May 1 2012 09:57 AM

The elimination of the Western federal milk order sheds light on what can happen to producer pay prices without minimum classified milk prices.

The author is a research assistant professor in the department of agricultural and applied economics at the University of Missouri.

Idaho producer milk prices have always been some of the lowest in the country. From 2001 to 2003, USDA reported that Idaho's All Milk price averaged $12.07 per hundredweight . . . more than a dollar below the U.S. All Milk price average of $13.20. Idaho and California producer milk prices have tracked near each other for much of the last decade as the western region of the country can generally be thought of as a low fluid use area with long hauls needed to move dairy products eastward to major population centers.

USDA's Agricultural Marketing Service highlights that one of the benefits of the federal milk market order program is that dairy producers receive a reasonable minimum price for their milk throughout the year. That concept was put to a real-world test on April 1, 2004, when the Western federal milk market order was terminated as a result of a lack of producer votes for adopting an amended order. At that time, nearly all Idaho milk production was pooled on the Western order. As producers in other areas of the country discuss the role of federal milk market orders, the experiences of producers who were in the Western order could prove useful.

Living in a postorder world
Upon termination of the Western order, the minimum pricing provisions contained in the order were eliminated. This has required milk producers and dairy processors within the region to negotiate prices to be paid for producer milk, as well as the quantity of producer milk deliveries, in a given time frame. As a result of the order termination, many proprietary cheese plants located in Idaho adopted a cheese yield formula to set producer pay prices for milk.

Although Western order Class I utilization was low relative to many other federal orders, the price enhancement offered for Class I milk relative to other milk classes has vanished over time with the termination of the Western order. Other areas contemplating the true value of a federal milk order should carefully examine the long-term impacts on fluid milk prices within the Western order.

For a closer look, we will evaluate the difference in milk prices prior to and after the elimination of the Western order.

The small spread has grown wide
Over the 2001-to-2003 period, Idaho All Milk prices averaged $1.13 per hundredweight below the U.S. All Milk price. Over the 2005 to 2007 period, Idaho All Milk prices averaged $1.18 per hundredweight below the U.S. All Milk price. It is clear from this simple comparison that there was a minimal difference in the relationship between Idaho and U.S. milk prices in a pre- and postfederal order market environment.

However, over the past two years, the spread between the Idaho and U.S. All Milk prices has widened. Over the 2010-to-2011 period, the Idaho All Milk price averaged $1.55 below the U.S. All Milk price. The spread between Idaho and U.S. All Milk prices hit a peak of $2.50 in August 2011.

This widening gap between U.S. and Idaho milk prices came at a time when milk prices were recovering from the economic devastation dairy producers experienced in 2009. As a result, Idaho dairy producers did not experience the same level of financial recovery and currently are experiencing more financial difficulties than producers in other parts of the country.

There is no single reason for the divergence in Idaho and U.S. All Milk prices. Instead, there are several factors that are in play when examining this price divergence over time.

When dry whey prices rose from 39 cents per pound in January 2010 to 65 cents by December 2011, they boosted minimum Class III prices in federal milk market order areas. However, the improved whey prices had little to no effect on Idaho pay prices because they are based on cheese yield formulas.

Also, the federal order minimum price for Class IV milk, milk used primarily for butter/powder production, was well above the minimum Class III price during portions of 2010 and 2011. Since Idaho milk prices are only marginally influenced by Class IV prices, U.S. All Milk prices experienced some gains as a result of strong Class IV prices while Idaho All Milk prices did not.

Growth also a factor
Growth in Idaho milk production relative to the other regions of the U.S. is another factor. In 2011, Idaho's milk production was nearly 15 percent higher than four years earlier. Meanwhile, U.S. milk production expanded only 6 percent during the same time period. The relatively rapid growth in Idaho milk supplies continues to outpace much of the country. In addition, new processing infrastructure continues to impact Idaho.

Changes in Idaho milk pricing are beginning to occur. Some proprietary cheese plants have adjusted to a producer pricing mechanism that incorporates the minimum Class III price reported in federal order areas. This is an attempt to try and keep producer prices in Idaho more aligned with other areas of the country. New processing capacity from processors like Chobani Yogurt also should allow for more price strength in Idaho.

Although there were many reasons why the Western order was terminated in early 2004, its elimination resulted in the loss of minimum pay prices for milk used in different dairy products. It has left former Western order producers to directly negotiate prices with processors, and in times of low dairy product prices and ample milk supplies, it has resulted in lower producer milk prices than in areas where producers participate in a federal order.

Maximizing milk prices
Milk producers who currently do not operate within a federal order will need to remain focused on the best market-wide strategy available to maximize revenue for their milk. The best outcome for these dairy producers could be to remain in an unregulated area. The supply-demand balance within the area likely dictates which alternative is best for dairy producers.

The evolution of a state milk order could be one possible alternative. State milk orders that provide minimum pricing of milk based on end-use do exist in some states. These state orders can prove helpful to milk producers depending on how the minimum pricing operates relative to other parts of the country. However, instituting a state order could prove politically difficult.

In some cases, reinstatement of a federal order would at least allow for the establishment of federal order minimum prices that do not exist today. A marketing agency in common may provide another tool to help producers deal with milk pricing issues. Regardless of the strategy taken, a united effort by dairy producers will be required to achieve higher pay prices for their milk.

This article appears in the May 10, 2012 issue of Hoard's Dairyman on page 325.