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Dairy pricing reform gains steam

steverts/Getty Images Stainless steel storage tanks and buildings at a dairy processing plant
PROPOSED REFORMS: Less than a week after the National Milk Producers Federation’s board of directors asked for an emergency hearing to address issues with the federal milk pricing system, four Midwest dairy groups have announced their own plan to reform the system.
A proposal by four Midwest groups would tie fluid milk prices to cheese and do away with advanced pricing.

Less than a week after the National Milk Producers Federation’s board of directors asked for an emergency hearing to address issues with the federal milk pricing system, four Midwest dairy groups have announced their own plan to reform the system.

Representatives of the four groups — Dairy Business Association, Edge Dairy Farmer Cooperative, Minnesota Milk and Nebraska State Dairy Association — announced a proposal Tuesday, called Class III Plus, that would tie the Class I skim milk price to the Class III price, plus an adjuster — no lower than 36 cents per cwt between 2021 and 2025 — and do away with advanced pricing. In all, Federal Milk Marketing Orders pricing formulas advanced prices would be replaced with announced prices, according to the proposal.

The current Class I price in most FMMOs is set by taking the average of Class III cheese and Class IV butter, plus 74 cents, to come up with a Class I skim price — the Class I mover — and is calculated a month in advance.

The groups say that Class III Plus provides a way for farmers to recoup, over the next four years, some of the revenue they might have missed out on in 2020, and also creates stability going forward, including protection from negative producer price differentials (PPDs) and better risk management.

Representatives of the groups say that they’ve been in contact with USDA on this proposal and are considering whether to call for an emergency USDA hearing. 

This comes on the heels of the National Milk Producers Federation calling for its own emergency hearing on the federal order system to specifically deal with the Class I price mover. In its announcement on April 23, NMPF stated that the Class I mover, changed in the 2018 Farm Bill from the higher of Class III or Class IV prices, was intended to be revenue neutral while facilitating increased price risk management by fluid milk bottlers.

But the new Class I mover contributed to disorderly marketing conditions last year during the height of the COVID-19 pandemic and cost dairy farmers more than $725 million in lost income, according to an NMPF press release. This was largely due to negative PPDs that came directly off farmers’ milk checks.

The organization’s proposal would adjust the current 74 cents every two years based on conditions from the prior 24 months, with the current 74 cents remaining the floor. In its request, the organization also called for USDA to limit any future hearing to the Class I mover, after which USDA would have 30 days to issue an action plan.

Amy Penterman, president of Dairy Business Association and a dairy farmer in west-central Wisconsin, said NMPF’s proposal is only a short-term fix to what has been a long-term problem. She said that Class III Plus aims to provide stability to the pricing system, reduce the likelihood of negative PPDs and make producer risk management more effective.

Lucas Sjostrom, executive director of Minnesota Milk, said the group worked with Marin Bozic, professor of ag economics at University of Minnesota, on the proposal, and that it was a conglomeration of his and other ideas.

When asked of the potential effect of this proposal on markets that are mostly Class I and Class IV, such as the Northeast, Sjostrom said the groups were sensitive to that, but that they aimed to be revenue neutral and not give any particular region an advantage over another.

“In the long run, we believe this is the best proposal. We are looking at best price discovery,” he said.

Part of the group’s motivation for the proposal, said John Holevoet, director of government affairs for Dairy Business Association and Edge Dairy Farmer Cooperative, was that if you look at an analysis of negative PPDs in 2020, a decent amount can be directly tied to the advanced pricing system.

Others have argued that the change to Class I pricing was an even bigger factor because the 74-cent addition couldn’t make up for the large spread between Class III and Class IV prices.

“In their expected impact over the next couple of years, NMPF and the Bozic-Minnesota-DBA proposal show trivial differences in numbers. As one would expect from Dr. Bozic, his proposal is cleaner in its ability to apply futures markets or DRP. I think both proposals are likely to have unforeseen consequences, as did the current systems,” said Andrew Novakovic, professor emeritus of applied economics and policy at Cornell University.

Tom Vilsack, secretary of agriculture, chimed in on federal milk pricing reforms Monday during a call with the North American Agricultural Journalists. He said that there’s been a lot of talk on dairy pricing reform lately, but said it was too early in the process to predict anything significant that could come out of it.

“There’s a lot of conversation on this; it’s a very tough issue,” Vilsack said. “Within the dairy industry, there are issues, and I think those conversations need to mature a bit more before anybody makes a decision that there’s going to be a significant change.

“It’s a very, very complicated issue, and not one that should be easily characterized. Anybody who tries to do that just doesn’t understand the complexity of that particular topic. It’s very complex,” he said.

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