Tag Archives: make allowances

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

U.S. dairy trade paradigm shift underway

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

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

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

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

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

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

March & Feb. milk production up 0.9%

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

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

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

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

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

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

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

Questions come to mind in these Eastern numbers:

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

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

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

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

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

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

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

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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.

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

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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.

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FMMO hearing update: ‘We made it to the moon, we can figure out this little equation’

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Milk pricing formulas and ‘make allowances’ can feel like rocket science, farmers point out the pitfalls in ignoring the impact of mozzarella and the rising costs on dairy farms. Georgia and California producers among those testifying on make allowances, along with economists, including Dr. Mark Stephenson

Previous FMMO hearing updates can be found here and here

By Sherry Bunting, Farmshine, September 15, 2023

CARMEL, Ind. — “It’s really simple. We made it to the moon back in the late 60s… if you tell me that we can’t figure this little (mozzarella) equation out, we got something wrong,” said Joaquin Contente, the son of Portugese immigrants and a lifelong dairy farmer near Hanford, California as he gave virtual testimony Friday, Sept. 8 during the ongoing USDA Federal Milk Market Order (FMMO) hearing in Carmel, Indiana.

Contente serves on the California Dairy Campaign (CDC) board, which is a member of California Farmers Union (CFU) and National Farmers Union (NFU) as well as Organization for Competitive Markets (OCM). His son and daughter today run the 1100-cow multi-generational dairy farm in California’s San Joaquin Valley.

“Mozzarella should no longer be ignored. This issue was raised in 2000, and the volume and demand have grown dramatically since then,” he said, referencing CDC’s proposal and citing USDA data showing mozzarella production last year was nearly 5 billion pounds while cheddar was short of 4 billion pounds, and all cheeses totaled just over 14 billion pounds.

“I represent myself and many other producers who are reluctant to step up and speak out in opposition to what is being said by milk handlers, out of fear of retribution,” he reported. “It is essential to include the largest cheese category – mozzarella. The volume has significantly exceeded cheddar, and the Class III price should be modified to reflect these market conditions.”

Contente noted comments about the change in the Class I base price from ‘higher of’ to ‘average of’ costing farmers $1 billion over four years’ time.

“This mozzarella issue, if you understand the formulas and yield factors, is costing dairy farmers more, annually, well over $1 billion — and that’s a conservative number I am using,” he said.

“We have situations where the milk price drops dramatically, 30 or 38%, so you have to look at this discrepancy going on over a couple of decades. Nobody is talking about it… you’ve got to be a little bit quiet about mozzarella because you don’t want to upset ‘the mozzarella people,’” said Contente, noting that mozzarella production is 12% larger than cheddar with very high yields. 

“There is information that needs to be collected, and that is the roadblock right now. It’s the largest category, and yet there is no reference to it, and the yields are so high that these cheesemakers are making product that they’re not getting charged for. It’s for free — off our backs,” he said. “We are in a system that requires price discovery of the uses of milk, and here we have the highest (volume of cheese) use in mozzarella, and we just turn the other way… why?”

The past two weeks of the daily 8 to 5 hearing sessions have been quagmired in the nuts and bolts of multiple proposals on what’s included or excluded from the pricing surveys as well as the corresponding make allowances as the hearing moved into its fourth week Wednesday (Sept. 13).

Like other producers testifying so far, Contente detailed the loss of dairy farms around him and the discrepancy between milk prices and cost of production leading to mass exodus of dairy farms currently. 

Economists from academia and from cooperatives later showed numbers revealing the hard reality that the farm-well for pulling out more processor investment money is running dry.

In fact, Contente pointed out that the processor make allowance cost surveys include “return on investment,” something he said is lacking for dairy farmers in their milk prices. This was corroborated in later testimony by Cornell’s Dr. Chris Wolf and DFA’s Ed Gallagher.

During Dr. Mark Stephenson’s testimony Tuesday (Sept. 12), we learned that the current voluntary make allowance cost surveys include “opportunity cost” for plant assets used to make the products included in the survey.

“As farmers, we don’t get a return on investment,” said Contente. (And the numbers put up by expert witnesses show farmers don’t get ‘opportunity cost’ either.)

In fact, Gallagher said it’s important for USDA to consider the impact of its hearing decisions on farmers because if they can’t reinvest in their operations, it affects the infrastructure, the lending and the farmers’ access to capital — putting the milk supply at risk.

While Contente’s testimony focused on the mozzarella proposal supported by CDC, CFU, NFU and OCM, he also voiced their opposition to any increase in make allowances for processors.

On the latter, American Farm Bureau Federation agrees. AFBF also opposes any increase in make allowances based on voluntary surveys without first seeing results of a mandatory and audited processing cost survey. 

AFBF’s chief economist Roger Cryan on cross-examination asked Contente if NFU opposes the make allowance increases due to the voluntary and unaudited nature of the cost surveys. “Yes,” was his response. “Very good,” said Cryan.

The IDFA make allowance proposal would reduce farm milk prices by $1.25 per hundredweight initially and even more down the road.

For Class I producers, the net result is an embedded make allowance deduct as large as $3.60/cwt at current make allowance levels, which could rise above $5.00 in a few years if the IDFA proposal is approved. 

This producer loss is embedded in the Class I price even though Class I processors are not even asked by USDA to provide their cost data. 

Georgia milk producer Matt Johnson testified in support of NMPF’s various proposals, which include returning to the ‘higher-of’ Class I base price and increasing the differentials. On the issue of make allowances, he said the NMPF proposal is preferred because it makes smaller adjustments.

“I understand that make allowances are an important aspect in determining Federal Order class prices, and from time to time, there is a regulatory need to adjust them,” said Johnson; however, “my milk price will go down when make allowances go up. I ask that when increasing make allowances, the Secretary consider the impact on dairy farm milk prices… and profitability. NMPF has proposed more modest changes to the make allowances, which are projected to lower farm milk prices by about $0.50 per hundredweight (not $1.25).”

During cross-examination, Johnson was specifically asked by USDA AMS administrator Erin Taylor to explain how the make allowances affect him as his farm’s milk goes mainly to Class I markets in Florida and the Southeast, not to manufacturing.

“It’s all negative,” he replied. “The make allowances are used in the prices used to figure the base Class I milk price. I don’t know who gets that draw, but for me, it’s all negative.”

In addition to CDC’s proposal to add mozzarella, American Farm Bureau defended its proposal to add 640-lb block cheddar and bulk unsalted butter, and NMPF defended its proposal to remove 500-lb barrel cheddar.

Several days of detailed accounting testimony were heard, and the kicker was when representatives for Leprino and IDFA stated that barrels should be kept in the survey as a ‘market clearing’ product that is ‘storable’, but that bulk mozzarella should not be added because it’s a higher moisture, fresh cheese, not storable like cheddar, making it a product that is not a ‘market clearing’ product. (This idea of ‘what is market clearing’ was further explored this week as needing a new definition now that there is no dairy price support program or government storage of dairy products).

Interestingly, in cross examination, we learned that barrel cheese — which Leprino and IDFA want to keep in the survey — is also a relatively fresh cheese, not all that different from bulk mozzarella, as only 4- to 30-day-old barrel cheddar is reported. 

At one point, cheese industry representatives suggested the spread between blocks and barrels is used to price ‘basis’ and to price exported products, while block cheddar is mostly used to price other cheeses. Witnesses indicated some processors use barrel movement to price cheeses, such as mozzarella.

Some expert witnesses contended that other products can’t be added to the FMMO pricing formula because they are not traded on the CME. AFBF’s Cryan retorted that the CME should not be running this show, and he noted that dry whey wasn’t traded on the CME until after it was added to the FMMO formulas.

In fact, CME futures hedging, CME cash spot markets and the risk management tools that use these exchanges were a contentious point. Some witnesses said USDA formula changes will ‘disturb’ risk management contracts, and must be delayed 15 additional months after a USDA final decision to avoid such disturbance. 

On a similar note, economist Dr. Stephenson, while providing academic processor cost survey information this week, was cross-examined by economist Dr. Marin Bozic for Edge cooperative. Bozic asked Stephenson if the disturbance of risk management practices would ‘fit’ his understanding of ‘disorderly marketing’.

Stephenson replied: “No… I am not sure hedgers or speculators should be first or foremost in the minds of FMMO personnel. That’s not what we are here to do.”

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