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From The MPC Newsletter
Friday, December 17, 2010

The "Higher-Of" Calculation in the Class I Pricing Formula - Valuable for Producers
By Rob Vandenheuvel, General Manager

Over the past six months, much has been written in this newsletter and other publications about the various aspects of the “Foundation for the Future” (FFTF) proposal, unveiled by the National Milk Producers Federation (NMPF) in June 2010.  This package is a collection of numerous proposals including: (1) replacing the MILC and Dairy Price Support Program with a new “Margin Protection Program,” and (2) the addition of a Dairy Market Stabilization Program that will help our industry maintain better balance in the supply and demand for our milk.  A third piece of FFTF addresses reforms to our nation’s Federal Milk Marketing Orders (FMMOs).  Today, I will begin delving into one of the details of that proposal that has gotten very little attention thus far by not only media outlets, but also producer groups.

Included in the proposed FMMO reforms is the elimination of the “higher-of” calculation when determining the Class I minimum price.  Currently, the FMMOs use the “higher of” the advanced Class III (cheese) or Class IV (butter/powder) prices to determine the minimum price for Class I (fluid milk).  California’s Class 1 minimum price formula also utilizes a similar mechanism.  What that means is that when the cheese/whey values are higher than the butter/powder values, those cheese/whey prices are utilized to determine the Class I price.  On the other hand, when the butter/powder values are higher, those prices are used.

Embedded in FFTF is a proposal that would use only the value of milk sold to cheese plants to calculate the Class I price, regardless of whether the Class IV price is higher or not.  This proposed change in policy has gotten very little attention, as much of the focus for FFTF has been on the other aspects of the proposal.  However, producers around the country are starting to figure out that a tremendous amount of producer money could be at stake if this specific policy were to become the law of the land.

This past week, a Position Paper written by the Dairy Cooperative Marketing Association, Inc. (DCMA) was published regarding this specific issue.  The DCMA is a Marketing-Agency-in-Common that represents the major Class I milk marketers in the Southern U.S.  A copy of this Position Paper, which was submitted to USDA Secretary Tom Vilsack’s Dairy Industry Advisory Committee, has been posted on our website at: http://www.milkproducerscouncil.org/121010DCMA.pdf.

In their report, DCMA took a look at the last 10 year’s worth of data to see what the impact on producer prices would have been if we had not utilized the “higher-of” calculation.  In short, their data found that in 44 percent of the months over the past 10 years, the advanced Class IV price was higher than the advanced Class III price, which meant that the butter/powder prices were utilized to calculate the Class I price.  The paper goes on to explain that in 24 of those 44 months, the advanced Class IV price was more than $1.00 per hundredweight higher than the advanced Class III price.

As for the financial impact on producers, the paper calculated that if the FMMOs did not have the “higher-of” calculation in its formula, the Class I price would have been $0.48 per hundredweight lower on average.  As the paper states, “With annual Federal Order Class I milk production averaging about 44.5 billion lbs., a decline of $0.48 per cwt. means over $213 million less revenue to dairy farmers per year.”  Or in other words, elimination of the “higher-of” calculation would have meant more than $2 Billion less money in producers’ pockets over the last 10 years!

Clearly, this is a significant change in policy being proposed, and producers need to be aware of the impact this proposal will have on our bottom line.  The members of DCMA clearly stated in their Position Paper that, “we support retaining the current method of calculating the Class I Mover which uses the ‘higher of'’ the Advanced Class III or IV price calculated by product price formulas.”  These members include:

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Arkansas Dairy Cooperative Association, Inc.

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Cobblestone Milk Cooperative, Inc.

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Cooperative Milk Producers Association, Inc.

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Dairy Farmers of America, Inc.

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Dairymen's Marketing Cooperative, Inc.

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LANCO-Pennland Quality Milk Producers Cooperative

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Lone Star Milk Producers, Inc.

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Maryland & Virginia Milk Producers Cooperative Association, Inc.

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Premier Milk, Inc.

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Select Milk Producers, Inc.

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Southeast Milk, Inc.

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Zia Milk Producers, Inc.

At our Milk Producers Council board meeting this week, the Board of Directors unanimously voted to echo the statements of the organizations above and strongly support the continuation of using the “higher-of” formula in determining our Class 1 minimum price.  While this proposal is specifically aimed at reforming FMMOs, it would also negatively impact our State pricing system.  CDFA is bound by law to consider the national value of milk when determining our minimum price formulas, and it’s hard to imagine the FMMOs removing this valuable provision for producers without California’s Class 1 bottler’s asking for the same change here at home.

I strongly encourage each of you to get in touch with your producer trade association and/or cooperative and make sure they are focusing on this important issue.

 

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