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What dairy farmers need to know about USDA's recommended decision on federal milk pricing

“Those who don’t learn from history are doomed to repeat it.” That was the theme of American Dairy Coalition’s Aug. 29 webinar on the USDA’s proposed Federal Milk Marketing Order (FMMO) pricing changes. Over 125 people participated, including state dairy and state farm bureau organization leaders and individual producers. (View or listen to webinar here)

“This was a grassroots dairy producer undertaking. ADC planned this webinar to make sure dairy farmers have a way to ask questions before the public comment period closes on Sept. 13th,” said moderator Kim Bremmer of Wisconsin-based Ag Inspirations, as she opened the discussion.

“We know the last update to the milk pricing formula, which determines the price farmers receive for their milk from processors, occurred in the 2018 farm bill. Unfortunately, that change to the Class I mover was made without dairy farmers’ input and involvement, and it cost them over a billion dollars out of their pockets,” adds ADC CEO Laurie Fischer. “We have a short time left on the public comment period on USDA's proposed rule, and we want dairy producers to be heard this time.”

Webinar participants asked, “Will commenting even matter? Or is the USDA Secretary's mind made up? How important is individual farmer input?”

“It’s extremely important for farmers to get involved. Even with talking points, really tell your own story with it,” said Danny Munch, American Farm Bureau economist, who presented an FMMO policy update for ADC webinar participants. “They like hearing from you, and the stories of the impacts to your balance sheet, to your future revenue or the stability of your local community. They want to know the impact on small businesses. That’s one of the driving points.”

ADC has identified four areas that dairy farmers should be alarmed about, and request USDA make changes to their proposed FMMO amendments in the final decision.

Learn from the past or be doomed to repeat it? The last time make allowances were increased in 2008, a dairy market crash followed. This time around, the proposed make allowance increases are more than twice as large as they were in 2008, and they are based on voluntary, unaudited processor cost surveys, in which only 66% of the price-reporting plants participated! USDA appears to have not seriously considered the negative impact their proposed make allowance increases will have on dairy farmers. But processor trade association leadership tell farmers...don’t worry, this will help the industry grow, which is good for dairy farmers, they say. So here we go again.

Learn from the past or be doomed to repeat it? Farmers were told the Class I mover change from higher-of to average-of in 2019 would be “revenue neutral.” But it cost farmers – at minimum -- $1.24 billion over five years, plus further losses from disorderly marketing and depooling. USDA is now proposing a 2-mover system for Class I. It restores the higher-of method for fresh conventionally pasteurized Class I fluid milk, but introduces a new, complicated 2nd mover for extended shelf life (ESL) fluid milk products that are not well defined. This has the potential to introduce volatility between movers and between plant costs, even at the same location, and it continues the incentive for wide spreads between Classes III and IV. Most importantly, a 2-mover Class I pricing system that creates a 5th class of milk, based on not well-defined shelf life parameters, was not part of any proposal accepted by USDA for the hearing framework. This concept of splitting Class I was not vetted during the hearing and somehow made it into the proposed language of USDA's recommended decision! But don’t worry, farmers are told this is good for risk management, they say, because ESL is the direction the milk processing industry wants to go. So, here we go again.

Learn from the past or be doomed to repeat it? USDA proposes a delay in implementing the increased milk composition updates, which are based on today's actual milk components that have not been updated since 2000. This means leaving what American Farm Bureau estimates is $200 million in annual dairy farm revenue off the table for one year while implementing right away the make allowance increases that will extract what AFBF estimates is $1.25 billion (with a B) annually from farmer milk checks. The delay, they say, is because the composition standards affect the formulas that are part of the CME contracts underlying milk price risk management. Make allowances are also part of these formulas, and they are a whole lot bigger on the negative side of the equation! So, here we go again.

Learn from the past or be doomed to repeat it? The proposed whey make allowance is too large relative to the price of dry whey. It is the largest increase of the four base commodities used in FMMO pricing, up 33.2% in the proposed rule. When make allowances were last raised in 2008, the whey price fell below the whey make allowance for the first seven months of implementation. This meant that during the dairy crisis of 2008-09, farmers PAID their processors to take the other solids in their milk from October 2008 through April 2009. Last summer, the historic low milk margins in July and August would have been made worse, had this proposed $0.2653/lb whey make allowance been in effect; Farmers would have paid processors to take their other solids, or given them away free, as the whey price was just under $0.2650/lb. So, here we go again.

NOT MUCH TIME

With just a week remaining to comment, American Dairy Coalition will be sending more updates and a link to ADC's official comment, inviting other dairy organizations and individual farmers to sign on. ADC is preparing some additional tools and talking points dairy farmers may want to use in their own comments. Those not currently receiving ADC emails, who want to make sure they don't miss these updates, click here to be added to receive them.

• View the ADC Aug. 29 webinar
• Read the ADC discussion draft
• Read AFBF Economist Danny Munch’s Sept. 4 Market Intel "Decoding USDA's FMMO recommendations"
• View webinar slides
• Go directly to the Federal Register comment portal