While dairy farmers and processors have been calling for updates to the Federal Milk Marketing Order system for years, USDA’s recommended changes to the way milk is priced are less favorable to orders where the majority of milk is used to make cheese and milk powder.

In the 11 federal orders, USDA sets minimum prices for four classes of milk using a formula based on market prices for dairy products.

Among the changes, USDA is recommending:

• A return to the previous formula to set the base price for most Class I milk (fluid consumption).

• An increase in Class I differentials (the costs to get milk to those markets).

• An update to milk composition factors (the level of protein and other solids in milk).

• An increase in “make allowances” (manufacturing costs, which are deducted from the price farmers receive for their milk).

Wins, losses

“First and foremost, American Farm Bureau was very happy to see the intended switch back to the ‘higher of’ Class I mover,” Danny Munch, American Farm Bureau Federation economist, said in a webinar hosted by the American Dairy Coalition.

The Class I mover sets the base price for Class I milk, 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.

More than COVID

The switch to the “average of” has caused a $1.24 billion loss in milk pool value, compared with what the value would have been with the “higher of” formula, he said.

The loss was originally thought to be linked only to COVID dynamics (government cheese purchases for food assistance increased the Class III price significantly), but it continues to impact farmers because of the Class III market dynamics, he said.

The largest impact would have been in 2020 when the Class I milk price would have been up $1.69 per hundredweight with the “higher of” formula. But that price also would have been up an average of 49 cents from 2019 to 2023, he said.

Make allowances

As for other recommended changes, Farm Bureau found:

If the proposed increases in make allowances were in place the last four years, milk price would have been 81 cents per hundredweight lower for Class 1; 74 cents lower for Class II; 89 cents lower for Class III; and 74 cents lower for Class IV.

If the increases to milk composition were in place the last four years, they would have increased Class 1 price by 46 cents cwt. on average, Class II price by 32 cents on average, Class III by 57 cents and Class IV by 32 cents. One year’s total value of pooled milk would see an increase of about $200 million. USDA, however, is recommending a one-year delay in implementation of the increased component factors.

Analyzing all of USDA’s recommendations, the net benefit based on the last four years would range from an annual increase of $87.9 million in the Appalachian order to a decrease of $78.7 million in the California order.

Net Benefit

Net pool value of FMMO recommended changes, 2020-2023 annual average (million dollars)

Northeast — increase $66.76

Appalachian — increase $87.86

Florida — increase $37.84

Southeast — increase $60.52

Upper Midwest — decrease $75.20

Central — increase $3.94

Mideast — decrease $81.24

California — decrease $78.68

Pacific Northwest — decrease $17.57

Southwest — decrease $64.43

Arizona — increase $3.27