As the dairy industry continues to come together in discussions around changes to the federal milk marketing system, we have to consider what goals we want a milk pricing structure to accomplish. The current system has two broad goals: order and equity in the market.

Order can be hard to define, but we seem to know what it is when we experience it, detailed the University of Wisconsin-Madison’s Mark Stephenson on the June 15 Hoard’s Dairyman DairyLivestream.

Equity, or fairness, in the market and distribution of revenue is another slippery goal.

These goals were developed and the federal order framework adopted them in response to the struggles farmers — and all Americans — faced during the Great Depression, added Cornell University’s Andy Novakovic. They had to manage a balancing act that helped farmers but not at the outright expense of consumers, which is still the department’s responsibility with federal orders today, he said.

The Agricultural Marketing and Agreement Act that governs federal orders provides these basic objectives with some flexibility, but it does have two fixed provisions for meeting these goals. That’s where classified pricing and pooling come in.

“It doesn’t say how many classes — as long as there are at least two — and it doesn’t precisely define what’s in each class. It doesn’t say what the price differences are between these classes. It just says classified pricing,” Novakovic explained. “And it says pooling. It says the revenues from the marketplace need to be shared, but it doesn’t say how many marketing areas. It doesn’t say a lot of things, but it does say classified pricing and pooling.”

Those tools have their purpose but also their shortcomings. “I would say these are kind of blunt tools in a lot of ways,” Stephenson noted.

He compared using these tools to accomplish the goals of market order and equity to flying a hot air balloon. “With a balloon, you don’t have a lot of tools, but maybe your goals are to get up in the air a great distance and have a great view, and maybe your second and very important goal is to land safely,” he illustrated. “But the tools you have are pretty rough; they’re pretty crude. You’ve got a propane tank and a burner up there and maybe you’ve got some sandbags on the sides. Federal orders are a little like that in some ways.”

He also noted that federal orders have some “relief valves” that function as a last resort for the system and indicate that something may be going wrong. One is that manufacturing milk is not required to be in the pool. When we see more depooling, it can be an indicator that something needs to be adjusted, Stephenson said.

With such a diverse dairy industry around the country, it is hard to know exactly what pricing tools will work well for everyone. Whatever they are, they must have the strength to accomplish the goals we aim for.

To watch the recording of the June 15 DairyLivestream, go to the link above. The program recording is also available as an audio-only podcast on Spotify, Google Podcasts, Apple Podcasts, and downloadable from the Hoard’s Dairyman website.

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(c) Hoard's Dairyman Intel 2022
June 20, 2022
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