Even though Federal Milk Marketing Order reform may not be top of mind in Congress, we can debate and coalesce around potential solutions. Not only could strong industry-generated consensus propel positive change when the time is right, some prelegislative action could be taken via the federal order’s hearing process.
The top issues center on Class I price formulas and the negative producer price differentials (PPDs) that were induced due to large amounts of manufacturing milk being depooled this past year. Those two issues, while separate, are interlinked.
Prior to May 2019, the “higher of” Class III or Class IV price provision drove Class I fluid prices. In making the most recent change, bottlers argued that the “higher of” provision made it too difficult to hedge milk prices. Dairy farmer representatives agreed, and a permanent change was rolled out based on the average Class III and Class IV prices, plus 74 cents per hundredweight. That worked well until the pandemic shot Class III prices to the moon and stymied the upward movement on Class I prices. As a result, dairy farmers lost hundreds of millions of dollars.
As for negative PPDs, anyone who claims they saw that situation on the horizon prior to this year isn’t telling the truth. However, it appeared when processors implemented early pandemic bases to curb production, export sales picked up, and most notably, USDA’s Farmers to Families Food Box program sent buyers in search of cheese. This perfect storm created record-low PPDs.
While Class III and IV prices will likely return to a normal relationship, the massive depooling from June to November does need a solid work over. It’s a delicate balance. That’s because cinching up regulations to deter depooling could chase manufacturing milk permanently out of federal order pools, creating even more harm in producer milk checks.
Another federal order matter would focus on amending the “make allowances.” While the topic doesn’t garner the headlines, it’s equally important, as those formulas have not been updated since 2009. Make allowances play a critical role in ensuring that the prices of the four basic dairy products are translated as accurately as possible into the corresponding milk components and, eventually, into farm-gate milk prices.
While federal orders have been an effective stabilizing force for nearly a century, we have witnessed that additional measures are warranted. That work begins now, even though the Senate Ag Committee Chairwoman Debbie Stabenow (D-Mich.) noted those discussions may be a year off on her docket. Those 12 months give all of us the necessary time to develop solid milk pricing solutions.