The National Milk Producers Federation expects to submit its proposal to retool the Federal Milk Marketing Order to USDA next month.

But what kind of impact will that have on dairy farmers? And will USDA even grant a hearing? Chris Wolf, professor of ag economics at Cornell, says there is more momentum than ever for changes to the FMMO, the system used to pay most dairy producers for their milk.

But what that will look like is up to Secretary of Agriculture Tom Vilsack, who has been on record stating that any changes to the current system would require dairy groups come up with a unified proposal to present at a potential FMMO hearing.

Earlier this month, National Milk Producers Federation (NMPF) released its own proposal to make changes to the FMMO system by:

• Returning to the “higher of” calculation for the Class I price mover.

• Extending the current 30-day reporting limit to 45 days on forward pricing of nonfat dry milk and dry whey to capture more export sales in USDA product price reporting.

• Updating milk component factors for protein, other solids and nonfat solids in Class III and Class IV skim milk price formulas.

• Developing a process to ensure more frequent analysis of make allowances.

‘Higher of’ gains traction

The one proposal that has generated buzz among dairy groups is returning the Class I price mover to the “higher of” Class III and IV price, and doing away with the current average, plus 74 cents, formula. This has the biggest impact in areas with higher Class I (fluid) utilization, like the Northeast, because a higher Class I price means more money available to producers in the federal order pool.

Unlike other federal orders where the overall uniform price paid to dairy producers is more based on Class III (cheese) or Class IV (butter), the Northeast order is one of the most balanced, with a nearly equal percentage of milk being used for fluid and cheese.

Wolf says the original intent of moving to the average, plus 74 cents, formula was to allow Class I dairy processors, who are required to take part in the Federal Milk Marketing Order system, to have price certainty in terms how much they would need to pay for milk.

“So, if they were looking at hedging, say six months out, they didn’t know if the pay price was going to be driven off Class III or Class IV. With the current system, they do,” he says.

But the quirky timing of how milk is priced, coupled with record spreads between Class III and IV prices during the height of the Covid pandemic, and de-pooling by Class III processors — which are not required to participate in the FMMO — led to record negative producer price differentials coming off farmers’ paychecks, especially in the Northeast.

American Dairy Coalition, which also supports returning the Class I mover formula back to the prior “higher of” formula, estimates the change to the average, plus 74 cents, cost dairy farmers $922 million in Class I revenue since 2019 when it was first implemented.

“If I’m the producers, I want the ‘higher of,’ probably. Then the question is, how much of this is impeding risk management by the Class I processors. But they were dealing with it for 18 years, so it's not clear that they can’t deal with it again,” Wolf says.

Make allowances

He says that another proposal to adjust Class I differentials — possibly between $1 and $1.50 — could have an even bigger impact because it would help offset proposed increases to make allowances, a fixed price deduction that is supposed to reflect the processors’ cost of converting milk into commodity dairy products.

Make allowances are established at fixed rates by the federal government and were last updated in the late 2000s. According to a January analysis by CoBank, labor and the cost of utilities account for between a third to half of total production costs to dairy processors.

Not surprisingly, those costs have gone up. For example, labor costs in dairy manufacturing have shot up 48% per unit of production, and the industrial rate for electricity rose 64% between 2006 and 2022, according to the analysis.

But getting the make allowance right is important. The CoBank analysis states that a make allowance that is set too high would lower the farm-gate price paid to producers. Conversely, a make allowance that is too low hurts processors.

Wolf says that if make allowances were sufficient over the long term, it would likely increase investment in dairy processing and perhaps lead to more competition for milk. But too high an increase at one time would lead to lower milk prices.

Regardless, Wolf called NMPF’s proposal balanced and pragmatic.

“I think aligning incentives for producing the components that consumers want is a good idea, and I do think that we have probably gone too long without recognizing the change in manufacturing costs and change in costs of servicing those Class I contracts,” he says.

He expects an FMMO hearing some time in the next six months.