Neither dairy farmers nor processors seeking changes in the Federal Milk Marketing Order got everything they wanted in the federal government’s rewrite of the system.

USDA on Monday issued its recommended decision to amend uniform pricing formulas in all 11 federal orders. The decision follows a 49-day national hearing in Carmel, Ind., that began Aug. 23 of last year and spanned five months.

Dairy farmers have been calling for updates to pricing formulas, contending significant changes in the industry have occurred since the last major update in 2000. In addition, they want USDA to return to a previous formula for setting the base price for Class I milk (fluid consumption).

Dairy processors have been seeking changes in “make allowances” — the cost of manufacturing dairy products — in the formulas, which haven’t been changed since 2008.

Other issues

The hearing also included:

• Updates to milk composition factors, such as protein, on which dairy farmers are paid.

• Surveyed commodity products, whose prices are used in the Dairy Mandatory Price Reporting Program.

• Class I differential values, reflecting the cost of servicing Class I fluid markets, such as getting milk from where it’s produced to urban areas.

National Milk Producers Federation is counting some wins in USDA’s proposal.

“Based on our initial reading, NMPF is heartened that much of what we proposed after more than two years of policy development, and another year of testimony and explanation, is reflected in USDA’s recommended Federal Milk Marketing Order modernization plan,” Gregg Doud, CEO of NMPF, said in a statement.

Complex system

“Crafting an effective milk-pricing system for farmers is complex and requires a careful balance. USDA’s plan acknowledges that complexity and, while not matching our proposal in every detail, looks largely in keeping with the comprehensive approach painstakingly determined by the work of dairy farmers and their cooperatives over the past three years,” he said.

One of the big wins for NMPF — and all dairy farmers — is the return to a previous pricing formula for the base price of Class I milk.

The Class I mover sets the base price to which a location differential is added. The previous mover was calculated as the “higher of” the advanced price for Class III (milk for cheese and dry whey) and Class IV (milk for butter and powder).

The 2018 Farm Bill changed the mover to the “average of” Class III and Class IV prices plus 74 cents per hundredweight to provide better risk management for processors.

Big losses

But it proved costly after government purchases of cheese for food assistance in response to the COVID-19 pandemic significantly increased the price of Class III milk. Averaging that high price with the much-lower Class IV price significantly reduced the Class I price and the price farmers received.

Dairy farmers have lost about $1.3 billion in revenue since the mover changed, compared with the previous mover, according to NMPF.

On the processing side, NMPF supported an increase to make allowances due to the increased cost of production. USDA did increase those amounts.

“USDA’s numbers for an adjustment were higher than what NMPF proposed, though not greatly out of line with our analysis,” Doud said in the latest NMPF newsletter.

Cost data

“The next step now will be seeking better plant-cost data through mandatory surveys via legislation, a step that’s been included in every significant congressional farm bill plan that’s been proposed,” he said.

American Farm Bureau Federation strongly believes make allowances should not be changed without a mandatory, audited survey of processors’ cost, said Zippy Duvall, AFBF president.

“Our dairy farmers deserve fairness in their milk checks and transparency in the formula, but the milk marketing order system can’t deliver that unless make allowances are based on accurate and unbiased data,” he said in a statement.

Current make allowances, which are deducted from famers’ milk checks, range from $2.17 to $3.17 per hundredweight of milk, depending on what product the milk is used for — butter, cheese, nonfat dry milk or dry whey, according to a 2019 Farm Bureau analysis.

Bigger bite

USDA’s higher proposed milk allowance will take a bigger bite.

“All else held equal, I estimate farmers’ milk value would drop between 74 cents and 89 cents per hundredweight, depending on the class of milk you feed the proposed make allowances into,” Danny Munch, Farm Bureau economist, told Capital Press.

“This is assuming 3.5% butterfat and leaves all other formula factors unchanged. Once all the FMMO recommended changes are accounted for, these values would change slightly,” he said.

Farm Bureau is pleased with USDA’s intent to return to the “higher of” formula for Class I milk, Duvall said.

Processor benefits

“That said, we’re disappointed in changes that will benefit processors without regard for producers at a time when dairy farmers are struggling and many have gone out of business,” he said.

Farm Bureau’s primary concern is the change to make allowances, said Bailey Corwine, Farm Bureau media relations specialist.

“However, AFBF also requested additional changes that would have helped offset the losses we expect from make allowance increases. These included the addition of 640-pound blocks to the price survey, removal of advanced pricing and increasing the Class II differential,” she told Capital Press.

“The ‘higher-of’ and Class I differentials will be helpful, but without the additional changes previously mentioned, the proposals lean more toward benefiting the processor,” she said.

USDA will provide a 30-day comment period once the proposal is published in the Federal Register.