formulas for all 11 Federal Milk Marketing Orders (FMMO) had a rocky start on Wednesday, Aug. 23 in Carmel, Indiana. The first day kicked off amid objections  to the hearing scope as fluid milk processors were seeking to get their excluded Class I proposals onto the docket.

The presiding administrative law judge set the stage for what he said will be an estimated 7-week hearing, held 8 to 5 ET every weekday with virtual farmer testimony on Fridays. (It is being livestreamed for watching by zoom or listening by phone. Look for that information in the graphic above, or find the links and numbers at the end of this article or at the hearing webpage).

The judge stated his authority to interrupt for comments or testimony outside of the hearing scope. “I will not issue a decision,” he said. “USDA will take the information to render a decision.”

Once a recommended decision is put forward by USDA, expected in February or March 2024, a comment period follows before the final decision is issued in June or July and made fully effective in the fall of 2024. Some proposals call for a 12-month delay in implementation, so the full effect of potential decisions could be delayed until fall of 2025.

Given the rocky start to the hearing, even this timetable could be prolonged, but USDA is under a Congressional mandate to render decisions within 18 months of a petition it agrees to hear.

Immediately following the setting of the stage, Chip English, attorney for the Milk Innovation Group (MIG) put forward an objection and a motion seeking reversal of USDA’s decision that excluded two of its Class I pricing proposals from the hearing announcement. One of the excluded proposals would exempt organic milk from FMMO pools and the other deals with ‘shrink’ in the extended shelf life category.

Attorney Chip English for the Milk Innovation Group (MIG) kicks off federal milk pricing hearing with objections to scope, saying two of their Class I pricing proposals were improperly excluded. Screen capture from livestream of first day of 7-week national public hearing on federal milk pricing formulas

“It’s all coming in whether you like it or not,” said English, “because at the end of the hearing, we’re going to be talking about raising Class I, and these are issues that have to be part of that.”

Attorney John Vetne for National All Jersey joined in the objection on procedural grounds because NAJ also had its proposal to make all 11 FMMOs use multiple component pricing was rejected from the hearing. Currently, the 3 southern marketing areas and Arizona are fat/skim priced, whereas the other 7 marketing areas use multiple component pricing (MCP). USDA excluded this proposal since the 4 fat/skim priced marketing areas must regionally call for the change to MCP pricing.

Within the first hour and a half of the first day, the hearing went “off record” into private discussion about handling the objections and handling the exhibits.

In addition to the hearing scope objections, there was extensive cross-examination of USDA AMS Dairy Program staff on its fulfillment of data requests and various exhibits provided by USDA — in some cases calling into question the comparability or reliability of some of the data.

For example, much was made of the differences between the USDA mailbox milk price report as compared to the Federal Order price announcement. Mr. English probed USDA staff on how these reports are audited, how the data is collected, what is included and what it is based on. He did what he has done in Pennsylvania Milk Marketing Board (PMMB) hearings in the past to discredit the comparability of the mailbox price report to state or federal “announced price” reports — because of the differences in the “auditing”.

As each exhibit on pooling figures and other data was put under the cross-examination microscope, the issue of “restricted” data came up due to “confidentiality,” which USDA staff explained is necessary when 2 or fewer companies are in a marketing area — be they plants or farms. In the rapidly consolidating dairy industry, what does this foretell of future market transparency if data are not available for price discovery and market transparency because of too few operators in a region?     

There were attempts to keep some exhibits from being included in the hearing record. Most of these discussions were put on hold to be explored through further cross-examination at a later time with future witnesses.

In many ways the sense of this round of cross-examination on exhibits felt a bit like cutting the legs out from under future presentation of proposal testimony even before they get to the floor. Basically, much legal maneuvering on data before the first proposal is even heard and testified to.

If the first day is any indication of what is in store, expect to see many attempts to push the scope boundaries, and expect the judge to err on the side of making sure USDA has all of the information it needs to render decisions, so some latitude will likely be given for these boundary explorations by attorneys.

Attorney English, is well known to any Pennsylvania dairy farmer who has ever sat in on a PMMB hearing in Harrisburg. He has represented Dean Foods and the Pennsylvania Milk Dealers in past years on the price-setting hearings conducted by the PMMB. In fact, the esteemed milk accountants of Herbein and Co. in Pennsylvania are providing material for some of the MIG opposition arguments to come. Cheap Class I milk is the name of the current game.

The MIG will be working overtime through Mr. English to make sure Class I prices are not raised, and in fact are lowered at the farm level since one of their proposals that WAS accepted by USDA is to remove the base Class I price differential of $1.60/cwt from every FMMO — across the board.

Who is the MIG? The Milk Innovation Group members include Anderson Erickson Dairy Co., Inc.; Aurora Organic Dairy; Crystal Creamery; Danone North America; Fairlife; HP Hood LLC; Organic Valley/CROPP Cooperative; Shamrock Foods Company; Shehadey Family Foods, LLC (Producers Dairy Foods, Inc.; Model Dairy, LLC; Umpqua Dairy Products Co.); and Turner Dairy Farms.

After lunch, some high points of the first day included Dr. Roger Cryan for American Farm Bureau Federation requesting volume data on all of the salted and unsalted butter that is graded by USDA AMS for retail. This, he said, is four numbers and should be readily available. It is germane to AFBF’s proposal to include unsalted butter in the product price survey used in the Class IV pricing formula.

Testimony began late in the afternoon on the first proposal from NMPF to raise component levels in the uniform pricing formulas to more accurately reflect today’s protein and other solids levels.

Peter Vitaliano, NMPF’s vice president for economic policy and market research, laid out the proposal and was subjected to intense cross-examination with the promise of hours more of cross examination on the second day by Mr. English before even getting to the first expert fact witness — Calvin Covington, for Southeast Milk and NMPF.

While NMPF witnesses will show the outdated component levels are giving a ‘deal’ to Class I processors paying less for skim that is more valuable today in terms of components, IDFA’s attorney Steven Rosenbaum grilled Vitaliano on this. He tried on seven attempts to establish that the fat/skim orders in the Southeast don’t have component levels as high as the national average by asking for this breakout in seven differently-phrased questions, all the while discreetly suggesting that this change would “overpay” producers in fat/skim orders.

He also questioned how fluid milk processors are supposed to recoup that value if it doesn’t “fill more jugs of milk”. Vitaliano responded to say that protein beverages are a big deal to consumers, and some milk marketing is being done on a protein basis. Rosenbaum asked for a study showing how many fluid processors are doing that, and then basically said, in lawyer speak, the equivalent of ‘never mind,’ as Vitaliano interjected that it’s more valuable to consumers.

In this reporter’s mind, the thought that kept popping up during that exchange was this: If IDFA and MIG are so intent on suppressing the Class I price to avoid paying for the improved value of milk, then maybe they should then start forking over their cost data in audited surveys to the USDA to justify the $3.60 per hundredweight they are getting subtracted from the base Class I price in the form of Class III and IV make allowances that do not even apply to them, but they get that deal anyway.

These are just a few thoughts from an intense first day of the national FMMO hearing that NMPF is calling the “first in a generation opportunity” to make key adjustments to the milk pricing formulas to reflect a changing dairy industry. It appears that many of their proposals will help farmers… We’ll see over the next 6 to 8 weeks where it’s all going.

In the meantime, Congress may want to think about fixing the Class I mistake it made in the 2018 farm bill by changing four simple words from ‘average plus 74 cents’ to ‘higher of’ and at least get that done timely.

This hearing could leave that objective in the dust if the first day is an indication of what is to come.

Information to tune in by livestream through zoom or to dial-in and listen from a cell phone or landline has just been announced.

View the hearing at this link: https://www.zoomgov.com/j/1604805748  and enter Webinar ID 160 480 5748

Or listen via one tap mobile: +1.646.828.7666, using ID 1604805748#

Or listen via landline telephone: +1.669.254.5252 and enter ID 160 480 5748

The hearing schedule will proceed in this order to consider accepted proposals under these categories, according to USDA:

1. Milk Composition (component yield) proposals.

2. Surveyed Commodity Prices (removing or adding commodities to the weekly price surveys used in the class and component pricing formulas).

3. Class III and IV Formula Factors, which includes various ‘make allowance’ proposals as well as butterfat recovery factors, and farm-to-plant shrink.

4. The Base Class I Skim Price (Mover) Formula (6 proposals, 3 favoring return to ‘higher of’, including 2 that also favor eliminating ‘advanced pricing’ of Class I. )

5. Class I and II Differentials.

Copies of the notice, a list of proposals being considered, guidelines for how to participate, the hearing schedule, and corresponding hearing record can be found and followed on the Hearing Website at https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing

For technical difficulties, please email FMMOHearing@usda.gov

-30-

USDA will hear 21 milk pricing proposals beginning Aug. 23; Front-and-center: May 2019 change in Class I (without a hearing) costing farmers $1 bil. over 52 mos.

Posted on by
1

By Sherry Bunting, Farmshine

WASHINGTON –- USDA officially announced Monday (July 24) the national public hearing to consider proposals seeking to amend the uniform pricing formulas across all 11 Federal Milk Marketing Orders (FMMO). The hearing begins Wednesday, August 23, 2023 at 9:00 a.m. at the 502 East Event Centre, 502 East Carmel Drive, Carmel, Indiana.

Farmers will be able to testify in person at any time, or virtually on Fridays by pre-registering.

Approximately 40 proposals were submitted by 12 organizations and were explained during a webinar in mid-June. Of those, 21 will be considered within the uniform pricing scope of the hearing, according to the USDA notice. Copies of the notice, a list of proposals being considered, guidelines for how to participate, the hearing schedule, and corresponding hearing record can be found and followed on the Hearing Website.

The Class I mover formula will be addressed in the national hearing’s scope, including the proposals from National Milk Producers Federation and American Farm Bureau to go back to the ‘higher of’ method. The change from ‘higher of’ to ‘average of’ was made legislatively in the 2018 farm bill without a hearing.

Since USDA implemented the ‘average of’ method in May 2019, net losses from this change are projected to exceed $1 billion after August 2023 milk is paid for in September.

On July 19, USDA announced the August advance Class I price mover at $16.62. If the previous ‘higher of’ method had been used, the Class I base price would have been $18.29. That’s a $1.67 per hundredweight loss on all Class I milk next month. July’s Class I mover was also calculated substantially lower (by $1.02) using the ‘average of’ vs. the ‘higher of.’ These losses will impact August and September milk checks for July and August milk.

Around 28% of all milk produced in the U.S. is Class I fluid use, so farmers stand to lose an additional 47 cents per hundredweight on all of the milk they market in August and 29 cents on all the milk they market in July — just from this formula change. This is on top of the market declines in the class and component prices. The loss to blended prices will be greater in some Federal Orders and less in others, and this does not include the impacts from de-pooling of higher-value Class IV milk.

The impact of the two-week Class I advance pricing factors is compounded by the ‘average of’ method, which is quite notable for July and August. Cheese and whey were in a tailspin lower; however, on the very next day after the August Class I base price mover had been averaged and locked-in on July 1-15 pricing factors, the dairy product markets began a huge rally, with cheese gaining nearly 40 cents in 8 trading sessions. This boosts the other class and component values much higher for the latter half of the month.

Over the 52 months of its implementation, the ‘average of’ formula has effectively removed an estimated 55 cents per hundredweight from farmer payment for all Class I milk, according to USDA data. On a blended uniform price, this comes out to a national average loss of 16-cents on every hundredweight of all milk used in all classes of products shipped from May 2019 through August 2023. That is like paying another checkoff for 52 months.

Among the other proposals included in the national hearing is the American Farm Bureau (AFBF) Class I and II proposal that seeks return to the ‘higher of’ with additional adjustments such as eliminating the two-week ‘advanced’ pricing.

IDFA’s Class I proposal seeks to keep the ‘average of’ and use either the current 74-cent-adjuster or a ‘rolling adjuster’ based on a calculated difference over 24 months, whichever is higher.

Milk Innovation Group’s (MIG) proposal seeks to keep the ‘average of’ but change the ‘adjuster’ monthly via a 24-month look-back with a 12-month lag.

Two Edge Cooperative proposals are included, one being a Class III-plus formula. The other would use the ‘higher of,’ but would base it on end-of-month four-week announced class and component prices instead of the two-week prior month advance pricing.

The hearing docket also contains four proposals on Class I differentials, including NMPF’s proposal to increase them in all locations by varying amounts as well as MIG’s proposal to lower them across the board by $1.60.

Two proposals from NMPF and National All Jersey will be heard to update milk component factors.

Six proposals will be heard on Class III and IV pricing formulas. Three are separate proposals from NMPF, IDFA and Wisconsin Cheesemakers to update processor credits, known as ‘make allowances,’ as well as three from Select Milk Producers on butterfat recovery, farm to plant shrink and nonfat solids yield.

In addition, the hearing scope includes four proposals on how dairy commodity products are surveyed, including NMPF’s proposal to remove 500-lb barrel cheese from the weekly survey, AFBF’s proposal to add bulk 640-lb block cheese and unsalted bulk butter, while California Dairy Campaign’s proposal would add mozzarella.

Dairy farmers can testify in-person at any time during the hearing, or virtually on Fridays. Beginning Fri., Sept. 1 and for each Friday thereafter until the hearing concludes, dairy farmers may testify virtually in 15-minute time slots beginning at Noon ET. There will be 10 slots for virtual testimony each Friday.

To be included, farmers must pre-register. The pre-registration for each Friday’s time slots will be available starting Monday of the same week at the USDA Hearing Website. For example, the link to testify on Fri., Sept. 1 will be available on Mon., Aug. 28. To submit exhibits for the record, email them to FMMOHearing@usda.gov by 8:00 a.m. ET on the day of testimony.

Those participating in the hearing in person should notify a USDA official upon arrival at the hearing. For additional information, contact Erin Taylor, Director, Order Formulation and Enforcement Division, USDA/AMS/Dairy Program at Erin.Taylor@usda.gov.

USDA inches closer to a national FMMO hearing

Posted on by
2

Consensus evident on some key proposals, such as returning the Class I mover formula to the ‘higher of’; but 10 packages contain over 30 variations and a few new biggies.

New to the party are:

  • AFBF wants to end ‘advance’ pricing of Class I;
  • NAJ wants uniform component-based pricing of Class I in all Orders;
  • MIG, made up of 7 fluid processors want organic exemptions, an assortment of new credits, and they want to knock $1.60 off the Class I differentials, forgetting they already get over $3.00 in ‘make allowance’ credits while not incurring those costs
  • California Dairy Campaign seeks an extension to consider alternative pricing formulas
  • Some proposals want to drop products (500-lb barrel cheese) from the FMMO formulas and price surveys, others want to add products (ie. 640-lb block cheese, mozzarella, unsalted butter)
Dana Coale, Deputy Administrator (top, left) and Erin Taylor, Director (top, right) and their USDA Dairy Division staff engaged with leads for 30 hearing proposals contained in packages submitted by 10 organizations in the pre-hearing information session Friday, June 16. Tim Doelman (bottom), CEO of Fairlife, a Coca-Cola subsidiary, explains one of the Milk Innovation Group’s (MIG) proposals that bucks the consensus on going back to the ‘higher of’ in setting the Class I mover. MIG wants to keep the averaging method with their ‘Floored Adjuster” proposal. He said returning to the ‘higher of’ prevents processors from forward-pricing their milk like soda and other beverage companies do for other ingredients. MIG also wants to knock $1.60/cwt off the current Class I differentials, and they want an assortment of new credits (obviously forgetting that fluid milk processors already get more than $3/cwt in various Class III and IV product manufacturing credits. These so-called ‘make allowances’, are built in as credits on the Class I and II prices also, for costs that fluid processors do not incur.) Zoom screen capture

By Sherry Bunting, Farmshine, June 23, 2023

WASHINGTON – In preparation for a potential national Federal Milk Marketing Order (FMMO) hearing, the Dairy Division of USDA’s Agricultural Marketing Service had a pre-hearing information session Friday, June 16. During the day-long session, held virtually through zoom, Deputy Administrator Dana Coale, Director Erin Taylor and others heard presentations of the more than 30 pieces contained in proposals submitted by 10 organizations, and they engaged in questions for clarification as well as accepting requests for data before the 10 proposals were to be modified for final submission June 20.

While the Secretary of Agriculture has not yet declared a hearing, the AMS Dairy Division has publicized the timelines and action plan.

Coale stated that mandated time frames by Congress, govern the amount of time from the point at which a proposal is received to the end of a hearing 120 days later. “All of our proposed time frames are based on keeping us focused to meet the 120-day mandate,” she said.

“Once submitted, USDA will further evaluate them, and the Secretary will make the determination,” said Coale. “If the Secretary intiates rulemaking, you will see a hearing notice containing all proposals to be heard. This will be mid- to late-July, and we would expect to move forward – if a hearing is initiated – on Aug 23 as the start of that hearing.”

The location will be Carmel, Indiana, and because of the new time constraints, new procedures will be put in place, she said.

“Expect to see a very different process than customarily done to create a very efficient process while maintaining transparency and a robust evidentiary record,” she explained, noting this includes a process for submitting testimony in advance, and a naming vs. numbering convention for exhibits.

After the hearing is noticed, there will be another information session, said Coale.

“It takes an entire village,” she stressed. “Ex parte communication does not begin until a hearing is noticed, so if you have questions or need explanation or discussion on data for submitted proposals, contact us at fmmohearing@usda.gov”

The marquis proposal is the comprehensive package submitted by National Milk Producers Federation (NMPF) that set into motion the Secretary’s call for other proposals. The NMPF package has five proposals, previously reported in Farmshine through various articles since the October stakeholders meeting hosted by American Farm Bureau in Kansas City in October 2022.

Retired cooperative executive Calvin Covington is the lead on one of the five NMPF proposals, which seeks to update skim components to more accurately reflect the percentage of protein, nonfat solids and other solids in a hundredweight of milk today.

Covington said he also expects to testify on the NMPF proposal to raise Class I differentials with a new pricing surface map, something that has not been done since 2007-08, and the proposal to return the Class I base price ‘mover’ to the ‘higher of’. The current average plus 74 cents method has been in place since May of 2019, which produced unintended consequences and losses for dairy farmers.

In a phone interview Tuesday, June 20, Covington explained that after more than a year of task force meetings and discussions via NMPF with its members and their farmer members, “We’ve gotten this far, and we have got a consensus,” he said of the NMPF package.

In addition to updating skim components and Class I differentials and changing the Class I ‘mover’ back to the ‘higher of,’ the NMPF package includes a proposal to modestly update make allowances and to discontinue the barrel cheese price in the Class III protein formula while allowing 45-day forward-priced nonfat dry milk and dry whey to be included in the formula price survey instead of the current 30-day forward-price limit.

“It took a year, and that’s pretty good, to have coast-to-coast consensus on five major proposals,” said Covington. “Then you also read the Farm Bureau’s proposal and there’s pretty good consensus there too.” 

Central to both the NMPF package and AFBF package of proposals is strong support for returning the Class I mover formula back to the previous ‘higher of’ method.

(Farmers have had a cumulative net loss of nearly $950 million, equivalent to losing 53 cents on every hundredweight of milk shipped for Class I use for the past 51 months or 15 cents per hundredweight on the FMMO blend price for all milk across all 51 months — since the change to ‘average of’ was made in May 2019 via the 2018 Farm Bill. In fact, the July 2023 Class I mover was announced June 22, 2023 at $17.32, which is a whopping $1.02 below the $18.34 it would have been under the ‘higher of’ method.)

AFBF supports NMPF’s proposal to restore the Class I mover to the ‘higher of’ Class III or IV, to drop the barrel cheese price from the Class III component and price calculation, to update component values into Class III and IV formulas, and to update Class I differentials, but notes this should be done through careful review where changes are based on a transparent record.

AFBF chief economist Roger Cryan stated that AFBF will defer to NMPF for substantiation on the Class I mover change, but if by any chance NMPF would back away from this proposal, Farm Bureau wants it kept on the table and will defend it.

On adjustment to Class III and IV product make allowances, AFBF supports this under the same logic as the NMPF proposal, but states that “such adjustment cannot be fairly undertaken except in using the data from a mandatory and audited USDA survey of, at least, those plants participating in the National Dairy Product Sales Report (NDPSR) survey.” 

The difference is NMPF says it will seek mandatory surveys through legislation, whereas AFBF sees USDA as already having the authority to do this.

AFBF’s package includes some “new” proposals as well. One would add 640-pound block cheese to the Class III component and price formula and the NDPSR survey and another would add unsalted butter to the butterfat and protein calculation and the NDPSR survey.

AFBF includes a proposal to update the Class II differential to $1.56 to account for current drying costs and to adjust formula product yields and include an adjustment to the ‘make allowances’ for cooperatives and plants that “balance the market.”

The AFBF package also cites “universal milk check transparency requirements” regarding clarity to be shared on producer milk checks regarding pooled volume, Order value and actual payment for pooled and nonpooled milk.

AFBF seeks a seasonal Class I differential adjustment to “address seasonal differences in supply and demand.”

The most notably divergent AFBF proposal is one that seeks to eliminate the advanced pricing of Class I milk and components and the advanced pricing of Class II skim milk and components. It would base both on the 4-week “announced” Class III and IV components and prices instead of the 2-week “advanced” pricing factors. The advanced factors are calculated for a given month during the first two weeks of the previous month and have been part of FMMO pricing for decades.

Edge Dairy Farmer Cooperative, representing farmers in nine Midwest states shipping to 34 processors also proposes ending advanced pricing of Class I.

A newsflash proposal came from the Milk Innovation Group, which was formed within the last few years and testified at the recent Southeast FMMO hearings. 

MIG is made up of seven companies — Anderson Erickson Dairy, Aurora Organic Dairy, Danone North America, Fairlife, HP Hood, Organic Valley/ CROPP Cooperative, and Shamrock Foods.

They want to REDUCE Class I differentials, whereas NMPF and AFBF support updates that increase them. 

MIG companies want to establish Class I differentials that remove the “Grade A compensation” portion that has been built into all Class I differentials from the beginning, as well as removing the “market balancing compensation.” 

Together, these removals would account for the $1.60 per hundredweight base differential that all FMMOs receive. As explained in the pre-hearing session, this would have the net effect of reducing Class I differentials (and producer pay prices) by $1.60 per hundredweight across all FMMOs.

In their justification, MIG writes that it is “far past time for the base Class I differential to be reconsidered in light of market changes, including the exploding growth of dairy beverage alternatives… and the exponential growth of non-fluid milk products often sold in the export market.”

(In this reporter’s analysis and opinion, reducing Class I differentials instead of raising them, ignores the fact that every Class I fluid milk processor – including the aseptic, ultrapasteurized, organic, ultrafiltered and other ‘specialty’ fluid milks – are already getting more than $3.00 per hundredweight embedded as a processor credit in the Class I base price mover by virtue of the cumulative sum of all product make allowances on the Class III and/or IV pricing factors used to establish that mover, but since they don’t make Class III and IV product, they don’t incur these costs. Now they want $1.60 more, plus “assembly” and other credits?)

The MIG also proposes exempting processors of Class I organic milk from paying into FMMO pools as long as they show they pay their producers at least the minimum FMMO price. There are a few other guard rails to this. 

They also want to receive “assembly credits,” specialty credits, and a higher shrink credit (forgetting that they already get make allowance credits that don’t even apply to them).

Citing the “unequivocal decline in Class I sales,” the MIG sets the stage with its package of proposals to transition further away from pricing mechanisms that support local fresh milk in favor of aseptic, extended shelf-life milks and specialty products. Some of the companies in the MIG are making dairy beverages that are not even Class I, and several are getting big into plant-based and other non-milk alternatives and blends. (Is that a conflict of interest?)

USDA AMS also accepted further information on the prior petition by the International Dairy Foods Association (IDFA) and Wisconsin Cheese Makers Association (WCMA) to update make allowances. With this additional information, their petitions are back on the table and are based on voluntary cost surveys.

Additionally, IDFA submitted a proposed alternative method for establishing the Class I mover they call the “Floored Class I Mover proposal.” This is IDFA’s response to NMPF’s proposal to return Class I to the ‘higher of.’

The IDFA alternative is described as using the current simple average of the Class III and IV advance pricing factors to set the base Class I price, and floor the adjuster at the current 74 cents — while allowing that adjuster to increase if a two-year look-back shows it was deficient vs. the higher of. This is a complex two-years back “making producers whole” in the two-years forward with the adjuster always being floored to go no lower than 74 cents even if it turns out that this method benefited farmers vs. the ‘higher of.’

The IDFA Class I proposal contains several pages of justification for the averaging method built around “preserving price hedging and risk management” for processors, particularly those in the ‘value-added’ category,” such as ultrafiltered and aseptic Class I milk products.

But it doesn’t end there…

National All Jersey (NAJ) brought forward its proposal, explained by Erick Metzger. “One mirrors NMPF’s proposal to update skim component factors in the Class III and IV formulas, except we want to see it be a simple annual update based on the previous year’s average, with an appropriate lag time to address risk management tools instead of being based on a three-year average,” he said.

In addition, NAJ proposes that FMMOs 5, 6, 7 and 131 (the Southeastern Orders and Arizona) become multiple component pricing (MCP) Orders instead of pricing on a fat/skim basis.

NAJ also proposes Class I payment requirements to be based on MCP pricing instead of skim / butterfat in all FMMOs, nationally.

“We are proposing uniform pricing across all orders — both on how processors pay for components and how producers are paid for components,” said Metzger. “Extensive updates are needed to Orders 5, 6, 7 and 131, and the needed Order language already exists in the other Orders.”

The NAJ proposal notes that Class I should be paid on actual solids, instead of valuing the skim on a skim basis. “In our proposal, it would be valued or priced on actual skim components,” he said.

What this means is if a dairy farm’s actual components processed (in Class I) were below the standard components in the Class III or IV formulas, the processor obligation would be less; and if the farm’s skim components are greater than the standard, then the obligation of Class I processors to the pool would be more. In short, accounting for actual skim components in the NAJ proposal, would replace the current pricing of Class I skim on a pounds of skim basis.

Select Milk Producers cooperative submitted proposals to update product yields to reflect “actual farm-to-plant shrink,” to update the butterfat recovery factor and to update nonfat solids yields. According to their own limited 5-year-average analysis the three proposals combined would net 13 cents/cwt on the Class III price and 42 cents/cwt on the Class IV price, but they’ve requested more data from USDA AMS to analyze — if their proposals are accepted for a hearing.

For its part, Edge Cooperative states in a cover letter to its proposals that a hearing should occur after the farm bill. “There is no imminent crisis that would present a compelling reason to initiate a hearing before the next farm bill is enacted,” the proposal states.

In the farm bill, Edge seeks a mandatory cost of processing survey before make allowance updates could be heard. Edge also seeks legislative language to expand flexibility to base individual FMMOs around something other than uniform pricing, to be determined on an Order by Order basis. This “flexibility” was explained by Lucas Sjostrom and Marin Bozic at the Farm Bureau stakeholders meeting in Kansas City last October.

However, Farm Bureau’s package of proposals asserts that there is no reason to hold off on a hearing while waiting for a farm bill, and indeed seeks the fastest resolution to the Class I ‘mover’ issue. Furthermore, Congress previously mandated timelines that don’t allow “waiting” once proposals are received by USDA. This process is in motion, unless Secretary Vilsack refuses a hearing on any of the proposals.

AFBF, in fact, cited areas of the Agricultural Agreement Act that give USDA authority to do mandatory cost surveys, without further legislation, because the Secretary has discretion to require any reporting deemed necessary from FMMO participating plants.

On the Class I ‘mover, Edge proposes two options, either a Class III-plus option if the ‘advanced pricing’ is retained or if the ‘higher of’ option is used, then to base it on final 4-week announced skim milk prices each month. This option would effectively end the 2-week advanced pricing factors and advance pricing of the Class I ‘mover,’ which has also been proposed by AFBF.

The Edge proposals include a request to align make allowance changes so that they don’t impact ‘risk management tools’ and a proposal to add Order formulation language about the information handlers shall furnish to producers with the intent of “transparency in producer milk checks.”

The California Dairy Campaign’s proposal asks USDA to extend the proposal deadline and to add mozzarella to the Class III component and price formula and the NDPSR survey. They also want consideration of “alternative pricing formulas that guarantee dairy farmers are paid according to current market rates.”

The California proposal includes a National Farmers Union (NFU) Dairy Policy Reform Special Order of Business that was passed at the 2023 NFU Convention in San Francisco. It states opposition to the call for a federal milk marketing order hearing, noting that, “If a hearing is granted, it is essential that any modifications to the federal order minimum pricing formulas take into account the volume and value of all dairy products, particularly high-moisture cheeses such as mozzarella.”

Dairy Pricing Association (DPA) submitted a few proposals explained by Wisconsin dairy farmer Tom Olson. One seeks to pay Grade B milk at FMMO minimums, but without a producer price differential (PPD).

DPA also proposes a supply-balancing feature, whereby milk handlers notify farms at least 7 days prior to milk disposal action, stating the baseline production needs, how much to reduce production, and for how long, with farmers making this reduction by dumping (or not producing) this milk.

In effect, the DPA proposal includes a processor-led supply management program, not a government intervention. But to do it, the FMMOs would be the arbiter, and therefore all Orders would have to be amended to require 100% mandatory participation and pooling of all U.S. milk. Something like that may require legislation since a producer referendum bloc-voted by cooperatives could vote it down, and it’s unclear how unregulated areas would be included since states like Idaho already voted the FMMOs out.

Currently, only Class I milk handlers are required to participate in FMMOs within marketing areas that have FMMOs. Participation is voluntary for most Class II, III and IV processors. Over the past three years, roughly 60% of total U.S. milk production has been pooled on FMMOs.

-30-

From DMC to FMMOs, from price ‘movers’ to ‘make allowances’: House Ag hearing reviews farm bill dairy provisions

Posted on by
1

By Sherry Bunting, June 24, 2022

WASHINGTON — It was a lot to wade through, but after two panels and nearly four hours, many cards were on the table, even if the full deck was not counted. 

The U.S. House Agriculture Committee hearing Wednesday, June 22 was a 2022 review of the current farm bill’s dairy provisions. Chairman David Scott (D-Ga.) set the stage with his opening remarks, noting a significant part of the hearing would be devoted to the dairy safety net, namely the Dairy Margin Coverage (DMC), but also to talk about the Federal Milk Marketing Orders (FMMO) to learn if this system is “the best fit for today’s world.

“We want to continue to listen to farmers and navigate the issue for the best approaches to any changes,” he said, setting the next stage for listening sessions.

Those testifying talked about building consensus for FMMO changes, a charge handed down from Ag Secretary Tom Vilsack last December, and again more recently, when he said a consensus agreement by stakeholders on one plan was needed before a national hearing on milk pricing could be held.

On the Class I ‘mover’ change in the last farm bill, USDA AMS Deputy Administrator Dana Coale noted that the change was authorized by Congress after an agreement was reached between NMPF and IDFA to change the ‘higher of’ to a simple average plus 74 cents. This was designed to be revenue neutral, she said, but the pandemic showed how an unforeseen market shock can create price inversions that significantly change this neutrality. (testimony)

Coale noted that “market abnormalities” brought on a situation where Class I was below Class III, which doesn’t typically happen, and this created losses.

“In the 2018 farm bill Congress authorized a change to the Class I price mover. We implemented that in the department in May 2019. This change was a consensus agreement reached between NMPF and IDFA to benefit the entire industry. Implementation in the farm bill was designed to be revenue neutral. However, nobody foresaw a pandemic occurring, and no one could have projected the implications that pandemic would have on (prices), particularly within the dairy sector. What we saw occur from mid-2020 through mid-2021 was a significant change in that revenue neutrality. As you look at the Class I mover before the pandemic and moving out of the pandemic, it is maintaining pretty much a revenue neutral position compared to the prior mover. However, due to the (class) price inversions that occurred, we had some major losses incurred by the dairy sector.”

Dana Coale, Deputy Administrator, USDA AMS Dairy Programs

On the primary dairy safety net, Farm Service Agency Deputy Administrator Scott Marlow went over the Dairy Margin Coverage (DMC) and explained the beneficial changes that have been implemented since the 2018 farm bill. (testimony)

He noted that supplemental DMC would have to be made permanent in the next farm bill in order for that additional production history between the 2011-13 figure and the 5 million pound cap to be covered in future years.

“In 2021, DMC payments were triggered for 11 months totaling $1.2 billion paid to producers who enrolled for that year, with an average payment of $60,275 per operation. At 15 cents per cwt at the $9.50 level of coverage, DMC is a very cost-effective risk management tool for dairy producers. Ahead of the 2022 DMC signup, FSA made several improvements. The program was expanded to allow producers to enroll supplemental production (up to the 5 million pound cap). In addition FSA updated the feed cost formula to better reflect the actual cost dairy farmers pay for alfalfa hay. FSA now calculates payments using 100% premium alfalfa hay, rather than 50% of the premium alfalfa hay price and 50% of the conventional alfalfa hay price. This change is retroactive to January 2020 and provided additional payments of $42.8 million for 2020 and 2021. We are very concerned about the margins. It is very important the way DMC focuses on the margin. Farmers are facing inflation of costs beyond the feed that is part of this calculation. This margin based coverage has proven to a model and is something we need to look at for other costs and commodities.”

Scott Marlow, Deputy administrator usda fsa farm programs

Dr. Marin Bozic, Assistant Professor Applied Economics at the University of Minnesota gave some long range trends and observed the factors that are decreasing participation in Federal Milk Marketing Orders. (testimony)

He mentioned that a consideration not to be ignored is the status of vibrancy and competition as seen in transparency and price discovery. When asked about proposals to improve this, Bozic said the proposals need to come forward from the industry, the stakeholders, and that the role of academia is to provide numbers, trends, and analysis of proposals, not to decide and determine these marketing structures.

“Farm gate milk price discovery is challenged by this lack of competition,” he said. “If a corn producer wishes to know how different local elevators would pay for corn, all he needs to do is go online or tune in to his local radio station. Dairy producers used to be able to ‘shop around’ and ask various processors what they would pay for their milk.”

Bozic was quick to point out that, “We should not rush to generalize from such anecdotal evidence, but in my opinion, it would also be prudent not to ignore it.”

“FMMOs start from a set of farmer-friendly ideas… They have somewhat lost luster due to declining sales of beverage milk. In regions other than Northeast and Southeast, fluid milk sales no longer provide strong enough incentives for manufacturers to choose to stay consistently regulated under FMMOs. My estimates are that the share of U.S. milk production in beverage milk products is likely to fall from 18.3% in 2022 to 14.5% by 2032. Do Federal Orders suffice to deliver fair market prices to dairy producers? The critical missing ingredient is vibrant competition for farm milk. Whereas just six or seven years ago, many producers had a choice where to ship their milk, today it is difficult. When some dairy producers have asked for milk price benchmarking information from their educators or consultants, those service providers have in multiple instances faced tacit disapproval or even aggressive legal threats from some dairy processors. Further research and an honest debate on competition in dairy is merited.”

Marin bozic, ph.d., department of applied economics, university of minnesota

Where FMMO changes are concerned, Bozic noted some of the broader issues to come out of the Class I pricing change that was made legislatively in the last farm bill. For example in future reforms, when there is lack of wide public debate on proposals, he said: “It increases odds of a fragile or flawed policy design, and lack of grassroots support for the mechanism in changing markets. FMMOs have a comprehensive protocol for instituting changes through an industry hearing process. The Class I milk price formula can be modified through a hearing process.”

From Bernville, Pennsylvania, representing National Milk Producers Federation (NMPF) and DFA, Lolly Lesher of Way-Har Farms shared the benefits of the Dairy Margin Coverage (DMC) program through FSA and other risk management tools through RMA. She said they purchase the coverage at the highest level each year as a safety net for their 240-cow dairy farm. (testimony)

DMC is intended for smaller farms producing up to 5 million pounds of milk annually, but other farms can layer it in with other available tools at the tier one level on the first 5 million pounds or choose to pay the tier two premium to cover more of their milk through that program, but other tools like DRP are also available, Marlow explained.

Turning to the Class I pricing change in the last farm bill, Lesher said the change was an effort to “accommodate a request for improved price risk management for processors, while maintaining revenue neutrality for farmers… but the (pandemic) dramatically undercut the revenue neutrality that formed its foundation.”

“As valuable as the (DMC) program has been, many farmers have not been able to fully benefit because the underlying production history calculation is outdated. It is critical that the (supplemental DMC) production history adjustment be carried over into the 2023 farm bill… The events of the last two years have shined a spotlight on the need for an overall update to the FMMO system. Class I skim milk prices averaged $3.56/cwt lower than they would have under the previous ‘mover’. This undermined orderly marketing and represented net loss to producers of more than $750 million, including over $141 million in the Northeast Order. The current Class I mover saddles dairy farmers with asymmetric risk because it includes an upper limit on how much more Class I skim revenue it can generate… but no lower limit on how much less… those losses become effectively permanent.”

lolly lesher, way-har farm, bernville, pennsylvania, representing nmpf and dfa

According to Lesher’s testimony: “The dairy industry through the National Milk Producers Federation is treating this matter with urgency and is seeking consensus on not only the Class I mover, but also a range of improvements to the FMMO system that we can take to USDA for consideration via a national order hearing.”

Lesher serves on DFA’s policy resolutions committee and she noted that DFA, as a member of NMPF “is actively participating in its process (for FMMO improvements), which involves careful examination of key issues to the dairy sector nationwide… We look forward to working with the broader dairy industry and members of this committee as our efforts advance.”

Representing International Dairy Foods Association (IDFA), Mike Durkin, President and CEO of Leprino Foods Company stressed the “extreme urgency” of updating the “make allowances” in the FMMO pricing formulas. These are processor credits deducted from the wholesale value of the four base commodities (cheddar, butter, nonfat dry milk and dry whey) used in FMMO class and component pricing as well as within the advance pricing for fluid milk. (Leprino is the largest maker of mozzarella cheese in the U.S. and the world. Mozzarella cheese is not reported on the USDA AMS price survey used in the FMMO class and component pricing.) (testimony)

Durkin also noted the importance of making the Dairy Forward Pricing Program that expires September 2023 a permanent fixture in the next farm bill for milk. This program allows forward pricing of milk used to make products in Classes II, III and IV so that longer-duration contracts can be used by this milk when also pooled under FMMO regulation without fear of the authority expiring in terms of the FMMO minimum pricing. (Milk that is used to make products in Classes II, III and IV is already not obligated to participate in or be regulated by FMMOs.)

“The costs in the (make allowance) formula dramatically understate today’s cost of manufacturing and have resulted in distortions to the dairy manufacturing sector, which have constrained capacity to process producer milk. Congress can improve the current situation by directing USDA to conduct regular cost of processing studies to enable regular make allowance updates. The need to address this lag is now extremely urgent. While our proposal to authorize USDA to conduct regular cost surveys will eventually provide data to address this in the longer term, steps must be taken now to ensure adequate processing capacity remains. Updating make allowances to reflect current costs will enable producer milk to have a home. Making the (Dairy Forward Pricing Program for Class II, III and IV) permanent could also facilitate additional industry use of this risk management tool for longer durations without concern about the program expiring.”

Mike Durkin, president and ceo, leprino foods, representing idfa

Lesher also thanked House Ag Ranking Member G.T. Thompson for his Whole Milk for Healthy Kids Act, seeking to bring the choice of whole and 2% milk back to schools. The bill currently has 94 additional cosponsors from 32 states, including the House Ag Chair David Scott and other members of the Agriculture Committee. The bill was referred to the House Committee on Education and Labor.

Other key dairy provisions were reported and questions answered, including a witness representing organic dairy farmers. There’s more to report, so stay tuned for additional rumination in Farmshine and here at Agmoos.com

Recorded hearing proceedings available at this link

Written testimony is available at this link


-30-