Reforms to the Federal Milk Marketing Order system have been on many minds lately thanks to the pricing chaos caused by last year’s dairy demand destruction. While a number of different ideas are surely circulating, positive changes will be best served by some industry consensus.

Six big points to focus on for improvements were identified by two experienced cooperative leaders during the April 7 Hoard’s Dairyman DairyLivestream.

1. The right purpose

“It’s so difficult to get where you’re going if you don’t know how you’re going to get there,” said Calvin Covington. He previously served as the CEO of Southeast Milk based in Belleview, Fla., the state with the largest Class I utilization in the country.

In other words, to effectively adjust federal orders, we must know what it is that we want them to accomplish. “The number one purpose, and it’s been intact for a long, long time through the order system, is that the federal orders should encourage the movement of and an adequate supply of fluid milk for drinking purposes,” Covington explained. Until 1980, over 60% of milk in the federal order system was used in Class I, and even around 2000, that share was still over 40%. Now, of course, we have seen fluid utilization fall to less than 30%, with a continued downward trend not unlikely.

In the Southeast, where a large share of milk is still used for fluid processing, that beverage marketing system might still work, but Covington proposed that in other places where uses vary, something else might work better. “Maybe we don’t need to have the same purpose for federal orders throughout the country,” he suggested. “Maybe we need to have regional differences because each region is a little different.”

2. Simplify

No one would argue that milk pricing couldn’t use a little simplification. Tom Wegner of Land O’Lakes gave the example of the negative Producer Price Differentials (PPDs) that rocked the country in 2020. That deduction on a milk check is an obvious alarm for farmers, and what causes it is very complicated. Is there a way to simplify that calculation so that no deductions are necessary?

In addition to serving as a top economist with Land O’Lakes, Wegner was involved with cooperative members in California as they navigated the state’s entrance into the federal order system. PPDs were a significant topic of concern in many of those conversations.

Simplifying class prices to align the timing of markets more will be better for farmers in the future as well as in the present, Wegner emphasized. “That might really help in some respects because it means easier hedging, and I think more hedging at the dairy farm level will really result in durable dairy farms,” he said.

3. In or out?

Behind PPDs, the next hottest topic of discussion for improvement might be depooling. Both Covington and Wegner believe more requirements on how long you’re in or out of the pool would provide more stability to the market and the farmer.

“As we know, we’ve had a lot of depooling over the last year because it hasn’t been profitable to be in the pool. They only get back in the pool when it is profitable,” Covington said. “Money comes out, but no money goes back in from those producers.”

If depooling is stretched out over a number of months, processor decision-making strategies change, Wegner added.

4. Pricing

Over the history of the Federal Milk Marketing Order, there have been a lot of different tools for what is called price discovery or evaluating the value of milk. Our current system uses end-product pricing, which Covington believes is sound but may need some updates.

“Maybe we need to have some tweaks and updates of the numbers that go in there. Maybe we need to have a process where they’re looked at on a regular basis rather than waiting for such length of time between when we make some changes,” said Covington, who was a strong advocate for multiple component pricing in his leadership roles at National All-Jersey and the American Jersey Cattle Association.

Further, he supports re-evaluating Class I differentials as well as moving back to the Class I ‘higher-of’ formula. “It gets milk to its highest use and encourages milk to go into fluid,” he remarked.

5. Make allowance

Similarly, outdated make allowances could use some adjustments, Wegner pointed out. His experiences with the California federal order provided some insight.

“Perhaps we learned something in California about the idea that we should look at what it takes to make these commodity products on an annual basis and have a discussion about them rather than wait 16 years,” he noted. “Is there some indexing that could possibly be used so that we don’t need to go back to hearings?”

6. Change through administration

Overall, Covington and Wegner believe that the above changes need to come through the administrative process that USDA’s Agricultural Marketing Service, which oversees the order system, has in place. This is opposed to reforms going through Congress.

“The reason I really push using the administrative process is that it allows all parties to have a say at the table. Through the hearing process, you can present your point of view,” said Covington, who has been involved in writing proposals and order hearings throughout his 40-year career with federal orders. Over the course of decisions he has agreed with and disagreed with, it is clear all voices are considered in USDA’s rulings, Covington believes.

An ongoing series of events

The next broadcast of DairyLivestream will be on Wednesday, April 21 at 11 a.m. CDT. 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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(c) Hoard's Dairyman Intel 2021
April 8, 2021
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