AFBF milk pricing forum draws 200 stakeholders to KC, some consensus gained, high priority given to return Class I ‘mover’ to ‘higher of’ formula

By Sherry Bunting, Farmshine, October 21, 2022

KANSAS CITY, Mo. — It was intense, productive, enlightening, and at times a bit emotional. And, yes, there was consensus on some key points during the American Farm Bureau Federation (AFBF) Federal Milk Marketing Order (FMMO) Forum in Kansas City last weekend (Oct. 14-16).

The event was a first of its kind meeting of the minds from across the dairy landscape, involving mostly dairy farmers, but also other industry stakeholders. It was planned by a 12-member committee representing state Farm Bureaus from coast-to-coast, working with AFBF economist Danny Munch.

Farm Bureau president Zippy Duvall kicked things off Friday afternoon, urging attendees to get something done for the future of the dairy industry, to stay cool, leave friendly, and set a pattern for continuing conversations.

“We have the people in this room who I hope can come up with guiding principles,” said Duvall, noting that a meeting like this is something he has dreamed about for years, even prayed for. He talked about his background as a former dairy farmer and assured attendees that milk pricing is a topic he is very interested in.

He challenged the group to come at it with “an open mind. The answers are sitting in this room, not on Capitol Hill. There are some geniuses in this room, people who really understand this system,” said Duvall.

“We all have ideas, and we can lend an ear to other ideas. We learn a lot if we listen to each other,” he said, noting a few of the existing Farm Bureau dairy policy principles: that FMMOs should be market oriented, with better price discovery. They should be fair and transparent, and farmers should be able to understand and compare milk checks.

Hearings not legislation

Duvall noted AFBF agrees with NMPF that future FMMO changes should go through the normal USDA hearing process, not through Congressional legislation. By Sunday, this seemed to be a point of consensus, along with the recognition that FMMOs need updating, but they are still vital for farmers and the industry. 

On the Class I ‘mover,’ specifically, Munch noted Farm Bureau already adopted the recommendation through its county, state and national grassroots process to return to the ‘higher of’ — plus 74 cents. The addition of the 74 cents is to make up for the unlimited losses incurred over the past four years.

For NMPF’s part, chief economist Peter Vitaliano and consultant Jim Sleper laid out a series of updates the economic committee’s task force is recommending to the NMPF board, which will vote at the annual meeting at the end of October.

These recommendations include going back to the simple ‘higher of’ for the Class I ‘mover,’ updating make allowances and yield factors, doing a pricing-surface study to update Class I differentials, making changes in the end-product pricing survey to allow dry whey price reporting of sales up to 45 days earlier, not 30 days, and eliminating the 500-pound barrel cheese sales from the Class III cheese price formula to base it only on the block cheese.

Intense, informative, valuable

The three days were intense, covering a lot of information, and were shepherded by expert panels and ‘cat herder in chief’ Roger Cryan, AFBF’s chief economist since October 2021.

Munch served as the emcee — akin to the ghost of milk pricing Past (Friday), Present (Saturday) and Future (Sunday). He introduced the various panels and provided economic snapshots and questions for the 25 breakout tables to discuss, decide and deliver.

Meeting organizers reshuffled the deck of 200 attendees from 36 states and representing nearly 150 state and national producer organizations, Farm Bureau chapters, regulatory agencies, farms, co-ops, processors, financial and risk management firms, and university extension educators.

Attendees were assigned tables with a number on the back of each name tag. The goal was to mix the table-groupings for varied geographic and industry perspectives. Each table was equipped with its own large flip tablet mounted on an easel. 

According to Munch, Farm Bureau will scan and collate the information from all of the large tablets and issue a preliminary report to attendees followed by a public report later this year.

On Sunday, the open microphone was lively and most tables reported from their flip tablets. Overwhelmingly, attendees said they found value in the meeting and appreciated the platform. They reported a desire to keep the conversations going, to do this again, not just every 20 years, and not just in response to a problem, but to be forward-looking with the many challenges on the dairy horizon.

Platform for next big issue

For example, Gretl Schlatter, an Ohio dairy producer on the board of American Dairy Coalition (ADC) noted that only Class I milk is mandated to participate in FMMOs, and that today, the FMMOs are weakened with only 60% of U.S. milk production participating in the revenue-sharing pools.

“Where will we be in five years? We do not want to give up on fluid milk – our nutrition powerhouse,” she said. “The issue now is federal milk pricing but the next one coming — fast — is the sustainability benchmarks, the climate scores. We need to keep meeting like this as an industry, keep talking to each other, and get ready for the next big thing affecting our farms and family businesses.”

This was touched upon by Duvall and others, but Cryan reminded everyone that, “Federal Orders are complicated enough without adding the sustainability discussion to it.”

Duvall reminded attendees that this meeting was Farm Bureau’s response to the words of Ag Secretary Tom Vilsack last year, when he said there would be no USDA hearing until the dairy industry reaches some “consensus” on solutions.

This set into motion an already dairy-active Farm Bureau that had formed its own task force, responding to grassroots dairy policy coming up from the county and state levels to national through AFBF’s grassroots process.

In fact, NMPF’s Vitaliano, noted that, “having Roger Cryan at Farm Bureau makes it easier to do this,” to partner on formulating dairy policy because of his background. Prior to coming to Farm Bureau a year ago, Cryan was an economist for NMPF and then for USDA AMS Dairy Programs.

The first hour of the first day included a recorded message from Secretary Vilsack and an in-person presentation by Gloria Montano Green, USDA deputy undersecretary for Farm Production and Conservation.

They encouraged attendees to work together and told them what the Biden-Harris administration has done and is doing for dairy. Primarily, they went through a list of funding and assistance, including the improved Dairy Margin Coverage, the PMVAP payments, Dairy Revenue Protection, Livestock Gross Margin, dairy innovation hub grants and the recent funding for conservation and climate projects that includes 17 funded pilots involving dairy. 

They told attendees that the dairy industry is “far ahead” on climate and conservation because it has been involved in these discussions and is already mapping that landscape.

Dana Coale, deputy administrator of USDA AMS Dairy Programs, took attendees through the FMMO parameters. She engaged with the largely dairy farmer crowd in a frank discussion of what Federal Orders can and cannot do. The headline here is that this current time period before a hearing is a time when she and her staff can talk freely and give opinions. Once a hearing process begins, she and her staff are subject to restrictions on ex parte communications.

Consensus to go back to ‘higher of’ formula

If there was one FMMO “fix” that achieved a clear consensus and was given priority, it was support for going back to the Class I ‘mover’ formula using the ‘higher of’ Class III or IV skim price instead of the current average plus 74 cents method that was changed in the 2018 farm bill.

Since implementation in May 2019 through October 2022, the new method will have cost dairy farmers $868 million in net reduced Class I revenue, which further erodes the mandatory Class I contribution to the uniform pricing among the 11 Federal Milk Marketing Orders (FMMO), setting off a domino effect that has led to massive de-pooling of milk from FMMOs and decreased Federal Order participation.

Pa. Farm Bureau presiden Rick Ebert (left), moderated the first panel Friday afternoon (l-r) Dana Coale, deputy administrator USDA AMS Dairy Programs; Calvin Covington, CEO emeritus, Southeast Milk; Anja Raudabaugh, CEO Western United Dairies. After this panel, during the first open-microphone and roundtable breakout, attendees were urged not to leave their flip tablets blank. “Groups with blank boards will have to drink the almond juice in the back,” said AFBF economist Danny Munch, taking note of the hotel offering and to have real milk on-site — provided Saturday and Sunday by Hiland Dairy.

During his presentation Friday, retired Southeast Milk CEO, Calvin Covington, said dairy farmers lost $69 million in revenue for the first 8 months of post-Covid 2022, alone. That figure will rise to an estimated $200 million when September and October Class I milk pounds are tallied. 

Noting NMPF’s task force recommends the board approve petitioning USDA to go back to the ‘higher of,’ Vitaliano cited “asymmetric risk” as the reason.

This risk scenario was also explained by others. ADC’s Schlatter, for example, noted the current averaging formula “caps the upside at 74 cents, but the downside is unlimited.”

Vitaliano noted that whenever there is a ‘black swan’ event or new and different market factors, this downside risk becomes unacceptable for farmers, and he indicated these market events that create wide spreads in manufacturing classes are likely to continue into the future.

Dr. Marin Bozic, University of Minnesota assistant professor of applied economics, observed the way this downside ‘basis’ risk becomes unmanageable via new and traditional risk management tools. In his futuristic talk on Sunday, producers asked questions, to which he responded that, “Yes, farmers show me that they can’t use the Dairy Revenue Protection because of this basis risk.”

Bozic is also founder and CEO of Bozic LLC developing and maintaining the intellectual property for risk management programs like DRP. 

He also spoke about the concerns of the Midwest as FMMO participation declines. 

Presenting his own ideas and separately the ideas of Edge Dairy Farmer Cooperativ, Bozic said Edge is seeking a consensus to support two or three lines in the upcoming farm bill to simply “enable” FMMO hearings to introduce flexibility on an Order by Order basis, so that uniform benefits can be shared instead of a uniform price. Flexibility, they believe, would enable new ‘uniform benefits’ discussion that can help maintain or encourage FMMO participation in marketing areas with low Class I utilization.

Early in the Class I formula loss scenario of 2020-21, Edge had suggested a new Class III-plus formula to determine the ‘mover.’ Bozic said that “the idea of returning to the ‘higher of’ is not a deal breaker for Edge in the short-term.”

Even Mike Brown, senior supply chain manager for Kroger, unofficially indicated IDFA “could be open to the idea” of reverting back to that previous ‘higher of’ formula. As dairy supply chain manager on everything from Kroger’s milk plants to its new dairy beverages, cheese procurement, and so forth, Brown was asked if the averaging formula allowed him to ‘hedge’ fluid milk to manage risk as a processor.

The answer? Not really. Brown said there are ways for processors to manage risk under the ‘higher of’ formula also, but that they haven’t done any hedging under the averaging formula with fresh fluid milk – and very little risk management with their new aseptically packaged, shelf-stable milks and high protein drinks.

Incidentally, he said, the aseptic, ultrafiltered, shelf-stable dairy beverage category “is growing faster than plant-based” in their retail sales.

This exchange and other discussions suggested the averaging formula may have been geared more toward price stability that would encourage processors to invest in expensive aseptic, ultrafiltered and shelf-stable milk-based beverage technologies that result in a storable product needing risk management. 

Fresh fluid milk is already advance-priced and quite perishable with a fast turnaround. Aseptic, ultrafiltered and shelf-stable products, on the other hand, can be packaged under one set of raw milk pricing conditions and sold to retail or consumers up to nine months later under another set of raw milk pricing conditions.

Frankly, it appears that the consumer-packaged goods companies (CPGs) may be driving such shifts, just as we heard from Phil Plourde of Blimling/Ever.Ag that CPGs are “all-in” on the climate scoring — the next big thing on the dairy challenge list.

Tacking de-pooling – regional or national?

Attendees came back to the specific concern about de-pooling, which Vitaliano and Cryan both described as an issue to be handled regionally and not through a national hearing.

This did not seem to satisfy some who raised the concern. Toward the conclusion Sunday, Cryan explained it this way: 

“De-pooling is a national issue in principle but a regional issue in detail. Every region will have different ideas, needs and situations. If there is consensus (on pooling rules) in a region, then changes could move forward quickly,” he said.

Make allowances are sticky wicket

Attendees appeared to agree that make allowances should be addressed or evaluated through a hearing, but ideas on how to handle this sticky-wicket varied.

Attendees questioned panelists, pointing out that if a farmer’s profit margin on milk is only around $1.00 per hundredweight, then raising make allowances an estimated $1.00 per hundredweight is going to be a tough pill to swallow.

Vitaliano said NMPF is commissioning an economic study with their go-to third-party economist Scott Brown at University of Missouri to show the actual milk check impact of raising make allowances that are embedded into the end-product pricing formulas for the four main products: cheddar, butter, nonfat dry milk and dry whey. 

He said the discussions about make allowances as a cost to farmers are “purely arithmetic” but that the “true impact” is not a straight math calculation. Instead, he said, when make allowances are set appropriately, dairy producers ultimately benefit, so in his opinion, it’s not a penny for penny subtraction.

Several other panelists and attendees observed that processors and cooperatives have been creating their own ‘make allowances’ through assessments, loss of premiums, and other milk check adjustments.

The Saturday afternoon panel of (l-r) Kevin Krentz, Peter Vitaliano, Chris Herlache, and Roger Cryan dove into Class III and IV pricing topics including make allowance formulations and structures.

Vitaliano stressed that when make allowances are set properly, the industry is stronger and better able to compensate producers. Initially, he said, raising make allowances would have a negative impact on expansion, which in turn would have a positive impact on producer prices.

When asked if raising make allowances would mean lost premiums would return to farmer milk checks, he responded by saying “that depends, and it won’t happen right away.”

In other words, raising make allowances will be painful in the short term, but in the long-term (to paraphrase) that pain leads to gain. 

Some panelists and attendees referenced an idea of “phasing in” a future raise in make allowances.

Others wondered why it is necessary with the amount of innovation happening in the 15 years since they were last raised as processors make a wider variety of dairy products – not just those bulk items that are surveyed for end-product pricing formulas.

One idea suggested by a Wisconsin dairy producer was to tie make allowance increases to plant size — much the same way that dairy farmers are only assisted up to a production cap of 5 million annual milk pounds. Cryan said he heard a similar proposal previously to use a graduated scale for make allowance increases according to plant size and presumably age.

This is the crux of the make allowance issue because the new state of the art plants produce many types of products, both commodity and value-added; whereas some of the smaller and older plants that are still vital to the dairy industry are more apt to specialize in producing a bulk commodity with a more limited foray into value-added non-surveyed products.

Modified bloc voting?

While there appeared to be consensus that changes to the FMMOs should be done by USDA petition through the administrative hearing process, not through Congressional legislation, some of the discussion at tables and the open-microphone noted the importance of a producer vote after hearings and USDA final decisions. Many felt farmers should have an individual vote on FMMO changes. 

Currently, cooperatives bloc vote for their members to assure that FMMOs are not ended inadvertently by lack of producer interest in following-through on a vote. 

One compromise suggested by Bozic was to have a preliminary non-binding vote by individual producers, followed by the binding vote done in its usual way.

This, he said, would at least increase accountability and transparency in the FMMO voting process and bring producer engagement into the FMMO hearing process. To be continued

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

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


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New ‘cost of processing’ report could boost make allowances by almost $1.00 per cwt

By Sherry Bunting

WASHINGTON, D.C. — The USDA released the long-anticipated study on milk price ‘make allowances’ recently. These are embedded in the end-product pricing formulas.

Make allowances are processor credits for transforming raw milk into the four base commodities – cheddar, butter, nonfat dry milk and dry whey that are used in end-product pricing formulas for Federal Milk Marketing Order (FMMO) Class and Component prices as well as the Class I Mover price.

During ADC’s Future of Federal Milk Pricing Forum Feb. 15, set make allowances were cited by panelist Mike McCully as margin guarantees that “encourage commodity production and deter innovation.”

He believes ‘value-added’ products are the path to return more dollars to farmers in the future for all classes, including Class I fluid milk.

“If (FMMO) end-product pricing continues, then the make allowances will have to be raised, and this will come at a cost to producers,” said McCully, referencing the Cost of Processing study commissioned in 2019 by USDA and completed in 2022 by Dr. Mark Stephenson, dairy economics professor at University of Wisconsin-Madison.

In a USDA AMS webinar Feb. 23, Dr. Stephenson talked about the report as well as previous reports in 2006-08 when make allowances were last raised. He observed that today’s plants are more complex with a wider range of products and innovations. Therefore, isolating the costs for the four basic commodities was more difficult this time.

He said 80% of the data came from participation by processing plants owned by cooperatives. Many proprietary plants chose not to participate.

The Class III make allowances for cheese and whey currently total $3.17 per hundredweight, and the Class IV make allowances for butter and nonfat dry milk total $2.17, according to Dr. John Newton, chief economist for the U.S. Senate Agriculture Committee Republicans.

Newton said the new Cost of Processing report shows these make allowances could go up to $4.00 for Class III and $3.12 for Class IV, which represents a nearly $1.00 impact in Federal Order minimum class price reductions if implemented.

“The ultimate result is a reduction in farm milk checks,” said Newton speaking virtually to Kentucky dairy producers at their annual Dairy Partners conference Wed., Feb. 23 in Bowling Green.

“The make allowances are designed to cover the costs of taking raw milk and converting it to these products, where the component value is captured in end-product pricing,” said Newton, observing that they haven’t been raised for more than 10 years, but this hasn’t stopped explosive growth in product production and significant re-blending of farm milk prices in recent years.

“Processors have opportunities to add value in the many other product streams outside of the make allowance and end-product pricing formula, already,” said Newton, noting some of the cumulative numbers and describing this as “effectively a subsidy from farmers to processors to process their milk.”

“This will be a very tough debate, and hopefully farmers are at the table as this debate happens,” he said.

March Class I mover higher, but marks second straight month of value loss under current formula

Weekly MARKET MOOS, by Sherry Bunting, Farmshine, Feb. 18, 2022

March Class I ‘mover’ $22.88 instead of $23.67

The March Class I base price, or ‘mover’, was announced Wed., Feb. 16 at $22.88. This is $1.24 higher than the Feb. Class I ‘mover’ and $7.60 higher than a year ago. This marks the 6th consecutive month of Class I mover gains.

However, for the second consecutive month, the Class I mover is at a level lower than it would have been under the previous ‘higher of’ formula. Announced at $22.88 for March 2022 using the average-plus method, this is 79 cents lower than the $23.67 it would have been under the previous ‘higher of’ formula.

As shown above, the net loss in Class I value since the new formula was implemented in May 2019 is over $738 million. This could continue for the foreseeable future if this week’s futures markets are an indication.

Near term futures diverge by $2 to $3; 12-mo. Cl. III avg. $21.34, IV $23.28

Class III milk contracts came under pressure at midweek while Class IV surged solidly higher. This created more divergence between the two this week — to spreads beyond the $1.48 ‘magic number’ for all but three of the next 12 month contracts. ($1.48 is the point when the Class I price set by the current average-plus method becomes a loss compared to the previous ‘higher of’ method.)

We already saw this occur for the February and March 2022 Class I mover (above).
But the good news is the overall price levels are the highest in 8 years for most of these months — just not as much higher as they would have been using the ‘higher of’ method.

The average spread between the two milk contracts for the next 12 months Feb. 2022 through Jan. 2023 stands at $1.94/cwt this week.

Class III milk futures averaged $21.34 for the next 12 months, 8 cents lower than the average a week ago.

Class IV futures averaged $23.28 for the next 12 months, gaining 47 cents on top of last week’s 67-cent gain, now up fully $2.00 compared with a month ago.

CME spot dairy products all higher, except whey slips a penny

CME spot dairy prices moved higher on all products this week, except whey slipped another penny. Butter made the biggest gains, followed by block cheddar.

On Wed., Feb. 16, butter was pegged at $2.80/lb with 7 loads trading. This is up a whopping 27 cents compared with a week ago but 7 cents below the high for the week at 2.87/lb on the previous day.

Grade A nonfat dry milk (NFDM) hit $1.90 this week, then lost a penny Wed., Feb. 16, pegged at $1.89/lb — still a 2 1/2 cent gain over a week ago with a single load changing hands.

On the Class III side of the ledger Wed., Feb. 16, 40-lb Cheddar blocks were pegged at $1.9825/lb, up 8 cents from the previous Wednesday with 3 loads trading; 500-lb barrels at $1.92 are up 6 cents from a week ago with 3 loads trading.

The spot market for dry whey lost another penny this week, but remains above the 80-cent mark. On Wed., Feb. 16, a single load traded and the price was pegged at 81 cents/lb.

Jan. blend up $1.50-$2.00: Class IV tops Class I in all 7 MCP Orders

January’s uniform prices announced in each of the 11 Federal Milk Marketing Orders (FMMO) over the past several days were $1.50 to $2.00 higher across the board for the third consecutive month. In the 7 multiple component pricing (MCP) FMMOs, the Class IV price topped the Class I minimums (including differentials) and in some FMMOs, the Class I minimums were the lowest class price.

Statistical reports show the spreads incentivized some de-pooling of Class II and IV milk. In the Northeast FMMO for January, Class IV and Class II, combined, accounted for 40% of utilization and Class I accounted for 31%, contributing to a blend price that was $2.36 above the Class III price. PPDs were positive throughout all MCP Orders because Class III was the lowest price. (PPD = blend price minus Class III.)

January’s uniform prices moved higher for the third straight month — across the board — as follows:

FMMO 1 (Northeast) SUP $22.74 PPD +$2.36
FMMO 33 (Mideast) SUP $20.38 PPD +$0.96
FMMO 32 (Central) SUP $21.09 PPD +$0.71
FMMO 30 (UpperMW) SUP $20.59 PPD +$0.21
FMMO 126 (So. West) SUP $21.63 PPD +$1.25
FMMO 124 (Pacific NW) SUP $21.49 PPD +$1.11
FMMO 51 (California) SUP $21.25 PPD +$0.87
FMMO 5 (Appalachian) uniform price $23.72
FMMO 7 (Southeast) uniform price $22.28
FMMO 6 (Florida) uniform price $25.49
FMMO 131 (Arizona) uniform price $24.17

PA Dairy Summit tackles milk pricing: Bozic digs into Class I, FMMO system

Dr. Marin Bozic at the PA Dairy Summit Feb. 2

By Sherry Bunting, published in Farmshine, Feb. 11, 2022

LANCASTER, Pa. — “The Federal Milk Marketing Order (FMMO) system is built around Class I fluid milk… if no changes are made, they can just collapse, west of the Mississippi,” said Dr. Marin Bozic, a University of Minnesota associate professor of applied economics speaking to over 300 farm and industry attendees of the Pennsylvania Dairy Summit in Lancaster on Feb. 2.

Dr. Bozic showed how the U.S. is now exporting more milk on a solids basis than is being sold in the domestic beverage category. This development is sending shockwaves through a Federal Milk Marketing Order system in which only Class I fluid milk handlers are required to participate.

Fluid milk sales are declining and being overtaken by the increasing export category — leading processors to lose interest in FMMO participation, he said.

Class I fluid milk handlers are the only ones required to participate in FMMOs. It is voluntary for all others.

As markets shift, Bozic predicts continued reductions in producer price differentials, forecasting the average Northeast PPD to decline by more than 20% over the next eight years. 

He also cited the impact of inefficient milk movement stimulated by FMMO pool access provisions. This could also apply to state-regulated over-order premiums. Location-based Class I premiums can fuel inefficient movement of packaged fluid milk from more distant lower-cost-of-production areas. (When local milk is displaced, hauling costs go up.)

“What can we do to give FMMOs a new lease on life?” Bozic asked, observing that future reforms should prepare them to survive in a time when the U.S. is increasingly exporting more milk on a solids basis than in the beverage category.

Bozic said national hearings on FMMO changes could happen after the midterm elections but may not happen until after the 2023 Farm Bill, and NMPF and IDFA are working on their positions.

He referenced a working paper about modernizing U.S. milk pricing and how pricing is done in other countries. Bozic authored the paper together with Blimling and Associates, and it was released at the IDFA convention in January. It is available and anticipating feedback at https://www.idfa.org/wordpress/wp-content/uploads/2022/01/Modernizing_US_Milk_Pricing_Working_Paper_012522.pdf

Right now, he said, “Milk is being priced like it’s 1999, but it’s 2022.”

For starters, he said, the standard component test should be raised to reflect current national averages that are higher than in 1999. Butterfat, for example, stands at an average 4.0, but standard test is still 3.5. 

Bozic also predicted that over the next two years, the embedded make allowances in the pricing formulas will be increased. He said processors are already re-blending pay prices to accomplish a higher ‘make allowance’ internally. He cited New Zealand’s system that frequently updates manufacturing costs used to determine producer prices.

He was quick to point out that when make allowances are adjusted, it would be tools like the monthly Milk Check Transparency Report that Bozic is working on — along with some ideas for contract fairness — that would put processors on notice that they can’t just re-blend their pay prices on top of a make allowance adjustment. That would be double-dipping.

Answering questions about producer ‘cost of production’ and ‘cost-plus’ pricing, Bozic explained that in the UK, retailers are starting to use a ‘Fairness for Farmers’ label by doing a cost-plus contract model where they use accountants to measure dairy farm costs of production, along with a consumer price index, to price milk three months at a time. 

One key difference, however, is the interstate commerce clause in the U.S. Constitution makes it impossible to keep milk from areas with a lower cost of production from moving to undercut price structures in areas with a higher cost of production. Feed cost could be used, which is a bit more universal, but still varies by region. 

With dairy farms in the UK similarly sized with similar cost structures to farms in the Class I markets of the eastern U.S., such ideas are worth exploring, he said, noting that fluid milk prices in the UK are more stable.

This slide from a working paper co-authored by Dr. Marin Bozic and Blimling and Associates was discussed at the PA Dairy Summit. Dairy farmer Nelson Troutman noticed the fluid milk consumption graph showed the UK (lighter blue line under gray line) doing much better in per-capita fluid milk trends the past 15 years compared with the U.S. (red line), and he asked about it. Australia (gray line) is also doing better.

Referencing Bozic’s graph showing fluid milk consumption trends for various countries, Berks County dairy farmer Nelson Troutman asked about the notably different trend in the UK compared with the U.S. 

“Why is their fluid milk not going down like here?” Troutman asked. “Over there, they talk about ‘the blue milk’ (a reference to the package color of whole milk in the UK). Is it because their whole milk is higher fat than ours? They don’t take it down to 3.25%, and I think their schools can still serve it. It’s no wonder fluid milk sales are falling here.”

Bozic responded to say he thinks “it’s atrocious that we make school kids drink milk without fat,” going on to mention new technology that can convert the lactose into a dietary fiber. 

“If that is successful,” said Bozic, “Then flavored milk (for schools) can be developed to have no additional calories (even with the full fat).”

In that aspect, Bozic talked about how to stimulate fluid milk brand innovation, promotion, and packaging investment in a regulated Class I pricing environment.

“We cling to the FMMO structure because we think that without it, milk pricing will be like the Wild West,” said Bozic.

“There’s some truth to that,” he acknowledged, noting that farms with fewer than 3000 cows are not sure if processors will want to work with them in the future, and the regulated pricing affords some structure for those small and mid-sized farms “to feel safe.”

In reality, however, Bozic said the Wild West is already happening, and it starts at the retail level, which then pushes losses through the system and milk all over the map.

He explained that the Class I price announcements give retailers a price in advance, and these pricing structures show them the costs of bottling, so they know how hard they can squeeze those bottlers, and they are squeezing them.

It’s within this context that Bozic put forth the idea of a fluid milk innovation premium or credit, where the Class I price could be lifted, maybe $2 per hundredweight, and processors could get this premium back — IF they innovate their brand packaging, marketing and promotion.

A key part of this concept is the cost of innovation would be within the Class I price. It would have to be earned, but would be protected from the retailer price squeeze.

“This could encourage fluid milk bottlers to do brand innovation and promotion, to invest in packaging, while making it not so easy for retailers to squeeze them to where they can’t do it,” said Bozic.

“Consumers would pay a little more for milk, but that’s fine,” he explained, citing research that shows the demand reaction to promotion is much larger than the demand reaction to price.

Outside of Pennsylvania, the 99-cent and $1.25, $1.50 gallons seen in supermarkets reflect Class I value loss that is not being borne solely by those discounting retailers. The losses are pushed back through the system, especially now that there is more cooperative ownership of Class I bottling plants, post-Dean. 

Cooperatives are not required to pay Class I minimums to their milk suppliers the way that private milk buyers must.

One attendee asked about the roughly $2.50 in make allowance equivalents that are, by default, subtracted from the Class I price. Could this money be used for innovation and promotion credits since Class I bottlers are not making cheese, butter, nonfat dry milk and whey that the make allowances pertain to?

Bozic replied that the make allowances aren’t extractable because they are “embedded” in the FMMO formulas that currently determine the value of milk components.

For producers in regulated Class I areas — namely the Northeast and Southeast — Bozic said it will be important for them to “lead the way” in an open debate on how fluid milk prices can be stabilized and how the other benefits of FMMOs in payment timeliness, weights and measures, price benchmarking and such can be preserved.

When asked specifically about going back to the ‘higher of’ for calculating the Class I base price, Bozic said: “In the Northeast and Southeast, Class I is still a big deal. If you want it, and if IDFA can’t make a strong argument against it, then go for it.”

More importantly, he said: “We need to build a grand coalition. Transparency is part of that. If building a broader coalition brings us back to discussion about the ‘higher of’, then maybe that’s part of it.”

But the bigger issue he alluded to is this: Doing nothing, and letting it all just happen, could lead to Federal Orders collapsing in other parts of the country, without enough Class I to keep them together, and the system could begin to unravel, anyway, without producer input as to what functions should be saved and how to save them.

Look for part two next week on other aspects of the milk pricing discussion, and more details about what Bozic is doing on Milk Check Transparency, including how producers can participate by writing to him at marin@bozic.io

Last week’s Farmshine (Feb. 4, 2022) had a brief overview of the discussion. Check it out here

Milk pricing reform preview? Bozic unveils bold ideas, new transparency report at PA Dairy Summit

By Sherry Bunting, published in Farmshine, Feb. 4, 2022

LANCASTER, Pa. – “The optimum level of tension is not zero,” said Dr. Marin Bozic. While he is an assistant professor of applied economics at the University of Minnesota, it his independent work that he spoke of during a 90-minute reveal of bold ideas for the future of milk pricing.

Bozic was the keynote speaker for the 2022 Pennsylvania Dairy Summit in Lancaster this week. His first public presentation of what he has been working on for months fueled questions and applause from the over 300 attending dairy producers and industry members.

He laid out three “pillars” of milk pricing reform: milk check transparency, fairness in contracting, and Federal Milk Marketing Order modifications.

The first is something he has already begun bringing to fruition. Receiving milk checks from producers in some parts of the country, so far, his goal is to start publishing a Milk Check Transparency Report that would allow producers in a region, or nationally, to see how they are paid — to make milk checks more comparable, and work toward a way for producers to plug in their volume and components and be able to see how decisions affect their price.

He urged dairy producers to consider providing milk checks for this purpose with the goal to cover all regions and buyers. Only Bozic and his assistant see the milk checks, and they are destroyed once the data is entered.

“Making milk checks more comparable brings accountability,” said Bozic. “Transparency is empowering. It gives perspective, and we can have those meaningful conversations.”

While acknowledging that the conversations could get “loud,” and this could get “messy” for a while, he said again, “The optimum level of tension is not zero.”

This new Milk Check Transparency Report will be a way to introduce accountability and competitiveness into the system, said Bozic.

On the milk contracting side, he laid out several ways that producers can have a more level playing field. Key among them is that milk buyers should not be allowed to limit a farm’s production and require exclusivity at the same time.

“Those are two separate lanes, and when they cross, we have traffic accidents,” said Bozic. In other words, a milk buyer or co-op should not require a patron farm to sell only to them while at the same time having a two-tiered pricing scheme — putting limits on how much they will buy at a non-penalty price.

Bozic talked about tweaking the FMMO system to “reinvigorate” fluid milk. He had ideas for a processor premium — raising the price of fluid milk with a premium that, for example, processors can earn back through innovation of packaging and promotion that improves fluid milk marketing.

He also discussed having an open debate about how to price Class I differently for more stability. So much important ground was covered. Look for details in a future Farmshine.

Part One published in Farmshine, Feb. 11, 2022

Check back for Part Two

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Senate Ag subcommittee hearing on milk pricing: Agreement that Federal Orders need reform, but how? That’s the billion-dollar question

By Sherry Bunting

WASHINGTON, D.C. — Federal Milk Marketing Orders, their purpose, performance, problems and solutions — including a recent change in the Class I fluid milk pricing formula — were the focus of a Senate Ag subcommittee hearing on ‘Milk Pricing: Areas of Improvement and Reform” Wednesday, Sept. 15 in the Capitol.

“We are in the midst of a modern dairy crisis, magnified by a Class I pricing change in the 2018 Farm Bill. The pandemic and economic downturn are not the only causes of this problem, but they did exacerbate it. This system cannot adapt to market conditions and thus is not fairly compensating our dairy farmers. The formula change is a symptom of larger problems in a system that is confusing, convoluted and difficult to understand,” said Gillibrand Wednesday.

She recounted the more than $750 million in producer losses when looking at the previous Class I fluid milk ‘mover’ formula that used the higher of Class III or IV manufacturing milk prices and comparing it to the current formula that uses an averaging method plus 74 cents.

The hearing was a first step Sen. Gillibrand had previously indicated in a press conference last June, when the full extent of dairy farmer financial losses was becoming known.

As the hearing got underway, Gillibrand observed that from 2003 to 2020 there has been a 55% decrease in the number of dairy farms in the U.S.

“We are using an almost 100-year-old system with the last reform 20 years ago, where dairy farms are not operating as they were then. We need to put the power back in the farmers’ hands.” said Gillibrand.

The power to make the issues known was in the hands of three dairy farmers making up the first panel — Jim Davenport, Tollgate Farm, Ancramdale, New York; Christina Zuiderveen, Black Soil Dairy, Granville, Iowa, and Mike Ferguson of Ferguson Dairy Farm, Senatobia, Mississippi.

This was followed by a panel with Dr. Chris Wolf, ag economics professor at Cornell University, Dr. Robert Wills, president of Cedar Grove Cheese and Clock Shadow Creamery, Plain, Wisconsin, and Catherine de Ronde, vice president of economics and legislative affairs with Agri-Mark cooperative based in Massachusetts with members in New England and New York.

One thing everyone agreed on, in differing degrees, is that reforms are needed in the Federal Milk Marketing Order System.

Testifiers agreed that a key purpose of the FMMOs is to make blended payments more equitable between producers supplying different classes and uses of milk.

All three producers agreed the FMMO system should continue, although they shared differing ideas about how reforms could improve it.

There was also agreement that the new Class I ‘mover’ formula is not adequate for changing and uncertain markets. They agreed that using the USDA rulemaking process is the way to make such changes to be sure all parties are heard.

However, the current change in the Class I ‘mover’, implemented in May 2019, was made legislatively during the 2018 Farm Bill, not through the USDA hearing process.

Ferguson, a 150-cow dairy producer in Mississippi said he supported bringing back the previous ‘higher of’ method while a longer-term solution can be considered through the USDA hearing process. He noted periodic reviews of the adjuster could also be helpful, and that the situation should be addressed in the short term.

He explained that the Southeast producers across FMMOs 5, 6 and 7, produce about 45% of the annual fluid milk needs of their growing population, and when supplemental milk has to be brought in, those Southeast producers pay the price to get it there. That was very difficult and costly when class pricing inversions happened last year for a prolonged period of time.

Davenport, milking 64 cows in New York observed that the Class I price was aligning better in the past few months, but “we’re not out of the woods yet,” on Covid-19, he said.

“The FMMO system has served farmers well but needs adjusted to reflect current product mixes and market swings,” said Davenport, adding that the fluid market is very important for smaller sized dairies and regional supply systems. He proffered the hope that Class I, long-term, could be stabilized by basing it on something other than the volatility of cheese, butter and powder prices.

“The rulemaking process USDA uses will work, it just takes time,” he said, adding that the Class I price should reflect how hard it is to supply the fluid market.

Zuiderveen, whose family has dairies totaling 15,000 cows in Iowa and South Dakota, said FMMO pricing for milk of the same quality should align and foster innovation and competition instead of consolidation. It should also be transparent and promote a nimble industry that can respond to changes, she said.

“Distortions can cause the system to become unglued,” she said, noting that if producers can’t anticipate which classes will participate in the pool and don’t know how that will drive their milk price, then they can’t manage their price risk effectively, losses become compounded, and this discourages risk management.

Zuiderveen and others noted a variance as wide as $9 per hundredweight was experienced in mailbox milk prices from region to region and neighbor to neighbor at intervals last year.

“That creates a sense of helplessness among producers,” said Zuiderveen.

Dr. Wolf noted multiple reasons for the negative PPDs and milk check losses under the new formula, including declining Class I fluid milk sales and increased milk components, but said the two biggest reasons for milk check losses under the new formula compared with the old formula were the large volumes of de-pooled milk that reduced FMMO pool funds as well as the Class I change itself.

Wolf explained multiple factors in the wide divergence between Class III and IV. A primary one was government purchases being tilted to cheese during that time. “This large divergence in butter and cheese prices meant that the Class I milk prices were lower than they would have been under the former pricing rule,” he said.

Ferguson noted that the government cheese purchases were intended to support dairy producers as well as the public during the pandemic, but it ended up having a “devastating effect on our fluid market,” he said, noting that a more balanced approach may have helped.

Through difficult times in the past, price alignments were more stable in large part because of the ‘higher of’ method keeping the Class I price above the blended price so no matter what was purchased, all farmers, supplying all classes of products, benefited more equitably.

Under the current formula, the pandemic cheese purchases helped support dairy producers, but also led to distortions that contributed to large differences in milk prices at the farm level.

Dr. Wills was the only processor testifying. He said the survival of dairy depends on being able to evolve on these pricing issues. “Farmers are only better off if the premium (shared in the FMMO pools) exceeds the value of other classes, and that’s inefficient,” he said, adding his opinion that FMMOs have outlived their purpose.

“The redistribution makes it appear that all farmers are winners, when the evidence shows pricing equity is being lowered,” said Wills. “I fear for the future of the dairy industry. The federally administrated milk pricing now functions opposite of its intent, resulting in higher prices for consumers and lower prices for farmers. It responds slowly, encourages inefficient trucking and promotes consolidation.”

Wills also mentioned the wave of competition from an array of plant-based and blended products as well as cellular agriculture and bio-engineered analog proteins, none of which are included in the FMMO pricing structure.

Wills brought home the reality for rural communities when small and mid-sized farms are lost. Near the end of the hearing, he responded to a question from Senator Roger Marshall (R-Kansas) asking what are his farmers’ biggest concerns, what do they talk about when he sits down with them for coffee at a restaurant?

“My farmers tend to be smaller producers,” said Wills, president of two Wisconsin cheese companies supplied by 28 dairy farms. “They are concerned about having continued access to markets as the industry continues to consolidate. Even in Wisconsin, where we have more competition than most places, it is hard to find homes for those dairies that are cut loose from big plants.”

As consolidation accelerates, he said, there is a trend toward plants not wanting to make multiple stops. “The impact of losing all of those producers … that 10% per year loss (over time) just hollows out our communities. There’s not a restaurant in town anymore to have coffee at,” said Wills. “We lost our hardware store, our grocery store. A lot of it has to do with our rural communities being hollowed out. The ability to maintain those small farms is also important for our communities.”

On program safety nets and risk management tools, Dr. Wolf noted that the Dairy Margin Coverage program has a very positive impact on small producers vs. large producers, and that the Dairy Revenue Protection and Livestock Gross Margin are aimed at bigger farms. He said farms with those programs in place were “in a better place” last year.

However, elsewhere in his testimony and in that of others, the risk management difficulties during the unusual price inversions were also mentioned, when the Class I pricing change was exacerbated by pandemic disruptions creating those misaligned conditions.

As for simply nationalizing the FMMO pooling rules or making them more rigid, Zuiderveen said this would lead to more processors staying out of the pool, and Wills said de-pooling is the pressure relief valve processors need.

With a nod to pricing delays that affect the transparency in sending market signals through the FMMO system, Wills said he found out that week (Sept. 13) what he will be paying for the milk he bought on August 1, and his producers who sold that milk to him were also just finding out what they would be paid. That’s six weeks after shipping the milk.

Wills said this kind of inefficiency makes it difficult to plan and compete in business.

Another positive to come out of the hearing was when Davenport brought up legalizing whole milk in schools, to which Chairwoman Gillibrand, Senator Marshall, a doctor, and a few other members of the Senate Subcommittee gave hearty verbal support.  

Here is the link to the recorded Senate Ag subcommittee hearing https://www.agriculture.senate.gov/hearings/milk-pricing-areas-for-improvement-and-reform

Look for more in a future Farmshine.

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Sen. Gillibrand’s plans for Dairy Subcommittee hearing are moving forward

By Sherry Bunting, Farmshine, July 9, 2021

WASHINGTON, D.C. — Senator Kirsten Gillibrand (D-NY), chair of the Senate Agriculture Subcommittee on Dairy, Livestock, Poultry, Local Food Systems, Food Safety and Security, told reporters in late May that she is working on milk pricing legislation and wants to have dairy pricing hearings in her subcommittee before the August congressional recess. 

According to a document obtained by Farmshine, the Senator has been granted the request to hold the hearing in her subcommittee. The American Dairy Coalition (ADC) reports their appreciation for Senator Gillibrand moving forward on this, noting her office has established the hearing scope and is contacting testifiers. A date is anticipated for late summer 2021, though not yet confirmed on the Senate Ag calendar.

“We cannot lose the ability to feed our own people,” Gillibrand said during her May press conference. “If you have a market that’s fundamentally flawed and are constantly leaving producers unable to survive in the industry, there’s a problem. So, I think we need a very thorough investigation of my concerns.”

At that time, Gillibrand also talked about a multi-part scenario where this hearing could be followed by an investigation. Since 2003, the U.S. has lost almost half its licensed herds with milk price returns declining 23% in the past five years, according to USDA.

In addition to pricing and competitive market concerns over the past decade, the billions of dollars in dairy farm losses due to negative producer price differentials (PPDs) and de-pooling are part of the hearing equation.

Of this, a documented $783 million in net losses have accrued over 26 months directly tied to the reduced Class I price for beverage milk under the new averaging method implemented by USDA in May 2019 (See Chart 1). 

That equates to a straight average loss of nearly $25,000 per farm or $83 per cow, but the Class I value losses would be greatest in milk marketing areas with a higher percentage of Class I use. Other types of losses were incurred by producers in milk marketing areas that have a lower Class I utilization but experienced large volumes of Class III milk de-pooled, making the much lower Class IV price a bigger portion of the blended price paid to farmers.

At the height of these losses being incurred, the American Dairy Coalition worked to bring dairy producers together through conference calls and emails, driving a letter signed by hundreds of producers and organizations to National Milk Producers Federation and International Dairy Foods Association. The March letter requested a seat at the table for producers to address the Class I method.

NMPF and other groups came out with statements about potential FMMO hearing requests, which did not materialize.

In May, ADC worked with Senators in supporting Senator Gillibrand’s letter to Ag Secretary Tom Vilsack, seeking use of available CFAP and PAP funds to assist dairy farm families with these losses. 

Secretary Vilsack recently responded to questions from Senator Patrick Leahy (D-Vt.) during an Ag Appropriations hearing to say USDA is working on a plan to compensate Class I and Class III differential losses, but no details have been forthcoming. Producers are also waiting for details from USDA about the enhanced Dairy Margin Coverage base payments approved by Congress in December.

Sen. Gillibrand has observed the extreme volatility in milk prices over the past decade of her service as a member of the Senate Ag Committee. Dairy farm revenues have steadily declined due to a combination of trade wars, increased production costs, and competition from non-dairy alternatives leading to reduced consumption of fluid milk.

Other seismic shifts have also occurred in the dairy market landscape over the past five years, including shockwaves of rapid cooperative and plant mergers, plant closings, farms and small cooperatives losing milk markets since 2015, Walmart opening its own fluid milk processing plant in 2018, and the bankruptcy filing in 2019 and sale of plants in 2020 by the nation’s largest milk bottler, Dean Foods.

Multiple factors have also converged around the pandemic to create further losses for dairy farm families operating on already razor-thin margins and struggling to attain equitable markets and revenue.

Even the risk management tools purchased by producers did not function as designed because they are based on market values that most farmers did not receive in their actual milk checks. That’s like filing an insurance claim for a fire, but the adjuster looks at someone else’s intact property to determine your damages.

The upcoming hearing will likely look at all of this in relation to the change in the Class I pricing method for fluid milk, which was added to the 2018 Farm Bill without being vetted through a hearing process. The hearing is also expected to look at ways to address the Class I change and the FMMO hearing process, as well as FMMO pooling and de-pooling rules and dairy cost of production.

FMMO revenue sharing pools are the mechanism for how the usually higher Class I base price and normally positive differentials are shared with producers across a milk marketing area, no matter what class of products their milk is used in.

However, when the Class I price — due to the new averaging method — fell below Class III for 16 of the past 26 months, an estimated 85 billion pounds of Class III milk normally associated with FMMOs was kept out of the revenue-sharing pools, dropping the Class III portion to less than half its normal size from May 2019 through May 2021, and ultimately depressing milk check returns to producers. Some handlers may have paid their own shippers a portion of this de-pooled value, most did not.

In effect, the equitable method became inequitable when pricing turned upside-down, and risk management, at a time when farmers needed it most, failed.

Additionally, the USDA Farmers to Families Food Box cheese purchase effects on markets in relation to Class I pricing, are also expected to be part of the hearing.

The Food Box program included cheese, milk and other dairy products to help struggling families and at the same time was intended to support struggling farmers that were having to dump milk and be docked further penalties by milk buyers and cooperatives as ‘balancing costs’ or ‘market adjustments’ to handle milk supplies during the disruptions of the Coronavirus pandemic.

These purchases prompted cheese market rallies, followed by intervals of higher Class III milk prices (see Chart 2). However, this support became inequitable in large part due to the Class I pricing change, alongside a record large spread between the Class III and Class IV prices of $5 to $10 per hundredweight. This spread was affected on one side by record-large butter imports and inventories (Class IV), a slowdown in milk powder exports (Class IV) and on the other side by cheese sales (Class III) rising because of active exports and government cheese purchases for food boxes during the pandemic.

Even though every food box contained a gallon of fluid milk, there is no way to determine the ‘market value’ of Class I fluid milk, apart from the manufacturing class and component values. This is because fluid milk is treated as a base commodity. It is present in 95% of shopping carts, and thus used by large retailers as a loss-leader on the one hand, while on the other hand, the USDA regulates Class I fluid milk handlers as the only class that must pay a minimum FMMO price to farmers.

The hearing is also expected to look at processor ‘make allowances’ that are built into USDA’s end-product pricing formulas for bulk surveyed commodities: cheddar and dry whey (Class III) and butter and powder (Class IV).

Make allowances and yield factors currently add up to $3.17 per hundredweight on the Class III milk price and $2.17 per hundredweight on Class IV, according to a 2018 presentation by John Newton, formerly the chief economist for Farm Bureau who was hired this year by the Senate Ag Committee, explained make allowances as part of a risk management conference in Pennsylvania.

In effect, the make allowances are deducted from the milk component values as a ‘processor credit’ per pound of product, and the yield factors are applied, determining the number of pounds of product made per hundredweight of milk. Processors are indicating the make allowances should be raised because of the “circular” nature of end-product pricing.

But there’s another way to look at that ‘circularity.’ While it’s true that 12 years have passed since make allowances and yield factors were last updated (2008), it also true that in those 12 years vast amounts of value-added manufacturing have been added that benefit from these make allowances but are not part of the end-product-pricing ‘circle’ back into the farm milk price. The cost of making those products can be easily passed up the supply chain instead of back to the farmers. 

For the plants making the four USDA-surveyed bulk commodities that determine class and component prices — cheddar, butter, nonfat dry milk and whey — the issue may be ‘circular’. However, if make allowances are too high and too rigid, then there’s too much incentive to make product for storage that further depresses raw milk prices through end-product-pricing. So make allowances can be circular in that way also.

Dairy pricing is complicated and intricate — a huge topic. But then again, maybe what can come out of a Senate Subcommittee hearing is a simple straightforward message about making milk pricing simple and straightforward.

Pennies per pound here and there across milk volumes mean millions for big players, and when they add up to nickels and dimes that turn into dollars per hundredweight in the farm milk price, the intricacies become something farmers should be able to see and understand.

In a word: Transparency.

As indicated in her May press conference, Senator Gillibrand is looking to have each part of the dairy sector represented to offer their unique perspectives in the upcoming hearing, which is expected to have two panels, the first being dairy farmers and the second panel bringing in cooperatives, processors and an expert on dairy policy and economics.

In May, Senator Gillibrand made it clear she wants to see a multi-part evaluation of current and longstanding dairy issues, with this hearing being a first step to get a look at the lay of the land.

Stay tuned.

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

FMMOs in disarray

By Sherry Bunting, Farmshine, April 2, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hot topic: Understanding milk pricing basics and PPD

Gratitude to Blimling and Associates for this flow chart illustrating the complexity of USDA milk pricing

By Sherry Bunting, Farmshine, March 26, 2021

I challenge anyone to find a pricing system on anything in the universe as complicated as the pricing of a hundred pounds of milk (See Fig. 1).

The Federal Milk Marketing Order (FMMO) system goes back to the 1930s Ag Marketing Law.  In 2000, changes were made to use end-product pricing formulas for four base commodities – Cheese (block and barrel Cheddar average), Butter, Nonfat dry milk (NDFM) and Dry Whey.

Today, these four commodities trade daily on the spot cash market at the Chicago Mercantile Exchange (CME), where less than 1% of volume, closer to 2% on butter, is sold. Since 2018, this 10-minute daily spot auction is done completely as an electronic auction.

The CME spot market sets the pace for actual sales reported weekly to USDA by around 100 processors. From these weekly-reported prices, a weighted average for each of the four commodities is calculated by USDA. The weighted averages are used in formulas that account for yield and deduct specific “make allowances” (See Table 1) to then calculate Class and Component prices.

But first, these weighted price averages for just the first two weeks of each month are plugged into a multi-step formula to determine an Advanced Skim Pricing Factor for Class III (cheese/whey) and Class IV (butter, NFDM). The adjusted butter price is also used to calculate the Advanced Butterfat Pricing Factor.

Effective May 2019 — as a result of a change agreed to by National Milk Producers Federation and International Dairy Foods Association and then passed by Congress in the 2018 Farm Bill — the 2-week Class III and IV Advanced Skim Pricing Factors are averaged together, plus 74 cents to calculate the Base Skim Price.

Prior to May 2019, the Base Skim Price was simply the “higher of” either the Class III or the Class IV Advanced Skim Pricing Factor.

(Author’s Note #1: The previous ‘higher of’ method was the way the FMMOs could make sure Class I always brought the highest price to fulfill the purpose of the Federal Orders – assuring fresh milk supplies – and to keep other handlers invested in pooling their milk. We can’t lose sight of the fact that the fluid milk sales (Class I) have no market transparency as to their value – at all. In some states there are loss-leader laws or minimum pricing provisions, but in most states, Class I fluid milk sales are treated as a base commodity by large retailers like Walmart and Kroger. They loss-lead the retail consumer price of fluid milk to extreme low levels, even as low as $1 per gallon, to win shoppers. They do this because supermarket data show fresh fluid milk is in over 94% of consumer shopping carts! Because it is treated as a loss-leader in some states, and regulated with minimum pricing in other states, it’s impossible to know the real market value of Class I fluid milk apart from the value of its components in making other products.)

Next, the Base Skim Price is multiplied by a yield factor of 0.965 and the Advanced Butterfat Pricing Factor is multiplied by a yield factor of 3.5 and then added together to become the Base Class I Price. This price, known as the Class I ‘mover,’ is announced before the 23rd of each month but is used in the following month.

The various location differentials throughout the 11 FMMOs are next added to this Base Class I Price.

Whew! Now back to those weekly-reported commodity prices, yield factors and make allowances… Announced around the 5th of the next month, the other class prices are a function of the component values based on average weekly prices for the four commodities for four weeks: Component Value = Yield x (Commodity Price – Make Allowance).

In Multiple Component Pricing FMMOs like the Northeast (FMMO 1) and Mideast (FMMO 33), a Statistical Uniform Price (SUP) is calculated from these Class and Component prices according to how the milk in the FMMO was utilized. The SUP is announced around the 11th of the next month before settlement checks are paid for the previous month’s milk.

(Author’s Note#2: Another wrinkle… did you know that an uptrending cheese and butter price can leave producers with a lower protein price? It happened in March 2021. Every end-product — butter, cheddar, nonfat dry milk and dry whey — was higher in March than February, and Class III, IV and II pricing were also higher, but the uptrending butterfat portion of the cheese price creates a ‘snubbing’ effect on the ability of protein to rise within the skim portion. Yes, it’s complicated, and the answer from USDA is a story of its own in the future.)

The FMMO SUPs are based on a 3.5% Butterfat test, but the FMMOs also report for information purposes a uniform price based on the average actual fat test. Your price will differ in your milk check based on your fat, protein, and other factors. In general, producing protein and butterfat above the statistical level nets a higher price, under normal conditions. Lately this has not held out because of negative PPDs.

What are PPDs? Along with the SUP, the FMMO calculates a Producer Price Differential (PPD). This shows how money remaining in the producer settlement fund is divided across the qualified hundredweights of milk, after all components are paid. Sometimes this is a negative number, meaning there was not enough money in the producer settlement fund to pay all of the actual component value after the location differentials on Class I were paid. A negative PPD represents spreading the shortfall across qualified milk in the pool. Severely negative PPDs represent unpaid component value.

The PPD is calculated by subtracting the Class III price from the average of all classes together: PPD = SUP – Class III. In the Northeast and Mideast FMMOs, this PPD has typically been a positive number but has been shrinking in recent years and has been negative for 13 of the past 23 months.

Negative PPDs happen for any or all of four main reasons:

1) When a rapid rise in commodity price(s) is not captured in the 2-week Advanced Pricing Factors.

2) When Class II and IV are far below Class III.

3) When Class I price falls below Class III because of the new averaging method when the spread between III and IV is greater than $1.48/cwt. Half of the months from May 2019 through December 2020 had a lower Class I Base price under the new method, representing a net loss of over $700 million on Class I pounds across all FMMOs. (See Table 2)

4) When handlers de-pool Class III milk because it is higher — to avoid paying into the pool.

Only Class I handlers are required to pool all of their milk. Other handlers can choose what non-Class I milk to pool or not pool based on what is financially advantageous. De-pooling is more likely when multiple months have negative PPDs because of wait times to re-qualify milk for the pool. Some FMMO pool-qualifying requirements are more stringent than others, and the rules have been loosening in recent years because handlers say they need more flexibility to meet fluctuating fluid milk needs.

Occasionally, when cooperatives or plants de-pool Class III milk, some will pass the higher value they withheld from the pool directly to their own producers. In most cases, however, this did not happen in 2020. Additionally, the severity of negative PPDs across FMMOs varied and this created a wide range of milk check pricing of $8 to $10 from top to bottom, when normally this range is $2 to $3, maybe $4. USDA relates that the value is still in the marketplace, so even when the PPD goes negative, some of that value is attributed to the All Milk price used in Dairy Margin Coverage margins because the value is in the market even if it is not in the “pool.”

In addition, for Pennsylvania dairy producers, all Class I milk from Pennsylvania farms that is bottled in Pennsylvania and sold in Pennsylvania stores receives the Pa. Milk Marketing Board (PMMB) over-order premium, which currently stands at $1.00/cwt. Processors can reduce this obligation by selling and sourcing milk from in and out of state as well as other methods.

Cooperatives are producers under the Pennsylvania law, so they collectively receive this premium also, where applicable, and have the ability to disburse the premium to members as they see fit.

Every farm’s mailbox price is further affected by premiums, such as quality bonuses, and deductions, such as trucking cost and marketing fees, which all vary across cooperatives and milk buyers.

This ‘primer’ just scratches the surface of current milk pricing issues. A related topic affecting many producers since May 2019 is how the new Class I pricing method, and the negative PPDs and depooling that can result when Class III and IV are so divergent, affect the way price risk management tools work, creating additional losses in many cases.

(Author’s Note #3: This article has been updated since it was previously published in R&J Dairy Consulting’s customer newsletter.)

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