But, as in all important matters, it’s important to understand the details. Comments on USDA’s plan are due by September 13. And NMPF is back at work.
There’s a lot to like about the recommendations. USDA’s endorsement of NMPF’s fundamental principle is itself a victory for dairy farmers and their marketing cooperatives. USDA also has established a blueprint for updating formulas, making it much more likely that future hearings can be more frequent and less expensive and time-consuming. Below is a summary of the key issues NMPF raised at the hearing and USDA’s planned actions. The final decision, expected later this fall, will likely differ from the recommended decision only in small ways.
Class III and IV skim milk component composition: USDA decided, based on precedent, that “the record supports updating the formulas to reflect current market conditions,” in line with NMPF’s proposal. The decision did not adopt a regular updating mechanism, which NMPF urged, but the relation between the decision’s increased factors of 3.3 for protein, 6 for other solids, and 9.3 for nonfat solids, and data on current milk composition, provides a blueprint for future proposals to raise the composition factors. That will be necessary as the average solids composition of producer milk continues to climb.
Barrel cheese in the protein formula: USDA stated that because the divergence between block and barrel cheese prices since 2017 has resulted in average cheese prices used in FMMO formulas that don’t represent any one cheese product, it accepted NMPF’s proposal to drop barrel cheese from the protein component price formula.
Make allowances: All parties to the hearing testified that the current make allowances are too low to reflect the current cost of manufacturing the products in the component pricing formulas; everyone also supported an interim increase, arguing that a one-time change would be too detrimental to dairy producer income. NMPF’s position was that further increases should wait until USDA had the authority, contained in the current draft farm bills, to conduct mandatory, auditable cost studies, given the limitations of voluntary cost studies.
USDA clearly indicated that, having found current make allowances were too low, it was required to establish make allowances based on current evidence, it couldn’t set an interim make allowance, and it couldn’t consider producer impact in its decision-making. That said, USDA’s proposed make allowance levels are between 23% and 27% of the difference between NMPF’s interim proposals for butter, cheese, and nonfat dry milk and the processors’ proposed cost levels following their proposed automatic step ups. For dry whey, this percentage is 40%.
Class I mover: NMPF proposed returning to the “higher of” Class III and Class IV mover; fluid milk processors argued that the original motive for adopting the current mover — risk management — remained essential for processors to hedge Class I milk for extended shelf-life products. USDA’s response was novel, creating effectively two Class I movers: the higher of for most milk, and the “average of” plus a rolling adjustor (instead of the current fixed 74 cents per hundredweight) for all milk used in extended shelf life products with a shelf life of no less than 60 days. USDA cited more orderly marketing and better ensuring price equity for handlers of similar Class I products, not risk management, as reasons for its decision.
Class I differentials: USDA supported raising Class I differentials because of elevated transportation costs and supported using its own model to calculate new differentials. NMPF had offered calculations based on an updated version of USDA’s model, which included several changes USDA rejected; the result was changes to differentials that were more modest than NMPF’s proposal. But again, the decision provides a guide to proposing future increases to the differentials.
Using a static economic analysis, USDA estimates that the impact of all elements of the recommended decision together would have raised the average blend price over all federal orders by 32 cents per cwt. during calendar years 2019 to 2023, with regional variations.
Overall, USDA has offered the comprehensive, thoughtful approach to FMMO modernization NMPF hoped for when it set out on this journey more than three years ago. While undoubtedly many questions will arise as our analysis continues, an updated FMMO system that serves dairy farmers, their cooperatives, and the broader industry better is well under way.
