USDA Proposes Significant Changes to Federal Milk Marketing Orders
Source: The DairyNews
On July 1, 2024, the U.S. Department of Agriculture (USDA) issued a recommended decision regarding proposed amendments to the Federal Milk Marketing Orders (FMMO) following an extensive hearing process that spanned from August 2023 to January 2024.
During this period, the USDA evaluated 22 proposals over 49 hearing days, leading to a set of significant proposed changes aimed at addressing evolving challenges in the dairy industry.
To help dairy producers and industry professionals navigate these proposed amendments, Professional Dairy Producers hosted a Dairy Signal webinar on July 10, featuring insights from three prominent economic experts: Dr. Charles Nicholson from the University of Wisconsin-Madison, Christopher Wolf from Cornell University, and Mark Stephenson, a retired Director of Dairy Policy Analysis from UW-Madison.
The USDA's recommended changes are categorized into five key areas:
Milk Composition Factors
Barrel Cheese Price Calculation
Make Allowances
Base Class I Skim Milk Price
Class I and Class II Differentials
Milk Composition Factors:
The USDA proposes updating the milk composition factors to better align with current U.S. production averages. The proposed adjustments would set the protein content at 3.3% and other solids at 6%, totaling 9.3% non-fat solids, up from the current 9%.
Barrel Cheese Price Calculation:
The USDA suggests removing the 500-pound barrel cheese from the monthly average cheese price calculation, relying solely on the 40-pound cheddar block instead. This change is intended to address the volatility observed in recent years due to fluctuating price relationships between barrels and blocks.
Make Allowances:
A significant aspect of the proposed amendments is the increase in make allowances, which account for the costs associated with processing milk into various products. The proposed increases are as follows:
Cheese: From 20 cents to 25 cents per pound
Butter: From 17 cents to 22.5 cents per pound
Non-fat dry milk: From 16.8 cents to 22.7 cents per pound
Dry whey: From 20 cents to 26.5 cents per pound
This adjustment is critical because make allowances directly affect the component price, which in turn influences the milk price received by farmers. The last update to make allowances occurred in 2008, making this a significant change in the pricing structure.
Base Class I Skim Milk Price:
The USDA proposes reverting to the "higher of" pricing method for determining the base Class I skim milk price, reversing the change made in the 2018 farm bill that adopted an "average of" method with a 74-cent adjustment. This proposed revision reflects concerns over the divergence between Class III and Class IV milk prices, which have impacted the base Class I skim milk price.
Class I and Class II Differentials:
The USDA recommends maintaining the $1.60 base differential for Class I milk while adopting modified location-specific Class I differential values across every county in the U.S. This approach aims to reflect regional variations in milk production and processing costs.
Expert Insights and Industry Impact
Christopher Wolf highlighted the potential impact of the proposed make allowances on farmers, noting that increasing these allowances could lower the milk price received by producers, depending on their location and current market conditions. He provided a specific example comparing the old and new butterfat prices under different make allowance scenarios, illustrating the potential financial implications for dairy farmers.
Mark Stephenson emphasized the importance of updating make allowances to reflect current manufacturing costs. He warned that failure to adjust these allowances could lead to continued de-pooling by manufacturing plants, which might opt out of participating in federal orders if they cannot recover milk costs with product prices.
The proposed changes to the base Class I skim milk price were also discussed, with Wolf explaining that the USDA's decision to revert to the "higher of" method is likely to be well-received by producers who have been concerned about the divergence between Class III and Class IV prices. Additionally, the introduction of a 24-month rolling average with a 12-month lag for extended shelf-life processors is seen as a clever solution for providing price stability in long-term contracts.
Decision-Making Process and Industry Considerations
Ultimately, the decision on whether to adopt these changes lies with dairy producers and their cooperatives, who will have the opportunity to vote on the proposed amendments. Dr. Nicholson pointed out that rejecting the proposed changes would mean operating without a federal milk marketing order, which could lead to greater uncertainty in milk pricing.
Mark Stephenson reinforced the gravity of this decision, urging producers to carefully consider whether they are better off with the modified order or with no order at all.
The USDA's proposed amendments to the Federal Milk Marketing Orders represent a significant shift in how milk prices are calculated and regulated. These changes, if implemented, will have far-reaching implications for dairy producers, processors, and the broader industry. As the comment period remains open until September 13, 2024, industry stakeholders are encouraged to review the proposals carefully and engage in discussions with their co-op boards or processors to fully understand the potential impacts on their operations.
To help dairy producers and industry professionals navigate these proposed amendments, Professional Dairy Producers hosted a Dairy Signal webinar on July 10, featuring insights from three prominent economic experts: Dr. Charles Nicholson from the University of Wisconsin-Madison, Christopher Wolf from Cornell University, and Mark Stephenson, a retired Director of Dairy Policy Analysis from UW-Madison.
The USDA's recommended changes are categorized into five key areas:
Milk Composition Factors
Barrel Cheese Price Calculation
Make Allowances
Base Class I Skim Milk Price
Class I and Class II Differentials
Milk Composition Factors:
The USDA proposes updating the milk composition factors to better align with current U.S. production averages. The proposed adjustments would set the protein content at 3.3% and other solids at 6%, totaling 9.3% non-fat solids, up from the current 9%.
Barrel Cheese Price Calculation:
The USDA suggests removing the 500-pound barrel cheese from the monthly average cheese price calculation, relying solely on the 40-pound cheddar block instead. This change is intended to address the volatility observed in recent years due to fluctuating price relationships between barrels and blocks.
Make Allowances:
A significant aspect of the proposed amendments is the increase in make allowances, which account for the costs associated with processing milk into various products. The proposed increases are as follows:
Cheese: From 20 cents to 25 cents per pound
Butter: From 17 cents to 22.5 cents per pound
Non-fat dry milk: From 16.8 cents to 22.7 cents per pound
Dry whey: From 20 cents to 26.5 cents per pound
This adjustment is critical because make allowances directly affect the component price, which in turn influences the milk price received by farmers. The last update to make allowances occurred in 2008, making this a significant change in the pricing structure.
Base Class I Skim Milk Price:
The USDA proposes reverting to the "higher of" pricing method for determining the base Class I skim milk price, reversing the change made in the 2018 farm bill that adopted an "average of" method with a 74-cent adjustment. This proposed revision reflects concerns over the divergence between Class III and Class IV milk prices, which have impacted the base Class I skim milk price.
Class I and Class II Differentials:
The USDA recommends maintaining the $1.60 base differential for Class I milk while adopting modified location-specific Class I differential values across every county in the U.S. This approach aims to reflect regional variations in milk production and processing costs.
Expert Insights and Industry Impact
Christopher Wolf highlighted the potential impact of the proposed make allowances on farmers, noting that increasing these allowances could lower the milk price received by producers, depending on their location and current market conditions. He provided a specific example comparing the old and new butterfat prices under different make allowance scenarios, illustrating the potential financial implications for dairy farmers.
Mark Stephenson emphasized the importance of updating make allowances to reflect current manufacturing costs. He warned that failure to adjust these allowances could lead to continued de-pooling by manufacturing plants, which might opt out of participating in federal orders if they cannot recover milk costs with product prices.
The proposed changes to the base Class I skim milk price were also discussed, with Wolf explaining that the USDA's decision to revert to the "higher of" method is likely to be well-received by producers who have been concerned about the divergence between Class III and Class IV prices. Additionally, the introduction of a 24-month rolling average with a 12-month lag for extended shelf-life processors is seen as a clever solution for providing price stability in long-term contracts.
Decision-Making Process and Industry Considerations
Ultimately, the decision on whether to adopt these changes lies with dairy producers and their cooperatives, who will have the opportunity to vote on the proposed amendments. Dr. Nicholson pointed out that rejecting the proposed changes would mean operating without a federal milk marketing order, which could lead to greater uncertainty in milk pricing.
Mark Stephenson reinforced the gravity of this decision, urging producers to carefully consider whether they are better off with the modified order or with no order at all.
The USDA's proposed amendments to the Federal Milk Marketing Orders represent a significant shift in how milk prices are calculated and regulated. These changes, if implemented, will have far-reaching implications for dairy producers, processors, and the broader industry. As the comment period remains open until September 13, 2024, industry stakeholders are encouraged to review the proposals carefully and engage in discussions with their co-op boards or processors to fully understand the potential impacts on their operations.
