Learn how USDA’s plan to bring back the ‘higher-of’ method for milk pricing might affect farmers. Will this change help dairy producers? Find out more.

The USDA plans to bring back the ‘higher-of’ pricing method for fluid milk, a move intended to modernize federal dairy policy based on a comprehensive 49-day hearing that evaluated numerous industry proposals. This method picks the higher price between Class III (cheese) and Class IV (butter and powder) milk, which could signify a notable shift for the dairy industry. Previously, the 2018 Farm Bill had replaced the ‘higher-of’ system with an ‘average-of’ pricing formula, averaging Class III and IV prices with an additional 74 cents. While switching back might benefit farmers, it also introduces risks like negative producer price differentials in 2020 and 2021. The USDA’s proposal seeks to mitigate these challenges and provide farmers financial gains amidst modern dairy economics’ complexities.

Understanding the Federal Milk Marketing Order (FMMO) System 

The Federal Milk Marketing Order (FMMO) system, established in 1937, plays a crucial role in ensuring fair and competitive dairy pricing. It mandates minimum milk prices based on end use, providing price stability for dairy farmers and processors across the U.S. Each FMMO represents a distinct marketing area, coordinating pricing and sales practices. 

The ‘higher-of’ pricing method for Class I (fluid) milk has long been integral to this system. It sets the Class I price using the higher Class III (cheese) or Class IV (butter and powder) price, offering a financial safeguard against market volatility. This method ensures dairy producers receive a fair price despite market fluctuations. 

However, the 2018 Farm Bill introduced an ‘average-of’ formula, using the average of Class III and IV prices plus 74 cents. While aimed at modernizing milk pricing, this change exposed farmers to greater risk and reduced earnings in volatile periods like 2020 and 2021.

A Marathon Analysis: Unraveling Modern Dairy Policy over 49 Days in Indiana

The marathon hearing in Indiana highlighted the complexities of modern dairy policy. Spanning 49 days, from Aug. 23, 2023, to Jan. 30, it reviewed nearly two dozen industry proposals. This intensive process reflected the sophisticated and multifaceted Federal Milk Marketing Order system as stakeholders debated diverse views and intricate data to influence future milk pricing.

Decoding Dairy Dilemmas: The “Higher-Of” vs. “Average-Of” Pricing Methods

The “higher-of” and “average-of” pricing methods are central to understanding their impact on farmers’ incomes. The “higher-of” process, which uses the greater of the Class III (cheese) price or Class IV (butter and powder) price, has historically provided a safety net against dairy market fluctuations. This method ensured farmers got a better price, potentially safeguarding their income during volatile times. Yet, it increased the risk of negative producer price differentials, which reduced earnings in 2020 and 2021. 

On the other hand, the “average-of” method, introduced by the 2018 Farm Bill, calculates the price as the average of Class III and IV prices plus 74 cents. While this seems balanced and predictable, it often fails to deliver the highest financial return when either Class III or IV prices exceed expectations. Farmers have noted that this method might not reflect their costs and economic challenges in volatile markets. 

The “higher-of” method often offers better financial outcomes during favorable market conditions but brings increased uncertainty during unstable periods. Conversely, the “average-of” method offers stability but may miss optimal pricing opportunities. This debate within the dairy industry over the best formula to support farmers’ livelihoods continues. Thus, the USDA’s proposal to revert to the “higher-of” method invites mixed feelings among farmers, whose earnings and economic stability are closely tied to these pricing mechanisms.

Examining the Potential Implications of the USDA’s Return to the ‘Higher-Of’ Pricing Method 

The USDA’s return to the ‘higher-of’ pricing method, while potentially beneficial, also presents some challenges that the industry needs to be aware of. This approach, favoring the higher Class III (cheese) or Class IV (butter and powder) prices, seems more beneficial than the ‘average-of’ formula. However, deeper insights indicate potential challenges that need to be carefully considered. 

The ‘higher-of’ method usually leads to higher fluid milk prices but poses the risk of negative producer price differentials (PPDs). When the Class I price far exceeds the average of the underlying class prices, PPDs can become negative, as seen during the harsh economic times of 2020 and 2021, exacerbated by the COVID-19 pandemic. 

Negative PPDs can hit farmers’ financial stability, making it harder to predict income and manage cash flows. This reflects the delicate balance between gaining higher milk prices now and ensuring long-term financial reliability. 

The 24-month rolling adjuster for extended-shelf-life milk introduces further uncertainty. Its effect on milk pricing needs to be clarified, potentially causing fluctuating incomes for farmers in this segment. 

In conclusion, while the ‘higher-of’ pricing method may offer immediate benefits, risks like negative PPDs and uncertain impacts on extended-shelf-life milk pricing demand careful consideration. Farmers must balance these factors with their financial strategies and long-term sustainability plans.

New Horizons for ESL Milk: Navigating the 24-Month Rolling Adjuster Amidst Market Uncertainties

Under the USDA’s new proposal, regular fluid milk will revert to the ‘higher-of’ pricing. In contrast, extended-shelf-life (ESL) milk will follow a different path. The plan introduces a 24-month rolling adjuster for ESL milk to stabilize prices for these longer-lasting products. 

Yet, this change brings uncertainties. Laurie Fischer, CEO of the American Dairy Coalition, questions the impact on farmers. The 24-month adjuster is untested, making it difficult to foresee its effects amid fluctuating market conditions. ESL milk’s unique production and logistics further complicate predictions. 

Critics warn that the lack of historical data makes it hard to judge whether this method will help or hurt farmers. There’s concern that it could create more price disparity between regular and ESL milk, potentially straining producers reliant on ESL products. While USDA aims to tailor pricing better, its success will hinge on adapting to real-world market dynamics.

Make Allowance Controversy: Balancing Processor Profitability and Farmer Finances

The USDA also plans to increase the make allowance, a credit to dairy processors to cover rising manufacturing costs. This adjustment aims to ensure processors are adequately compensated to sustain profitability and operational efficiency, which is expected to benefit the entire dairy supply chain. 

However, this proposal has drawn substantial criticism. Laurie Fischer, CEO of the American Dairy Coalition, argues that the increased make allowance effectively reduces farmers’ milk checks, disadvantaging them financially.

Pivotal Adjustments and Economic Realignment in Dairy Pricing Formulas

The USDA’s proposal adjusts pricing formulas to match advancements in milk component production since 2000. This update ensures that farmers receive fair compensation for their contributions. 

The proposal also revises Class I differential values for all counties to reflect current economic realities. This is essential for maintaining fair compensation for the higher costs of serving the fluid milk market. By reevaluating these differentials, the USDA aims to align the Federal Milk Marketing Order system with today’s economic landscape.

Recalibrating Cheese Pricing: Transition to 40-pound Cheddar Blocks Only

Another critical change in USDA’s proposal is the shift in the cheese pricing system. Monthly average cheese prices will now be based solely on 40-pound cheddar blocks instead of including 500-pound cheddar barrels. This aims to streamline the process and more accurately reflect market values, impacting various stakeholders in the dairy industry.

Initial Reactions from Industry Leaders: Balancing Optimism with Key Concerns 

Initial reactions from crucial industry organizations reveal a mix of cautious optimism and significant concerns. The National Milk Producers Federation (NMPF) showed preliminary approval, noting that USDA’s proposal incorporates many of their requested changes. On the other hand, Laurie Fischer, CEO of the American Dairy Coalition, raised concerns about the make allowance updates and the impact of extended-shelf-life milk pricing, fearing it might hurt farmers’ earnings.

Structured Engagement: Navigating the 60-Day Comment Period and Ensuing Voting Procedure

To advance its proposal, USDA will open a 60-day public comment period, allowing stakeholders and the public to share insights, concerns, and support. This process ensures that diverse voices within the dairy industry are heard and considered. Once the comment period ends, USDA will review the feedback to gain a comprehensive understanding of industry perspectives, informing the finalization of the proposal. 

Afterward, the USDA will decide based on the collected data and input. However, the process continues with a voting procedure where farmers pooled under each Federal Milk Marketing Order (FMMO) cast votes to approve or reject the proposed amendments. Each Federal Order, representing different regions, will vote individually. 

This voting process is crucial, as it directly determines the outcome of the proposed changes. For adoption, a two-thirds majority approval within each Federal Order is required. Suppose a Federal Order fails to meet this threshold. In that case, USDA may terminate the order, leading to significant changes in how milk pricing is managed in that region. This democratic approach ensures that the final policies reflect majority support within the dairy farming community, aiming for fair and sustainable outcomes.

Regional Impacts: Navigating the Complex Landscape of FMMO System Changes

The proposed changes to the Federal Milk Marketing Order (FMMO) system are bound to impact various regions differently, given each Federal Order’s unique economic landscape. Federal Order 1, covering most New England, eastern New York, New Jersey, Delaware, southeastern Pennsylvania, and most of Maryland, may benefit from more favorable fluid milk pricing due to the higher-of method. With significant urban markets, this region could see advantages from updated Class I differential values addressing the increased costs of serving these areas. 

On the other hand, Federal Order 33—encompassing western Pennsylvania, Ohio, Michigan, and Indiana—might witness mixed outcomes. This area has substantial dairy manufacturing, especially in cheese and butter production, which could gain from the new cheese pricing method focusing on 40-pound cheddar blocks. However, the higher make allowance might stir controversy, potentially cutting farmers’ earnings despite adjustments for rising manufacturing costs. 

The future remains uncertain for western New York and most of Pennsylvania’s mountain counties, which any Federal Order does not cover. These areas could feel indirect effects from the new proposals, particularly the revised pricing formulas and allowances, which could impact local milk processing and producer price differentials. 

While the higher-of-pricing method may benefit farmers by securing better fluid milk prices, the regional impacts will hinge on each Federal Order’s specific economic activities and market structures. Stakeholders must examine the proposed changes closely to gauge their potential benefits and drawbacks.

The Bottom Line

The USDA’s push to reinstate the ‘higher-of’ pricing method for fluid milk marks a decisive moment for the dairy industry. The 49-day hearing in Indiana underscored the complexity of the Federal Milk Marketing Order (FMMO) System. Key aspects include reverting to the ‘higher-of’ pricing from the 2018 ‘average-of’ formula, new pricing for extended-shelf-life milk, and the debate over increased make allowances. Significant updates to pricing formulas and cheese pricing methodologies were also discussed. 

The forthcoming vote on these changes is critical. With the power to reshape financial outcomes for dairy farmers and processors, each Federal Order needs two-thirds approval to implement these changes. Balancing modern dairy policy advancements with fair profits for all stakeholders is at the heart of this discourse. 

Ultimately, these decisions will affect dairy practices’ economic landscape and sustainability nationwide. This vote is a pivotal moment in the evolution of the American dairy industry, demanding informed participation from all involved.

Key Takeaways:

• The USDA plans to reinstate the “higher-of” method for pricing Class I (fluid) milk, reversing the “average-of” formula introduced in the 2018 Farm Bill.
• A 332-page recommendation outlines the USDA’s proposed changes, following a comprehensive 49-day hearing in Indiana.
• The reinstatement is anticipated to benefit farmers most of the time, though it may introduce risks like negative producer price differentials.
• New pricing structures will affect regular fluid milk and introduce a 24-month rolling adjuster for extended-shelf-life (ESL) milk.
• The USDA will update pricing formulas to reflect increased milk component production and adjust Class I differential values to better capture the costs of serving the fluid market.
• There will be changes in cheese pricing, with average monthly prices based solely on 40-pound cheddar blocks.
• The proposal also includes an increase in the make allowance for processors, a point of contention among industry stakeholders.
• The USDA will open a 60-day public comment period before making a final decision, with each Federal Milk Marketing Order region voting individually on the proposed changes.

Summary:

The USDA plans to reintroduce the ‘higher-of’ pricing method for fluid milk, a move aimed at modernizing federal dairy policy. This method, which selects the higher price between Class III and Class IV milk, could be a significant shift for the dairy industry. The 2018 Farm Bill replaced the ‘higher-of’ system with an ‘average-of’ formula, averaging Class III and IV prices plus an additional 74 cents. This change could benefit farmers but also introduce risks like negative producer price differentials (PPDs). The Federal Milk Marketing Order (FMMO) system ensures fair and competitive dairy pricing, and the ‘higher-of’ method usually leads to higher fluid milk prices but also poses the risk of negative producer price differentials (PPDs). Negative PPDs can impact farmers’ financial stability, making it harder to predict income and manage cash flows. The 24-month rolling adjuster for extended-shelf-life milk introduces further uncertainty, potentially causing fluctuating incomes for farmers. The USDA’s proposal to increase the make allowance, a credit to dairy processors, has been met with criticism from industry leaders. The USDA will open a 60-day public comment period to advance its proposal. The proposed changes to the FMMO system will impact various regions differently due to each Federal Order’s unique economic landscape.

Learn more:

• US Dairy Farmers’ Revenue and Expenditure Rise Slightly in March
• Navigating the Waves: Dairy Producers Defy Challenges to Keep Barns Full Amid Soaring Milk Prices and Adverse Conditions
• Rising Milk Prices and Lower Feed Costs Boost Profitability: May Dairy Margin Watch