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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As depooling, negative PPDs and Cl. I formula change continue stealing value from milk checks, here’s what you can do

This table originally published in Farmshine last year, has been updated through March. It shows what the Class I formula change, alone, has collectively removed from all FMMO producer settlement funds and farmer milk checks in terms of Class I milk payment (NET loss of 91 cents / cwt net over Class I milk shipped from all FMMOs for all 23 months since the Class I formula change and 28 cents / cwt NET loss for ALL FMMO pounds of milk May 2019 through March 2021). The massive depooling that resulted has cost dairy producers more than three times this amount in negative PPDs.

Dairy producers and organizations are encouraging more to add names by March 12 to letter seeking equal seat at table for producers in regard to milk pricing policy

By Sherry Bunting, Farmshine, Friday, March 5, 2021

EAST EARL, Pa. — Dairy producers from across the U.S., along with many state dairy associations and the American Dairy Coalition, have come together to compose a letter to the National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA). The letter addresses the impact of massive depooling in relation to large negative PPDs for dairy farmers across the U.S during the last three months in 2019, eight months in 2020, and is estimated to continue through at least the first four to seven months of 2021. 

Dairy producers and dairy advocacy trade associations are invited to add their names as signatories to this letter to the presidents of both NMPF and IDFA. Hundreds of producers and dairy trade associations have done so electronically within the first few days. 

The deadline to sign is March 12, 2021.

Farmshine has learned that allied industry persons can also sign and mention how they are affiliated — due to the many jobs, economic activity and livelihoods supported by dairy beyond the farmgate having a vested interest in seeing a price formula that is fairer to producers. Those signing who are not producers, but are affiliated with dairy production, will be listed separately as ‘allied industry’ when the letter is officially presented.

Multiple family members involved in a dairy farm operation may individually sign.

Click here or scroll to the end of the article to view the letter and sign electronically through the automated short form.

Or, read the letter as published in Farmshine. Then, email your name, phone number, city, state, and farm name or allied industry affiliation (veterinarian, nutritionist, lender, accountant, feed sales, custom harvester, heifer grower, etc.) to info@americandairycoalitioninc.com or text this information to 920-366-1880.

A photo example of the electronic form appears below.

Click here to open to add your name or organization name.

In the letter, dairy producers ask NMPF and IDFA to work with them to find a solution that can result in a fairer distribution of dairy dollars.

“Dairy farmers all across the U.S. were stunned to see the huge negative PPD deductions on their milk checks,” states the American Dairy Coalition (ADC) in an email about the letter. “We understand the need to better ensure that processors are able to utilize risk management. However, this came at a huge expense to dairy producers and eliminated their ability to utilize the risk management tools like DRP and DMC if they had already purchased them — leaving many producers with no way to shield themselves from significant financial loss.”

The new formula (average Class III and Class IV advance pricing factors + 74 cents), passed by Congress in the 2018 Farm Bill at the request of NMPF and IDFA, is not acceptable, says the ADC.

The goal of the letter to NMPF and IDFA is to ensure that dairy producers have the opportunity to truly be at the table to find workable solutions for milk pricing. 

Remember, NMPF and IDFA advocated the change in the Class I base price that is a key part of the problem — without any hearings. NMPF indicates in various press releases that they are working on this and have a plan to “fix it”, but their plan, as indicated so far, falls short according to available economic analysis. 

A recent Farm Bureau preliminary analysis of four Class I pricing scenarios (2019-2021), using USDA AMS data, shows this. Fig. 1 (above) compares the previous higher-of, the current average + 74 cents, the current average + $1.68 and Class III + $1.25. Dairy producers are looking to be part of evaluating the best solution using past and future pricing indicators, and it appears that Class III + $1.25 offers a fairer distribution of dairy dollars than the averaging method.

The central point of the letter, however, is to give dairy producers an equal seat at the table. While NMPF represents dairy cooperatives and IDFA represents dairy processors, there is inadequate representation of dairy farmers at the policy-making level on this issue.

The domino effect of the Class I formula change, negative PPDs and depooling, as well as impact on risk management tools, have been hardest on dairy producers in so-called “fringe” areas, and those supplying regional Class I markets. This tends to accelerate the consolidation trend toward ‘cow islands’.

In fact, dairy farm exits in 2020 represent a 7.5% loss in the average number of licensed dairies in the U.S. compared with a more typical attrition rate of 5% annually over the past decade. This, according to USDA’s annual milk production report released last Tuesday (Feb. 23).

Producers interviewed in multiple states recently indicated that while the USDA CFAP payments were helpful, they did not come close to covering losses incurred from negative PPDs and the cost of risk protection tools they chose to purchase but which did not protect against this depooling-negative PPD risk. In many cases, those producers using risk protection through futures markets, actually had additional costs in margin calls that were not recouped in the real milk check when the market went against the hedge.

In short, not only are milk checks not transferring equitable value, the risk management tools offered by USDA and privately, do not work as intended or expected.

Across all 11 FMMOs, the NET loss on Class I milk pounds, alone, due to the new Class I formula, amount to over $726 million. (Table 1). This translates to a 91-cent per hundredweight NET loss over 23 months (May 2019 through March 2021) on Class I utilized milk and a 28-cent per hundredweight NET loss over 23 months on all milk pooled across 11 FMMOs.

Normand St-Pierre, Ph.D., PAS, shows the losses in his 20-month chart May 2019 through December 2020. As director of research and technical services for Perdue Agribusiness, he broke down the amounts for each FMMO in his “Tiny change with unforeseen consequences” Perdue weekly dairy outlook recently.

“Cumulatively, since the new formula was implemented (May 2019), producers have suffered a (20-month net) loss of $714 million. If from here on the new formula would always produce a gain equal to the average gains that have occurred in the 10 winning months since May 2019 (i.e.,~ $0.40/cwt), it would take producers 50 months to recover the $714 million in lost income.”

In fact, with current futures markets projecting a continued divergence of Class III and IV advance pricing factors by more than the ‘magic’ $1.48 per hundredweight, this situation of negative PPDs, depooling and milk check value extraction will continue for at least another four months, digging the milk check hole even deeper for dairy producers.

Producers are often told that negative PPDs are ‘good’ because it means milk prices are going up. This used to be the case back when the ‘advanced pricing’ aspect of the Class I formula was the main reason for small negative PPDs occurring once in a while. 

The situation today is far different – largely due to the change in the Class I base price from ‘higher of’ to averaging Class III and IV pricing factors. The net losses over the past 23 months will not be ‘caught up’, and as St-Pierre points out, the situation is now at the point that it could take years to catch up or recoup even with a tweak.

St-Pierre also observed that producers in the Northeast FMMO suffered losses from the formula change that were the largest in total across all FMMOs, but nearly equal to the average loss per hundredweight across all FMMOs. The losses per hundredweight are largest in Florida’s high Class I milk marketing order, of course.

Now consider that the Class I shortfalls created by the lopsided Class III vs. Class I relationship prompted massive depooling. As previously reported in multiple Farmshine articles and Market Moos columns, only the milk directly associated with the Class I plants is truly regulated to be pooled. Handlers of Class III milk are accustomed to getting a check from the pool, not writing one to the pool.

This Class III over I situation creates collective shortfalls in Federal Milk Marketing Order producer settlement funds when massive depooling occurs. This has resulted in a collective net loss of well over $3 billion ($2.7 billion as of the end of November), as represented by negative PPDs across the 7 multiple component-priced FMMOs and the aforementioned Class I skim losses in the 4 fat/skim-priced FMMOs. 

Fig. 2 and 4, from American Farm Bureau based on USDA AMS data, shows the depooling / negative PPD losses just for June through November 2020, but the losses continue in the months since then for which data are available, and the futures markets suggest this will continue into at least July 2021.

In December, Farm Bureau economist John Newton wrote about the most severe negative PPD depooling losses as of the end of November — shown here for June-November 2020.

USDA AMS answered Farmshine’s question last year about these losses in relation to calculating the “All-Milk” price on which Dairy Margin Coverage is based. Their response indicated that some of this depooling / negative PPD loss is included as value in the All-Milk price. It is seen as value received by producers because the dollars are “in the marketplace” due to the FMMO end-product pricing formulas – even if these dollars are not passed on to producers after producer settlement funds are depleted by depooling.

Farm Bureau chief economist John Newton wrote in his December 2020 Market Intel analysis of the negative PPD impact June through November 2020: “To put this into a farm-level perspective, assuming a national average milk yield per cow of nearly 12,000 pounds of milk produced from June to November, a 200-cow dairy in western Pennsylvania would have experienced PPD milk check “deductions” of nearly $130,000. Similarly, for a 3,000-cow dairy operation in California, the negative PPDs would represent milk check deductions of more than $2.5 million.”

Newton goes on to explain in the article published in the December 25, 2020 edition of Farmshine: “What makes the situation even worse is public and private risk management tools such as Chicago Mercantile Exchange futures contracts, Dairy Margin Coverage and Dairy Revenue Protection were unable to protect against PPD price risk. Margin calls on Class III milk likely made the negative PPDs sting even more as milk prices rapidly rose.”

So back to what dairy producers can do! Read the letter and consider signing it. Share it with others. Talk to your local, state and regional dairy organizations and farm organizations. Ask them to sign as organizations. Both individuals and organizations can sign on.

The bottom line is that dairy producers need an equitable seat at the table where decisions are made that affect how dairy value is shared. NMPF and IDFA — as processors — wear multiple hats and do not wholly represent the on-farm producer interests. 

To view the letter (below) click here and look for instructions to electronically add your name, or the name of your organization. Or read the letter below and click here for the direct link to electronically add your name — or the name of your organization — to the letter.

Farmers send June milk check data and preliminary review is revealing

MilkCheckSurvey072920

UPDATED! By Sherry Bunting, Updated from the article in July 24 Farmshine print edition

BROWNSTOWN, Pa. — June milk check reports are pouring in after Farmshine’s previous article about negative Producer Price Differentials (PPD) included a request for milk check data from readers. Along with the data, we are receiving many comments.

One producer notes the PPD had typically averaged a positive $1.50 in his area of the Northeast, but for June, it was a negative $5.38, a loss he pegged at $15,000 for the month for his farm.

Another producer in the Mideast area noted a loss of over $60,000 in component value, which would not be covered in the way expected by the Dairy Revenue Protection (DRP) policy he had purchased. The negative PPD loss represents “basis risk”, whereas tools like DRP, forward contracting, even DMC, mitigate “market and margin risk.”

The “markets” did their thing. Demand went up, cheese prices went up, Class III milk contracts gained, but the de-pooling in most Federal Milk Marketing Orders (FMMOs) ate up most of the doubled protein value and other component value gains for farms across most of the country, as reflected in a steeply negative “basis”. There’s really no risk management tool for that, and we’ve received correspondence indicating that producers who opted to manage risk, had losses where they thought they would have coverage.

It’s difficult to make sense of it all, especially when FMMO Market Administrators explain all the workings of PPDs in terms of advance pricing, sudden commodity increases that are complicated by advance pricing of Class I, pooling and de-pooling of milk when Class I milk value is lower than the blend price. But these explanations leave out the fact that Congress changed the way the Class I Mover is calculated at the request of NMPF and IDFA in the 2018 Farm Bill, without holding a milk pricing hearing that so many have requested.

This is a big concern going forward. The spreads between the higher Class III price over the Class I Mover are $9.62 for June and $7.75 (estimated) for July.

From July, forward, the lagtime is less of a factor. However, the new way vs. the old way of calculating Class I is a much bigger factor in predicted negative PPDs because as Class III has been rising, Class IV has been falling, widening the divergence.

The final math equation for the Class I Mover is the same as it was: Class I Mover = (Base Skim Milk Price x 0.965) + Butterfat Price x 3.5). What changed in May 2019 is the way the Base Skim Milk Price is determined before it is placed in that calculation. It used to be simply the higher of the two Advance Pricing Factors — Class III or Class IV — that was plugged into that equation as the “Base Skim Milk Price. Now the two Advance Pricing Factors are added together, divided by 2, and 74 cents is added to that to produce the Base Skim Milk Price for the final equation above.

Under the previous way, using the “higher of,” the August Class I Mover would have been $24.36 — $4.58 higher than the $19.78 Class I Mover announced on July 22 for August. Also, under the previous method, July’s Class I Mover would have been $19.13 — $2.57 higher than the announced July Class I Mover at $16.56.

These new concerns in FMMO pricing bring new variables into how producers manage risk, so the market value that did not make it into milk checks or risk management tools cannot be blamed completely on Covid-19 pandemic disruptions. A convergence of factors have created a situation where the mechanics of risk management like Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP) — as well as forward contracting — may not work as intended for all producers in all regions in a time of disrupted markets and extreme risk, with fairly recent changes to certain milk pricing formulas.

This market disruption, and the fallout in negative PPDs, should signal to USDA and the Congress that a National Hearing on Milk Pricing is overdue. Piecemeal changes have consequences. The de-pooling exacerbates the situation. In June, de-pooling contributed to removing hundreds of millions of dollars of value from milk checks across all Federal Orders. As one producer asked, who gets that money? The answer: It depends.

First, if the end-product “market” value found was paid to the plant or cooperative or handler, and if the handler consequently de-pooled the milk and didn’t pass that value back to the farms voluntarily or contractually, then we know who has the money. If the “market” did not pay what we see in the USDA end-product pricing or on the CME spot market and futures markets, then it’s not real money.

Given the wide range in milk check data with most of the nation coming in around $5 to $7 lower than the Upper Midwest — and a $4 range in FMMO uniform prices to begin with — it’s obvious the “market” is paying. But the calculations are not passing through to milk checks, except in the Upper Midwest Order 30 where 50% of pooled milk receipts were utilized as Class III milk, even though Class III volume reductions suggest significant de-pooling occurred.

Let’s look at preliminary data from Farmshine readers around the country (Table 2 above).

So far, over 150 Farmshine readers from six of the 11 FMMOs have provided milk check data. Since only a couple responses were received from California, we did not do any math for FMMO 51 yet, until we receive more data. At this writing, we have not received any milk check data from Orders 6 (Florida), 126 (Texas and New Mexico), 124 (Arizona) and 131 (Oregon and Washington).

What is evident in the preliminary review is the significant gap between the highest and lowest gross and net prices paid.

For each of the six FMMOs — where we had enough data to do some math — we see the difference of $7 between the FMMO with the highest average gross price paid (before deductions) of $20.81 in the Upper Midwest (FMMO 30) and the lowest average gross price paid of $13.77 in the Central Order (FMMO 32). When looking at the range of price data, the spread is $8 between some check data as low as $13.02 gross pay price in Pennsylvania to $21.05 in Minnesota.

The other FMMO average data fall into place $4 to $6 below the Upper Midwest with gross pay price averaging between $14.97 and $16.15 before deductions.

On the net mailbox price (after deductions), the difference is almost $7 between the highest mailbox average of $19.74 for FMMO 30 and the lowest average of $12.97 for FMMO 32. Average net mailbox price for FMMOs 1, 33, 5, and 7 trail FMMO 30 by a difference of $5 to $6. (See Table 2.)

Respondents for each of the FMMOs so far are a mix of mostly co-op members, but also some independent shippers, and a range of cooperatives — national and regional — are represented in the data.

In the Upper Midwest FMMO 30 for June, where PPD was least negative and Class III milk utilization was the highest (50%), the Uniform price already reflected the smallest negative PPD in the $3s compared to negative $5s and $7s everywhere else. At the same time, reports indicate the cheese plants and co-ops in that region even shared some of that smaller loss, knocking it back into the negative $2’s.

While large penalties for overbase milk still remain part of the pricing equation, it was not a major factor for most producers in June, perhaps because producers are reducing production as well as dumping, donating or utilizing overbase milk differently to avoid these penalties. This process is continuing into July. In the Northeast and Midatlantic region, reports of milk dumping were confirmed in July. Mostly this was due to producers wanting to avoid overbase penalties, but at least one report involved temporary “plant equipment issues”.

Of the milk check data shared with Farmshine, most showed producers were shipping 93 to 99% of their base for June. But some data includes producers seeing significant assessments on small amounts of overbase milk by both smaller regional cooperatives and larger national footprint cooperatives — except in the Upper Midwest. Also, in pockets of the Southeast, check data show some penalties were waived as a base / overbase blend was shown on checks, but then in another spot, the stub reported “revenues available to pay” a better price. In those instances, it appears the overbase penalty was eliminated and market adjustments reduced, which added 30 to 50 cents to what the location blend would have been.

Elsewhere, producers overbase deductions ranged $1.50 to $6.40.

Another variable was “market adjustments”. No “covid” deductions were seen in June check data, however, many had “market adjustments” deducted to the tune of 13 to 24 cents. In a few cases, the “market adjustment” was described in an earlier letter stating that the “covid” deduction for co-op costs incurred in April and May was being spread out evenly over several months forward.

The averages for the Northeast and Mideast FMMOs belie the wide range in prices. For Pennsylvania, alone, the range in gross pay prices before deductions was more than $4.00/cwt.  Even after adjusting for butterfat, the range was $3.50. The lowest net mailbox prices submitted by anyone in any FMMO came from Pennsylvania producers, with instances as low as $11.20/cwt mailbox for June. Overbase penalties and market adjustment deductions contributed to these lower nets.

In Pennsylvania, the Pa. Milk Marketing Board (PMMB) over-order premium (OOP) was set large for June, but was a small factor on most milk checks. It does appear that the western half of the state in Order 33 received at least some OOP benefit to make up for taking a more significant beating from negative PPDs.

Very few producer milk checks showed numbers other than zero in the PMMB OOP line item. However for Pennsylvania producers shipping directly to some Pennsylvania bottlers in the Mideast order, the benefit was $1.25 to $2.00/cwt listed as a line item and serving to simply pull them up closer to where the Northeast blend price sat. Remember, negative PPDs in the Mideast Order, which includes western Pa., were in the $7s. Negative PPDs in the Northeast Order, which includes eastern Pa., were in the $5s.

Meanwhile, out-of-state bottlers buying Pennsylvania milk and selling into the Pennsylvania minimum retail price market passed on about 10% of this floor-setting OOP in June at about 30 to 50 cents.

June’s PMMB OOP was over $4 per cwt because $3.68 was added to the normal $1 to make the difference between the USDA Class I Mover and a temporary $15 Class I floor. The PMMB used the OOP to temporarily accomplish this, but then became an island as USDA did not follow suit. The USDA had canceled a hearing requested by cooperatives petitioning it do the same nationally.

Looking at the milk check data we have received, it is obvious that USDA would have done well to have followed PMMB’s lead — as they were petitioned to do in April — to set a temporary Class I Mover floor at $15 through August.

At the time that the PMMB took its action, USDA AMS Dairy Programs had indicated in correspondence shared with Farmshine that a date was set to meet with petitioners to hear evidence for a national temporary Class I floor.

But, when word got out, certain dairy economists, such as at the University of Minnesota, along with Minnesota Milk Producers and other entities, including Walmart, protested that this idea of a temporary Class I Mover floor would “decouple” Class I milk and be unfair to the Upper Midwest where Class I utilization is low. Mainly, they complained that a move to stabilize Class I would “disrupt” milk markets and affect the Dairy Margin Coverage.

Well, folks, that disruption happened anyway — in reverse.

What we have seen, in the absence of a Class I floor, is total disruption and instability due to the inherent lagtime in Class I pricing reflecting market trends, and additional severity because of how the Class I Mover calculation was changed by Congress, with no hearing at all, just placed in the 2018 Farm Bill at the direction of National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA).

The so-called “markets” have not worked for any of the FMMO’s dairy producers except for the Upper Midwest where the complaints over flooring the Class I Mover arose.

The change in the calculation of the Class I Mover in the 2018 Farm Bill was implemented one year ago in May 2019. By using an average instead of the “higher of” to determine a base value for components or fat/skim, the Class I Mover no longer moves in concert with the highest value of components or fat/skim.

This is a problem because there is no way to assess market value on Class I in an of itself. Class I beverage milk is a designated loss-leader by the 800-lb retailer-processor gorillas like Walmart and Kroger. Also, in a couple states, the retail milk price is regulated to some degree.

Class I’s new “averaging” method is contributing to the removal of hundreds of millions of dollars from Federal Order pools through de-pooling.

It’s hard to predict what “reality” or “alternate reality” the USDA NASS All Milk price and Dairy Margin Coverage milk margin will reflect when they are announced on July 31.

This is a serious problem, given the widening divergence between Classes III and IV on the futures markets. This divergence is a warning that the current four-class system should be re-evaluated. When two manufacturing classes for stored products can be averaged to produce the basis of value for fresh products and beverages, it’s easy to see how large entities in the marketplace can make decisions that affect imports, storage, supply and demand to move one side of an “averaging” equation and create lopsided returns outside of FMMO pools. If milk moved to its highest value use and components were valued on multiple cross-class markets, a stable Class I base could be established as one piece of an overall value mix with less incentive to de-pool lopsided value.

For example, the July Class III contract stood at $24.41 on the futures markets as of July 27 — now $10.76 higher than the Class IV contract at $13.65. August Class III stands at $22.11, $8.39 higher than the Class IV contract at $13.72. September Class III, at $20.49, is $6.34 higher than the $14.15 Class IV contract. October Class III, at $18.90, is $4.51 higher than Class IV at $14.39. November Class III, at $17.53, is $2.95 higher than Class IV at $14.58. The gap narrows for December, but as of July 27, the difference between the two classes is still more than the $1.48 ‘magic number’ with December Class III at $16.60, $1.81 higher than Class IV at $14.79.

Creating even more value loss in every FMMO in June — whether priced by multiple components or fat/skim — is the amount of Class III milk that was de-pooled. Total volume pooled across all Federal Orders was 9.5 billion pounds in June, down 36% from a year ago and down 28% from May (May 2020 was down 13% from year ago).

While June milk production was reported on July 21 at 0.5% above year ago, milk dumpage in June was down considerably in terms of what showed up on FMMO pools. We know farms are dumping and diverting to avoid overbase penalties, but the pooled “other use” milk, including dumpage and animal feed, was down by 44% compared with a year ago in June. The only Federal Order to have more “other use” milk in June than in May was the Appalachian Order 5, and Central Order 32.

Table1_YTD_MilkDumped(Bunting)rTable 1 (above) shows the “other use / milk dumpage” pooling data. What is mind-boggling is that year-to-date milk dumped totals at 566.7 million pounds for just the first 6 months of 2020, is 125 to 150 million pounds greater than the 12-month annual totals for each of the past five years.

Dairy producers wishing to submit June milk check data as well as next month’s milk check data for July to broaden this survey geographically, please send: Gross price, net mailbox price, PPD, butterfat and protein, other deductions (especially ‘market adjustment’ deductions), overbase penalties if applicable, along with your location or the FMMO in which your milk is marketed and information stating whether you market with a cooperative or as an independent. There is no need to provide your name or your specific co-op or plant affiliation unless you choose to include that.

Please consider emailing me at agrite2011@gmail.com or text/call 717.587.3706. All information is aggregated anonymously by state, region and FMMO.

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