By the time this article is published, Congress might have passed a Farm Bill. As this article is being written, few have any real inkling about whether this lame duck session will result in a new bill, an extension of the old bill or nothing at all. What will likely be lacking in the dairy title of the farm bill, whenever it gets passed and in whatever form that legislation might ultimately take, is substantive direction on the federal milk marketing orders.

When National Milk Producers Federation introduced its Foundation for the Future program, it included four prongs. Three of those have been included in the Farm Bill as it is being considered by Congress. The fourth element, federal order reform, is not included. That leaves this topic open for further discussion during 2013 and beyond.

The principal element of federal order reform as laid out in Foundation for the Future was retooling of the pricing formulas used to establish the base price for milk. In short, National Milk had proposed moving to a competitive price model and away from the current end-product pricing model for setting the base price.

Now, the adoption of a competitive price for milk is a topic that has garnered significant interest, if not support, from the industry as a whole. In addition to the proposal from National Milk, the Maine Dairy Industry Association (MDIA) proposed such a program when the FMMO pricing formulas were last examined by the USDA . MDIA continues to work on developing their program, which differs from the NMPF proposal.

Keeping Congress out of affirmatively enacting federal order regulations is, in my personal opinion, a good thing. Rarely do I have confidence legislators have a sufficient grasp on the intricacies of economic regulation of the dairy industry to make the end result meaningful and healthy over the long term. So, from that perspective, the absence of federal order reform in the Farm Bill is not entirely negative.

Not having federal order reform within the Farm Bill also has the advantage of allowing the industry to examine the entirety of the program. The pricing formulas are only one aspect of the FMMO program, although certainly the component that has received the greatest degree of attention recently.

In addition to the pricing formulas, recent articles from leaders in the dairy industry have raised discussion points that question the efficacy of other elements of the federal order program. In particular, these comments question whether the assumptions and conditions that underlie the basis for the program should be re-examined.

In a guest editorial in The Cheese Reporter , Dr. Andy Novakovic, who chaired the USDA Dairy Industry Advisory Committee, explained that the Class I differential – which once represented a premium of nearly 100 percent over the lowest-value class – now represents a premium of about 10 percent.

Dr. Novakovic also writes that: “Many analysts debate whether Class I demand still is the most inelastic dairy demand. If it is, the economic theory would still hold that adding a premium to the Class I price would increase gross revenue to farmers, but this may no longer be the relevant question.” The converse is that if Class I demand is not the most inelastic dairy demand, increasing Class I differentials could have a net negative effect on producer income.

In a separate comments, Tom Gallagher, CEO of Dairy Management Inc ., has explained that while fluid milk demand is relatively inelastic, when consumers stop purchasing milk because of price increases, not all of the same consumers resume purchasing milk when prices return to lower levels. In short, every time price volatility drives up the cost of milk, the dairy industry loses customers.

Based on that analysis, it would follow that increasing the Class I differentials would have a negative overall effect on fluid milk consumption. Perhaps as importantly, those facts illuminate a possible flaw in the presumptions underlying the federal orders – the inelasticity of demand for fluid milk is not elastic with respect to price declines.

While these comments do not make either an explicit or implicit call for federal order changes, they illustrate why the industry needs to take a hard look at why the federal orders were implemented 80 years ago and compare that with what the industry needs from the federal orders in 2013.

And to further complicate the entire federal milk marketing order picture, we cannot ignore the continuing discussions in California regarding their price formulas and the preliminary exploration of including California in the federal order system.Including California in the federal orders would be a tremendous undertaking, requiring a tremendous amount of thought, discussion and careful planning. Ultimately, any such effort would need to have the broad support of the California dairy industry.

The federal order system has served the industry over quite a long term. Its efficacy during any given period is subject to debate and disagreement. But for nearly 80 years, some form of classified minimum pricing and pooling of returns has been administered by the USDA.

Part of the ability of the federal order system to endure for eight decades must be attributed to its ability to change to the particular economic circumstances of any given marketing area. While not exactly speedy, the procedure that the FMMO system provides for the amendment of marketing orders affords the entire industry opportunity to implement changes based on real-world-tested data and evidence, reviewed by USDA marketing specialists and approved by the industry before implementation.

But even this system has its disadvantages. There is the issue of the time it takes to go through the amendment process. Changes in the 2008 Farm Bill imposed a defined timeframe, but even that process takes almost a year.

Depending on the marketing area involved with any amendment, concerns often get expressed about the influence of one or more dominant participants in the marketplace. And while I personally believe that the ability to terminate a marketing order by not approving amendments is an important tool available to producers, for others the loss of an order following a referendum is a major concern.

In summary, the federal order program needs to address all of these issues – competitive pricing, Class I differentials, the number of classes of milk, the possible inclusion of California in the system, responsiveness to the industry and the overall level of prices paid to producers.

In total, these multiple considerations are a formidable list to address. But with the farm bill coming to a close sometime in the near future, these questions should move to the forefront of the industry’s discussion list. Addressing them will take a concerted effort from cooperatives, processors, other producer groups and the USDA. As we look forward to 2013, let’s hope that these groups work toward tackling this important project. PD

Ryan Miltner
Attorney
Miltner Law Firm LLC