This past week USDA released a draft of the final rule for modifying the milk pricing formulas in the Federal Milk Marketing Order program. The new regulation becomes official when they are formally published in the Federal Register, probably in the next week or two. Back in July, a recommended decision had been released which laid out what changes USDA believe needed to be made to the Class I, II, III and IV pricing formulas based on their hearing findings. Interested parties had 60 days to comment on that proposal. You can read my article on the substance of the recommended decision here.
USDA reviewed 128 comments and did make some adjustments in the final rule. One adjustment is to reduce the delay in the producer positive change to the component values in the Class III and IV formulas from 12 months to six months. MPC had requested the elimination of this delay. The other significant change was to actually increase the Class III and IV make allowances slightly by adding a marketing cost to the manufacturing allowance. This change will increase the make allowance by between 2-3 cents per cwt. In addition, USDA modified the calculation of costs in the make allowance for nonfat dry milk, which results in about another 9 cent increase in the Class IV make allowance. They also made modifications of Class I differentials, but not in California. The bottom line is Class I differentials are going up in California by 60-80 cents per cwt. Class III and IV prices are dropping by 85-90 cents per cwt. due to increases in the make allowance. Changing the base Class I price back to the “higher of” Class III or IV should be price positive to producers over time, as will the elimination of barrel cheese prices from the Class III formula. But the value of those changes for producers will vary from month to month and year to year.
I did make an attempt to calculate the California Order October Pool using the new pricing formulas. There was very little Class III milk pooled on the California order in October because Class III was $1.95 per cwt. higher than Class IV. Therefore, the October pool had 25% Class I and 60% Class IV. This is probably not a normal pool. Inserting into the formulas the higher Class I differentials, including the higher of base price, and using the lower butterfat, protein, other solids and nonfat solid prices that are a result of the increased make allowances in the final decision, would reduce the total producer revenue in the October pool by just under $10 million or $0.59 per cwt. of pooled producer milk. This is an initial attempt to come up with a price comparison. More analysis to come when the real economists start cranking numbers.
Raising the make allowance has always been something producers resist because of its impact on milk prices. But the make allowances in the FMMO formulas have not been changed since 2008 and if the system is going to remain viable it has to reflect real world conditions.
The fundamental value of having the government regulate milk prices is summed up in a couple paragraphs contained in the Final decision on page 247.
“FMMOs were established in the 1930s when the market contained many sellers and few buyers of milk. The highly perishable nature of raw milk resulted in producers engaging in pricing behavior that lowered farm prices as producers undercut one another in order to find a market outlet, a condition generally described as destructive competition. This unavoidable competitive behavior was among the reasons producers petitioned Congress to authorize a marketing order program to provide orderly marketing through known terms of trade and the pooling of market returns, which in turn provided a more equitable balance of power between buyers and sellers. While the record of this proceeding reveals continued consolidation on both the producer and processing sides of the market, it also contains evidence the fundamental elements that were the genesis of the FMMO program still exist. Raw milk remains a highly perishable product, produced every day, that cannot be stored for any significant length of time and incurs high costs when transported over long distances. No substantive evidence was presented to indicate there is no longer an imbalance of market power between buyers and sellers. Processors spoke of the abundance of milk produced as a reason Class I prices should not be increased. However, that reality also highlights how the dairy marketplace continues to place processors in a price setting role. As a price taker, the record reflects considerable testimony attesting to the difficulty dairy farmers have had and continue to have in obtaining and maintaining over-order premiums at levels sufficient to cover actual and/or opportunity costs.
The role of USDA in operating the FMMO program is to be a referee between producers and processors. In order for this system to work it has to be fair and based on market realities. Producers will have a chance to vote yes or no on adopting these new rules. Cooperatives have the right to “block vote” on behalf of their members. January 2025 will be the month of record for the purpose of the vote. You can read the USDA press release here.
Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
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