Back when California operated under a State Milk Marketing Order, milk price hearings were a regular occurrence. I can remember having multiple hearings in a single year to adjust milk prices. The process usually involved some stakeholder filing a petition for a hearing to raise or lower milk prices and the California Department of Food and Agriculture (CDFA) would often respond by scheduling a hearing. Those hearings would normally last a day. The CDFA staff would be the hearing panel taking “testimony” and they could ask questions of the witnesses, but no one else could. Within about 50 days after the hearing the decision would be announced, usually about 15 days before it took effect and that would be it. Folks would be happy or sad depending on the results, but you could be sure another hearing would be called in the not-too-distant future and the argument would start over again.
The Federal Milk Marketing Order (FMMO) process is very different. Getting USDA to call a hearing, particularly on a big issue, can take years. When a hearing is called, there is an Administrative Law Judge and an adversarial process where every proposal must be defended. The proposals are challenged by lawyers and professional economists and anyone else who shows up and wants to ask a question. There is no time limit and anyone and everyone can participate. When the hearing is over, USDA does have some time limits on when they have to decide. FMMO hearings happen rarely. The pricing formula hearing that started back in August of 2023 and finished on January 30, 2024, covered virtually the entire classified milk pricing system. There were 21 proposals that were accepted by USDA for consideration that were grouped into five topic categories.
Here is what you need to know about the recommended decision USDA just released.
First the bad news. The make allowance for Class III cheese is going up by about 90 cents per cwt. and the Class IV butter/powder make allowance is going up by about 75 cents per cwt. National Milk Producers Federation (NMPF) had proposed make allowance increases for Class III and IV of about 55-60 cents per cwt. and the processors had proposed increases of about $1.35-$1.55 per cwt. The last time the class III and IV manufacturing (make) allowances were changed was in 2008. Since it was agreed by everyone that the basic costs associated with processing milk into butter/powder and cheese/dry whey, such as labor and energy, have all increased significantly since 2008, it was not a matter of whether the make allowance would be increased, but by how much it would be increased. USDA’s recommended decision goes into detail on how they came up with the numbers that they did. They used observed cost data reported in a couple of manufacturing cost studies that were done by long time academic dairy economists for cheese, butter, and dry whey. In the case of nonfat dry milk, they also considered the 2016 CDFA manufacturing cost study. They took averages, meaning they did not fully cover all the plants’ costs.
In their proposal, NMPF had acknowledged that the 55-60 cent request was a negotiated number that did not fully reflect the increases in manufacturing costs. They explicitly said that they discounted it because of concern about the impact increasing the make allowance has on producer income. USDA responded to that with this statement on page 176 of the recommended decision: “The potential impact to producers remains an inappropriate factor in determining make allowance levels. While many stakeholders look to the FMMO program to provide stability, it is not within FMMO authority to support dairy farmer income.”
There are a couple of things to keep in mind around this bad news. For California producers, we are now on a level playing field with the rest of the country on Class III and IV minimum prices, so the changes to the make allowance will affect everyone in the country, not just us. Secondly, USDA made this change based on their assessment of the costs of manufacturing that were entered into the hearing record. They state that they believe they have enough valid information to make this decision. This looks like a final decision to me, not a “down payment” on further make allowance changes. There is a lot of talk in the industry about having USDA establish a mandatory cost of processing study. Congress is considering giving USDA that authority in the Farm Bill, but I see no indication that this decision anticipates that will happen any time soon. For cooperatives with manufacturing plants, this change will ease some of the intense margin pressure they have been experiencing, hopefully enabling them to eliminate the negative re-blending that is occurring now.
Now for the good news in the decision. Barrel cheese is being dropped as part of the Class III product survey. The huge negative disparity of barrel cheese prices has hurt producer income substantially in recent years. For Class I, it is back to “higher of” using either the Class III or Class IV value. The “average of, plus 74 cents” experiment that has cost producers in excess of $1 billion will soon be over. Class I differentials are also going up. The Southern California Class I differential is going from $2.10 to $2.80. The Fresno Class I differential is going from $1.60 to $2.20. The Bay area is going from $1.80 to $2.40. The standard milk solids component assumptions in the current pricing system are going to be raised. In California this will mostly impact the Class I base price, raising it in the range of about 30 cents per cwt. Unfortunately, the component change will not be effective until 12 months after the other changes are made in the formula. The reason for the delay is that it will change the announced Class III and IV prices, which will impact futures prices and therefore complicates risk management programs. I think this delay is something we might want to say something to USDA about in the 60-day comment period that starts as soon as this recommended decision is published in the Federal Register. The big make allowance changes will also impact risk management strategies and there is no delay in their implementation. I see no reason that the component change should be delayed if the make allowance decision is not being delayed.
The bottom line is that we have known for a long time that a major change was coming to the FMMO pricing formulas. It could have been worse. But it is not great. After a comment period, USDA has 60 days to respond to comments. Then there will be a Final Decision, which the producers will have to vote on. The choice at that point is the new FMMO or no FMMO. Keeping the current system is not an option. If adopted, the new formulas would take effect sometime in early 2025. You can read the full recommended decision here.
Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
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