All 11 of the Federal Milk Marketing Orders are being adjusted by the U.S. Department of Agriculture. A final proposal regarding pricing formulas was released Nov. 12. Any dairy-producer vote on the proposed reforms must be made by the end of the year. Mailed ballots must be postmarked by Dec. 31 and must be received by Jan. 15, 2025.
“This is exemplary performance by USDA staff, meeting deadlines in a complex public-hearing process to reform milk pricing,” said John Umhoefer, executive director of the Wisconsin Cheese Makers Association. “While this decision is not a cure-all for dairy manufacturers and processors facing rising production costs, (association) members acknowledge the significant effort made by USDA leadership and staff throughout this process.”
The final version is the same as the proposed decision made in July.
Tim Trotter, Edge CEO, said, “While not all of our proposals were included in the final decision, and we believe more could have been done to enhance the pricing formula, we are satisfied that the changes do not negatively impact our dairy-farmer members. In aggregate we believe the proposed reform would slightly decrease the minimum regulated price private milk buyers have to pay to pooled milk producers in the Upper Midwest order, and would slightly increase the price to producers in the Central and Mideast orders. In all cases we expect the impact on milk checks, after accounting for impact to over-order premiums, to be neutral or positive.”
Once upon a time there were no federal milk orders.
“The gold standard was once asking processors, ‘What are you paying for Grade B milk?’” Umhoefer said earlier this year during a Professional Dairy Producers workshop. “That was the free market. Ever since then it’s been government regulation. (But) all we need is a free market.”
Mike Brown, International Dairy Foods Association chief economist, said, “The gold standard would be Idaho but nobody’s excited about Idaho surveys; that’s our big pool of unregulated milk.”
Federal Milk Marketing Order 135, a marketing area covering dairy farmers in Utah, southern Idaho and eastern Oregon, was terminated in April of this year, according to the American Farm Bureau Federation. Since 2000 that’s the only order that’s been terminated following a producer referendum.
Federal Milk Marketing Orders were born out of the instability created by the Great Depression. The Agricultural Adjustment Act of 1933 was signed into law May 12, 1933; it introduced price-support programs.
“Cooperatives began pretty early in the history of this country,” said Mark Stephenson, University of Wisconsin retired director of dairy policy and analysis. “They put together a structure to be able to bargain. But the depression saw cooperatives asking for help.”
The 1933 act was different than current farm bills, he said. It only covered short periods of time. Federal orders grew until the 1960s, when they peaked at 80 orders. Currently there are only 11 orders.
“We’ve had a lot of milk being de-pooled,” he said. “Federal orders were all designed and built for Class I – it was (formerly) two-thirds of all orders. Today Class I is like 20 percent; it’s declined substantially. Manufacturing milk is (currently) leading the orders – one reason it’s hard to address all the problems in the modern dairy world with a system built when Class I led.”
The orders haven’t been revised in 25 years. And revising them is a complicated process, said Christopher Wolf, a dairy economist from Cornell University.
“It’s not a simple process, as you may have noticed,” he said. “We’ve been doing (the process) for a while. There were 22 total proposals considered, all related to pricing issues. It took a while because it hadn’t been changed since 2008.
“There was a lot of testimony and a lot of discussion. Location differentials needed to be updated. We start with wholesale-product prices and work back to farm prices. We have to give value to the manufacturing cost; the ‘make allowances’ are on the manufacturing costs.”
Brown said with the new make allowances he believes the system will become more responsive.
“I think prices will be more honest because no-one is being paid minimum right now,” he said. “It’s going to even the playing field and make it easier for everyone. People will be able to use the regulated prices to more accurately reflect the value of milk and that’s a good thing. That doesn’t mean I think we need it, but it’s an improvement.
“The fundamental situation for a dairy farmer is ‘I have to sell milk every day to a processor who doesn’t need to buy it every day.’ And so that reality requires a referee. The FMMO task is to be that referee – a very important and fundamental role. Producers want the lowest make allowances; the processor wants the highest.
“I was concerned about the integrity of the federal-order program. Labor, utilities, all the costs of a processor have gone up since 2008. We had to get the minimum price back into the ball game in order for the federal-order program to be relative. There’s going to be tension on what the appropriate number is going to be. The orders are a necessary part of maintaining a system that’s really critical for our industry.”
It’s a good time to implement the changes, he said, because of the current increase in milk prices.
Calvin Covington of Southeast Milk Inc. said, “Make allowances needed to be increased. Back in the 1990s we knew those numbers were going to be changed. I hope we can put a procedure in place so we don’t wait another 20 years to make changes.
“They’re going to be a big hit to dairy farmers; there’s no way around it. We’re just going to have to work a little harder with who we sell milk to. And remember we still have to take a vote on this.”
Geoffrey Vanden Heuvel of the Milk Producers Council said, “I was surprised by the magnitude of the make-allowance change – 90 on cheese, 75 on powder. … That kind of margin is real money, very serious money. When you look at the studies the USDA used, they were voluntary. It’s reasonable to assume that if you were an efficient plant you didn’t have much reason to participate in a study.
“What I don’t know for the future, if the make allowances were so completely out of bounds so they were all losing money, how do you explain the $7 billion in investments going on right now? Somebody thinks there’s money to be made. The magnitude of the make allowances should give these new plants a wind at their back – much more generous margins compared to what they had when they built those plants. How are the older plants going to compete? I think there will be consequences.”
The USDA couldn’t propose any changes that weren’t offered into the voluminous testimony, Stephenson said.
“We’re trying to discover a milk price,” he said. “Sounds easy, right? The economist view is to talk about supply and demand. People interpret that as just a quantity but it’s a relationship between price and quantity. Dairy farmers are quite ready to produce more milk when it’s at a higher price than they will at a lower price. But consumers also have a relationship with price and quantity. They don’t want as much product when prices are high.
“If we get it wrong, consumers only want so much product (when prices are high) but at this price farmers want to make more milk. But then we have a surplus. But if we get the price too low, farmers only want to make this much milk and consumers want to buy more.
“But premiums will get us back to this point where everybody’s happy. We shoot at that target and we hope to hit somewhere in the center.”
Visit www.ams.usda.gov and search for “FMMO vote” for more information.
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