Editor's note: The original article has been updated to include comments from the International Dairy Foods Association. With the two-year anniversary of the implementation of the change in the Federal Milk Marketing Order (FMMO) Class I skim milk price formula near, the National Milk Producers Federation (NMPF) is closer to asking the USDA for an emergency expedited hearing to address the issue. Proposals from other organizations regarding the Class I pricing formula and other FMMO reforms may be forthcoming as well.
Under provisions approved in the 2018 Farm Bill, the change in the FMMO Class I skim milk price formula was effective May 1, 2019, and remains in place at least two years (until April 30, 2021) and until modified through a further action by Congress or administratively through a FMMO hearing process.
In a meeting on April 16, the NMPF executive committee received an update on the so-called “Class I mover” and approved a proposal that would require the USDA to recalculate that formula every two years using milk pricing factors during the previous 24 months.
The committee also directed NMPF staff to move forward with a request to USDA’s Agricultural Marketing Service (AMS) to hold an emergency national FMMO hearing to consider the proposal.
NMPF’s board of directors was scheduled to meet Friday, April 23, to ratify the executive committee’s actions.
NMPF had been in discussion with the International Dairy Foods Association (IDFA), the trade association for dairy processors, but was unable to reach consensus agreement about how to proceed on the issue.
In his recent NMPF President’s Update, Jim Mulhern said “the pandemic-induced price disruptions of the past 12 months have created an untenable situation in fluid milk pricing that has reduced dairy farmer revenue by more than $725 million.”
A short, tumultuous history
As a means to help struggling Class I fluid milk processors manage price risk, a provision in the 2018 Farm Bill adjusted the formula for the FMMO Class I skim milk price, using the “average of” the monthly Class III and Class IV advanced pricing factors, plus 74 cents per hundredweight (cwt), plus the applicable adjusted Class I differential.
Previously, the Class I skim milk price was calculated using the “higher of” the monthly advanced pricing factors for Class III or Class IV skim milk, which reflect dairy product survey prices for the two weeks prior to the price announcement, plus the applicable adjusted Class I differential. Because market prices for these surveyed products fluctuate, the “higher of” factor increased risk and uncertainty associated with price hedging for fluid milk processors. The Chicago Mercantile Exchange (CME) offers futures contracts for Class III and Class IV milk prices, but there is no platform for hedging Class I milk prices.
The change to the milk pricing formula did not proceed through a formal FMMO rule-making process, but rather through the 2018 Farm Bill.
While the new formula provided risk protection for processors, dairy farmers were exposed to substantially higher price risk. The unintended consequences of the change were exasperated by COVID-19-related price volatility, resulting in record-large negative producer price differentials (PPDs) and mass depooling of milk from FMMOs.
According to NMPF analysis, pandemic-induced price disruptions caused second-half 2020 Class I skim milk prices calculated under the new formula to average $3.56 per cwt lower than they would have under the old formula, sinking to -$4.74 and -$5.19 per cwt lower in August and December 2020, respectively. The cumulative net loss in Class I skim milk revenues to dairy producers was more than $725 million since the change was implemented in May 2019.
NMPF’s proposal would ask the USDA to adjust the Class I mover every two years to reflect the difference between the former “higher of” and the current “average of” Class III and IV milk price formulas.
The NMPF request would limit the scope of an FMMO hearing to the Class I mover. If the USDA advances to a hearing on that specific request, other proposals on the Class I mover could be offered, but proposals addressing other FMMO reforms would not be considered. Following the hearing process, if the USDA issues a decision making Class I changes, it would go to a producer referendum.
IDFA studying options
According to Michael Dykes, IDFA president and CEO, the nation's dairy processor organization is evaluating potential solutions that benefit the entire industry.
“We’ve discussed the Class I issue extensively with our membership over the past three months,” Dykes said in a statement to Progressive Dairy. “Over the course of those talks, it’s become clear that the issue is multifaceted. There’s the Class III/Class IV spread, make allowances, long term utilization trends, component tests, government purchases (such as food boxes), pooling rules and other factors, all nicely outlined in a recent paper by professors Marin Bozic and Christopher Wolf (Read: Weekly Digest: Links to webinar, papers on negative PPDs.) As a result, IDFA membership has not yet been able to identify a path forward that unites the industry. In the meantime, IDFA has an ongoing study of the FMMO system to better understand these factors. We will continue to evaluate proposals as they emerge and hope to find a solution that the entire industry can get behind.”
Citing ongoing discussions regarding details, reform proposals from other dairy producer organizations have not yet been released. An American Farm Bureau Federation (AFBF) working group had previously released recommendations for broader FMMO reforms.
And while NMPF pursues changes through the FMMO administrative process, a working group of dairy farmers shared concerns with staff members representing U.S. Sen. Kirsten Gillibrand (D-New York), a member of the Senate Agriculture Committee, earlier this week.
