Dairy producers may cite a variety of different concerns and frustrations with the Federal Milk Marketing Order system, but the reality is that any one of the issues can’t be solved on its own, explained Mark Stephenson on the November 18 Hoard’s Dairyman DairyLivestream sponsored by Diamond V.

“You have to think about a federal order system as being a full system,” the University of Wisconsin-Madison economist said. “Every piece impacts some other piece of a federal order system.”

With that being said, Stephenson honed in on a few of the pieces that often create the most stress.

The “screaming issue” he described was what has gained much attention this pandemic year: Negative producer price differentials (PPDs) that result when there’s an opportunity to pay out more in Class III components than has been collected in the pool.

“Part of the reason that we have a problem like that is because we’ve got a lot of price volatility. Prices are moving up and down quite rapidly,” he said. “In some way, shape, or form, people are telling us that federal orders ought to solve that problem of price volatility for us.

“It may be possible, but it maybe, currently, isn’t what we’re asking federal orders to do,” Stephenson continued.

Many DairyLivestream viewers had questions about the complex topic of plant depooling. In some areas of the country, it is easier to move out of the pool than in others, but regardless, it contributes to milk price instability.

One intrinsic role of federal orders is to discover the value of milk and set the class prices based on what processors are paying. But since these values are often volatile, some are asking if a better price discovery tool should be considered. “Is this reflective of what the market value of milk really is?” asked Stephenson.

Product price formulas, which give dairy processors the means to turn milk into dairy products, contribute to that price discovery. This is where make allowances come in — and that make allowance hasn’t been changed in 10 years, Stephenson pointed out.

“I think if you ask dairy processors, ‘Have your costs other than milk been stable over a 10-year time period?’, they’d say no. So, there is a need to look at these make allowance formulas in the federal order formulas if we’re going to use that as a means of discovering price,” he shared.

Two final issues that aren’t talked about as much, said Stephenson, are Class I price differentials and timing. “Are our price relationships the same as 20 years ago when we set these prices?” he asked.

As for the timing of dairy prices, Class I and some Class II processors are able to receive advanced pricing to know what their milk price is before it’s used. The rest of Class II plants, along with Class III and Class IV, don’t know their prices until after the milk has been processed. This irregularity can contribute to negative PPDs, Stephenson said.

Finding a way to resolve these concerns will require a cohesive approach, added Cornell University’s Andy Novakovic. “If you’re the United States Department of Agriculture and you hear all these people saying, ‘Fix federal orders,’ they’re going to say, ‘Do you have any particular way you’d want to fix them, and can you agree on what that one way is? If you can, then we’ll talk.’”

An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast, “What we want and what we might get from Washington,” will be on Wednesday, December 2 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.

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November 19, 2020
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