The USDA released December and 2020 annual “mailbox” milk price summaries, providing yet another illustration of how the COVID-19 pandemic disrupted milk marketing last year. When compared to the USDA’s all-milk prices, the price differences also reflect challenges to dairy risk management.
First, a disclaimer of sorts. Comparing the all-milk price and mailbox price isn’t exactly apples to apples.
The all-milk price is the gross milk price farmers receive and includes quality, quantity and other premiums. Prices are reported monthly by the USDA National Ag Statistics Service (NASS). The all-milk price is the average price all grades and qualities of milk before deductions (hauling subsidies are excluded). Prices received represent sales from producers to first buyers. All-milk prices are also used to calculate the monthly Dairy Margin Coverage (DMC) margin to determine any indemnity payments.
The mailbox price is defined as the net price received by producers for milk, including all payments received for milk sold, and deducting costs associated with marketing the milk. Data included in all payments for milk sold are: over-order premiums; quality, component, breed and volume premiums; payouts from state-run over-order pricing pools; payments from super pool organizations or marketing agencies in common; payouts from programs offering seasonal production bonuses; and monthly distributions of cooperative earnings. Annual distributions of cooperative profits/earnings or equity repayments are not included.
Included in mail price costs associated with marketing milk are: hauling charges; cooperative dues, assessments, equity deductions/capital retains and reblends; the Federal Milk Marketing Order (FMMO) deduction for marketing services; and federally mandated assessments such as the dairy checkoff and budget sequestration deductions. In 2020, negative producer price differentials (PPDs) played a prominent role on the deduction side. Other deductions, such as loan, insurance or feed mill assignments are not included. For all markets, the mailbox price is reported at the handlers' average butterfat test (i.e., no adjustment to 3.5%).
And the average all-milk and mailbox prices do not necessarily reflect the same geographic areas. While NASS reports monthly average all-milk prices for the 24 major dairy states, the mailbox prices are reported by the USDA’s Agricultural Marketing Service (AMS) and covers selected FMMO marketing areas. The all FMMO mailbox price is the weighted average of prices for all FMMO reporting areas for which prices are reported for at least 75% of the milk marketed under FMMOs.
For example, while NASS reports an all-milk price for Georgia, the mailbox price lumps Georgia with other Southeast states: Alabama, Arkansas, Louisiana and Mississippi. Similarly, Kansas is part of the Corn Belt states, Oregon and Washington and combined in the Northwest states, Vermont is among six New England states and Virginia is clustered with Kentucky, North Carolina, South Carolina and Tennessee among Appalachian states.
In Table 1, Progressive Dairy attempts to align the state-level NASS all-milk prices and the AMS FMMO marketing area mailbox prices as closely as possible.
All-milk vs. mailbox prices
Historically, these two national average milk prices followed one another very closely, according to John Newton, chief economist with the American farm Bureau Federation. With COVID-19 market disruptions, negative PPDs and mass depooling, the difference between all-milk and mailbox prices was record-large in 2020.
Based on the USDA data, the U.S. average difference between mailbox and all-milk prices grew to $1.36 per cwt in 2020, a substantial increase from 2019 and 2018 (Table 1).
In October and November 2020, for example, the USDA all-milk price was more than $2 per hundredweight higher than the national average mailbox milk price. One explanation, Newton notes, is the higher-valued Class III milk was not in the pool, and thus was not included in the mailbox milk price calculation.
The 2020 mailbox price illustrates how strange the year was in another way: At $18.16 per cwt, the FMMO Class III price was higher than the mailbox milk price in 2020.
Price differences and risk management
The difference in the all-milk price and the mailbox price represents an additional challenge: USDA risk management programs are based on the all-milk price. With the mailbox price below the all-milk price, producers are unable to protect against falling net prices impacted by such things as negative PPDs.
Newton, who is finishing up his last week as chief economist with the American Farm Bureau Federation (AFBF), April 9, before moving to serve as chief economist with Republicans on the U.S. Senate Ag Committee, noted AFBF delegates recently adopted policy calling for these milk check deductions to be factored into farm safety net programs.
During 2020, the DMC margin averaged $9.65 per cwt and ranged from a low of $5.37 per cwt in May to a high of $12.41 per cwt two months later in July. DMC indemnity payments were triggered in five months during 2020. For a farm covering 5 million pounds of milk in DMC, program payments totaled more than $36,000, or 73 cents per cwt.
Substituting the mailbox milk price in the DMC margin calculation, the DMC margin would have averaged $8.34 per cwt, ranging from a low of $4.67 per cwt to a high of $10.55 per cwt. Had DMC used the mailbox milk price, indemnity payments would have triggered in nine months during 2020. Total DMC payments for an operation covering 5 million pounds of milk would have been more than $65,000, or $1.31 per cwt.
Change faces challenges
As calls for dairy policy reform grow louder, revamping the DMC formula is one of several issues receiving attention. The challenge with using the mailbox milk price in risk management proframs is multifaceted, Newton said.
“First, the mailbox milk price release lags the release of the all-milk price by several months. The USDA would need to expedite the calculation of the mailbox milk price for it to be used in the DMC formula,” he said.
In addition, depooled milk would need to be taken into consideration to prevent double-dipping, i.e., farmers with depooled milk who likely received higher mailbox milk prices may be overcompensated for low milk prices received by others.
Finally, Newton lists “moral hazard”: Since milk check deductions reflect membership dues, hauling charges, balancing costs and reblending fees, moral hazard exists to the extent that these assessments could be increased and then partially offset by federal program payments from DMC. Moral hazard, in this case, is the lack of incentive to protect against higher costs imposed on the dairy farmer.
