Dave Natzke

Editor / Progressive Dairy

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Read: PPDs took a small step back in April.

In late April, the National Milk Producers Federation’s (NMPF) board of directors voted to request an expedited FMMO hearing limited to proposed changes to the “Class I mover.” At Progressive Dairy’s deadline, May 13, the formal request had not been submitted to the USDA’s Agricultural Marketing Service. (Read Weekly Digest: NMPF to request FMMO hearing on Class I mover and NMPF moving toward request for limited FMMO hearing.)

Southeast producers seeking direct aid

With heavy Class I milk utilization in the southeast U.S., dairy producers there have felt the biggest impact from the Class I formula change. In a letter circulating this week and directed to U.S. Ag Secretary Tom Vilsack, Southeastern producers asked for direct aid from federal COVID-19 stimulus funds to cover some of those losses, without waiting for a hearing.

According to the letter, FMMO revenue losses resulting from changes in the Class I mover formula totaled about $750 million in 2020. And, they charge, those losses have not been shared equitably among all dairy farmers. Through depooling, producers marketing milk through cheese plants were able to receive the full advantage of record Class III prices in 2020. In contrast, producers marketing milk production in Class I markets (fluid), incurred most of the revenue loss, the letter states.

Losses in the three FMMOs covering the southeast U.S. – Appalachian, Florida and Southeast – lost about $155 million (21%) of the $750 million total, even though the percentage of milk produced in the three marketing areas represents just 5.5% of FMMO total milk marketings. That $155 million equated to a reduction in the 2020 blend price of about $1.25 per cwt.

Those losses, the letter continues, are hurting the financial health and milk production capability of dairy producers in the region, with the long-term impact likely to reach consumers. Without adjusting for leap day in 2020, U.S. milk production during the first quarter of 2021 was 1% higher than the same period in 2020. However, in the Southeast, first quarter production was 5.7% lower (without the leap day adjustment). If this trend continues, more milk will need to be trucked in from a greater distances to meet the fluid milk needs of a growing Southeast population.

The letter states Southeast dairy producers cannot wait for a potentially lengthy FMMO hearing process and need monetary relief to assure an adequate supply of local milk to meet consumers’ fluid milk needs.

Midwest groups also sends letter

In a separate letter to Vilsack, five Midwest dairy groups said that if and when a FMMO hearing is held, its scope should go beyond an emergency look at the Class I mover.

In the letter, the groups – the Wisconsin-based Dairy Business Association and Edge Dairy Farmer Cooperative, the Minnesota Milk Producers Association, Nebraska State Dairy Association and South Dakota Dairy Producers – said they did not have a strong desire to have a FMMO hearing but wanted to call attention to opinions and proposals that differed from that considered by the NMPF.

“We believe in order reform, but we would prefer to tackle more than just Class I pricing if we are going to go to the trouble and effort of having a hearing with national scope,” the groups said in the letter. “Ultimately, the dairy community might not be ready yet to tackle a hearing with a broad scope, but we are working to prepare ourselves and our members for that discussion if and when it comes.”

In May 2019, that Class I mover formula was changed from using the “higher of” Class III-Class IV milk prices to the “average of” Class III-Class IV prices, plus a 74-cent per hundredweight (cwt) adjuster. While meant to provide fluid milk processors additional price risk management protection because they can hedge Class III and Class IV prices – and intended to be revenue neutral for dairy farmers – the onset of the COVID-19 pandemic and USDA Farmers to Food Box program dairy product purchases created unintended consequences. Those consequences increased price volatility, widened spreads in Class III and Class IV milk prices, and created occasional inversions in Class I and Class III milk prices. Large-scale depooling of higher-valued Class III milk and record-large negative PPDs resulted.

Although NMPF has not publicly released its complete reform proposal, Jim Mulhern, NMPF president and CEO, has said the proposal will maintain the current Class I price formula using the “average of” the Class III-Class IV prices but would increase the adjuster, using the current 74 cents per cwt as the floor. The proposal also calls for the USDA to recalculate that adjuster every two years, based on market conditions.

The Midwest organizations previously unveiled a “Class III Plus” plan to be proposed in the event a FMMO hearing was held.

Read: Moving on Class I: Midwest groups unveil ’Class III Plus’ proposal.

Another possible proposal from FarmFirst Dairy Cooperative, representing dairy farmers in Wisconsin, Minnesota, South Dakota, Michigan, Iowa, Illinois and Indiana, calls for a return to the “higher of” formula in place for about two decades prior to the May 2019 change.

Read: FarmFirst will propose returning to ‘higher of’ Class I price formula.

If and when a formal request is submitted, the USDA has 30 days to issue an action plan designed to complete the hearing within 120 days, request additional information from proponents or deny the request.

If a hearing is approved, hearing dates as well as the scope of topics to be covered are established. A brochure designed to provide an overview of the FMMO amendment process is available on the FMMO website.

The current Class I mover formula was implemented in May 2019 through the 2018 Farm Bill and remains in place until modified through a further action by Congress or administratively through the FMMO hearing process.