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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