Dairy producers and other market participants will be sharing testimony starting Wednesday and continuing in future meetings to explore a wide range of proposals as USDA considers updates to the federal milk marketing order.
The FMMO hearing in Carmel, Indiana, will likely span between five to seven weeks as USDA staff listens to testimony on five different topic areas with a total of 22 proposals from industry participants. Each witness will have 60 minutes to present their testimony with an unlimited amount of time for direct cross-examination.
Dairy farmers get to go to the front of the line each day if they travel to testify in person; every Friday beginning Sept. 1, up to 10 dairy farmers will also be allowed to testify virtually for 15 minutes. Major farmer-led groups including the National Milk Producers Federation, American Farm Bureau Federation, California Dairy Campaign and Edge Dairy Farmer Cooperative have all encouraged farmers to be prepared to offer their thoughts on the slate of proposals.
Daniel Munch, an economist at AFBF, anticipates each week will cover a different topic, but that could change and the process could be sped up. “It really depends how many farmers come in person,” he said.
“This is a formal rulemaking procedure that is very unique. There's not a lot of administrative rulemaking that exists right now where farmers get to be actively in-person or virtually commenting to USDA on the challenges they face and how can they improve the system,” Munch added.
Lynne McBride, executive director of California Dairy Campaign, told Agri-Pulse it is a “crisis situation” for her members, and questioned whether the resources devoted to the hearing couldn’t have been better directed at making changes through the legislative process.
“It’s really going to determine who’s able to stay in business and who isn’t,” she said of the potential reforms. “We should be changing our system so that we have more stable prices for dairy farmers that really reflect the value of dairy products in the marketplace. We don’t see that happening today with these low prices.”
California Dairy Campaign “strongly opposed” the call for a hearing because it could lead to a “bigger carve out for make allowances” — the rough estimate of dairy processing costs — at a time when milk prices are drastically low; California's dairy farmers are faced with net milk checks in the $13-14 range when USDA's Economic Research Service estimates production costs are $23 in California and $27 nationally.
Munch and McBride both shared that some members are concerned farmers might not participate due to fear of potential retaliation. McBride said unlike the last time a national hearing was held, many California dairy farmers today only have one milk handler option to purchase their milk.
“Unfortunately, the way it's set up where the room is filled with lawyers and economists and others who get into these highly technical discussions, that in and of itself, is difficult to engage farmers to come out against what perhaps their coop or their proprietary is saying at the hearing,” McBride said.
Munch said AFBF is hoping this is a hearing where farmers and handlers can be open and honest about the issues that they face “without any sort of negative consequences.”
At the end of the hearing process, it is the farmers who will have the final say in approving any proposed order changes. Alan Bjerga, NMPF senior vice president for communications, said NMPF’s comprehensive proposal will be presented and supported during the hearing by its cooperative members who helped develop it.
“There isn't an area where we feel like we're not in a good position to make our case. But it's also not a big shock that there are people with other cases to make, especially in the processors' community, which has always had a different view of how a milk check should be sliced up rather than a group that is predominantly farmer-led,” Bjerga said.
Mike Brown, IDFAMike Brown, chief economist at the International Dairy Foods Association, which represents the nation's dairy processors, said, “We go into this process with the same goal we’ve had all along — unify the industry around ideas that are in the best interest of the full dairy supply chain. IDFA members across the dairy industry want to see milk pricing policies that support all parts of the supply chain, to ensure the industry’s continued success and growth.”
The 2018 farm bill made a change in the Class 1 (the category for fluid milk) pricing formula, which backfired in 2020 and set up much of the ground support for change heading into this hearing.
“Our main goal at Farm Bureau is to just prioritize adjustments aimed at realigning the four milk prices correctly each month. And that really will hopefully minimize some of the de-pooling, negative PPD (producer price differentials) issues that we've seen,” Munch added.
Edge Dairy Farmer Cooperative CEO Tim Trotter said in an email to Agri-Pulse, “Even though this is a limited scope hearing, Edge will keep a watchful eye on any topics that can impact farmers’ ability to effectively manage price risk, including milk composition, Class III and IV formula factors and the Base Class I Skim Milk Price. Outside the hearing, Edge is steadfast in making appropriate changes in the legislative process to ensure farmers have the right policies in place to guide dairy long-term.”
Here’s an overview of those topics and the varying proposals on the table:
Milk composition: Both NMPF and the National All-Jersey Inc., introduced proposals on how to amend the milk component factors in the Class III (products like cream cheese and other spreadable or hard cheeses) and Class IV (typically sold as butter) skim milk price formulas. National All-Jersey proposes to update the factors annually using the previous year’s weighted average calculations, with a 12-month implementation lag. NMPF proposes to adjust the component pricing slightly higher and to evaluate it no less than every three years going forward.
Munch explained farmers have made improvements in recent years with genetics, nutrition and overall production as the market has demanded higher nonfat solids, protein and the components used to produce higher-value products such as cheese.
“The argument here is that the existing component factors and the formulas that are used in multiple-component pricing are out of date, because farmers have done all these things that have improved and created higher percentages of these components in milk,” Munch said. Both proposals on the table, and supported by AFBF in principle, would more appropriately compensate farmers for what is currently in their milk.
Surveyed commodity products: Four different proposals, including two from AFBF, will be discussed to determine how to best establish minimum prices farmers are paid under the FMMO. Munch explained USDA uses the National Dairy Product Survey report to survey prices for different commodities and help identify prices dairy manufacturers can get for products and, in turn, the level to pay dairy farmers.
“We’re primarily looking at adjustments to the survey that will accurately reflect the different products that are out there being sold and correctly weighted for the volumes that are being sold,” Munch said.
NMPF proposes to eliminate the cheddar cheese 500-lb. barrel prices series from the protein price formula, whereas AFBF seeks to add 640-lb. cheddar cheese blocks to the formula as well as add unsalted butter to the butterfat and protein price formulas.
California Dairy Campaign also seeks to add mozzarella, which exceeds cheddar in production, to the Class III formula. Although the group opposed the hearing, McBride said now that it is happening, it wanted to at least push for the changes of including mozzarella — a higher moisture cheese that captures a higher price — in the pricing formula.
“We think these formulas need to be more market-oriented, so we have to take into account what’s actually happening in the cheese market,” McBride said.
Munch said in the short-run, proposed changes would likely increase the average milk price that dairy farmers receive, but over time it could be expected that "some of the competitive market forces of supply and demand to buffer any large impacts to manufacturers.”
Class III and Class IV formula factors: Leading up to the hearing, there’s been extensive discussion about make allowances and how to set the levels that strike the proper balance between farmers and processors. USDA will consider six different proposals on the topic: one each from NMPF, International Dairy Foods Association, Wisconsin Cheese Makers Association and three from Select Milk Producers, which represents several dairy farmers and processors such as Fair Oak Farms.
IDFA’s make allowance proposal would update the system to better reflect the cost of processing milk into dairy products — something that hasn’t been adjusted since 2008. The group proposes to increase the 2008 make allowance levels to the average of proposals from a voluntary 2022 study conducted by Mark Stephenson, a dairy economics professor at the University of Wisconsin-Madison, and William Schiek, economist for the Dairy Institute of California.
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“Half of the difference would be applied when (and if) the order changes are initiated, and 1/6 of the difference would be added each year over the next three years until the full amount is reached. If an audited mandatory cost survey conducted by USDA becomes available during this time, the make allowance numbers from the new survey would be used instead,” IDFA said in an email.
McBride said California Dairy Campaign strongly opposes IDFA’s stair-step up to a 60% increase in Class III and Class IV make allowances and NMPF’s proposal of a 20% increase. “This would be really devastating to dairy farmers to have that level of carve out in their milk checks.”
She said these increases are based on voluntary cost studies that are not audited. “We just don’t think they’re reliable in terms of any sort of estimation of what actual costs are,” she said.
The Wisconsin Cheese Makers Association and IDFA call for a four-year phased-in implementation schedule with increases to the product component prices. Select Milk’s proposal increases the butterfat factor in the cheese price to 93%. Another Select Milk proposal reflects what it calls “actual farm-to-plant shrink” by adjusting yield factors for butterfat, protein value in cheese and butterfat value in cheese.
IDFA, NMPF, AFBF and other stakeholders are all asking Congress to provide USDA with the statutory authority to conduct regular cost surveys in the upcoming farm bill.
Class I mover proposal: Munch said this issue will likely create the most controversy between those who represent different interests in the dairy supply chain. Processors fear changes could minimize their ability to manage risk, while farmers could see a timelier correlation to actual prices.
Currently under the current Class I and Class II (soft products like cottage cheese or sour cream) pricing formulas, the weighted average product price from the first two weeks of one month is used to calculate the advanced price of Class I and Class II products for the following month. This creates a 25—40-day lag time between Class III and Class IV prices and Class I and II prices.
“That means when the market price rallies, current prices can be much higher than those advanced prices, leading to lower negative PPDs. It also creates an opportunity for manufacturing processors to de-pool their milk because there’s this time lag,” Munch said. AFBF proposes to eliminate the advanced pricing of Class I milk and components and Class II skim milk and components.
Daniel Munch, AFBFA 2018 farm bill provision dictated the price paid for fluid milk (Class I) must be at least 74 cents per hundredweight over an average of the prices for Class III (milk sold for cheese) and Class IV (butter and milk powder). NMPF seeks to return to the "higher of" the Class III and Class IV, rather than the average. Edge Dairy Cooperative also has a proposal that supports going back to the “higher of” with the removal of advanced pricing.
“Nearly three years ago, Edge first introduced the concept of Class III Plus fluid milk pricing, allowing for better risk management and reducing producer impact of negative producer price differentials,” Trotter said. “Along with Class III Plus, we also submitted a proposal to return to the ‘higher-of’ fluid milk pricing model, with the caveat that we eliminate advanced pricing, as advanced pricing is a key culprit to negative PPDs.”
Under the IDFA's proposal, “the Class I skim milk mover for any given year would equal the simple average of the Class III and Class IV Advance Skim Milk Price, plus the higher of the following:
- The 24-month simple average of the advanced ‘higher-of’ skim milk price (rounded to two decimals) for the August-July of the two preceding years, minus the 24-month simple average of the III-IV advanced skim milk price (rounded to two decimals), or
- 74 cents per cwt skim milk (71 cents per cwt 3.5% milk).”
Brown said IDFA’s proposal on Class I milk “allows our members to manage risk effectively while putting more dollars into the pockets of dairy farmers over time than they would receive under the ‘higher of’ mover proposal.”
The Milk Innovation Group proposal asks USDA to consider “retaining the current ‘average of’ formula for the base Class I skim milk price and proposes to update the adjuster monthly using a 24-month look back period with a 12-month lag, i.e., the preceding the 13-to-36-month period.”
Class I and Class II differentials: NMPF, AFBF and Milk Innovation Group each have varying proposals to address Class I and II differentials. NMPF's proposed update would increase the differential at all locations in varying amounts. The Milk Innovation Group proposes to lower the current Class I differential from $1.60 to zero. AFBF proposes to update the “Class II differential to $1.56 and calculate the differential using the current nonfat dry milk make allowance multiplied by the current nonfat solids yield factor and updated butterfat and nonfat solids test for milk,” according to a summary of proposals.
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