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DAIRY POLICY
What happened?
Ag committees in both the House and Senate have begun to hold hearings and listening sessions to consider potential components of the 2023 Farm Bill, including dairy. The National Milk Producers Federation (NMPF) continues discussions on potential Federal Milk Marketing Order (FMMO) reforms, while the two-year anniversary of the implementation of the change in the Class I skim milk price formula has come and gone.
At the end of June, leaders of Edge Dairy Farmer Cooperative outlined a two-track path through Congress and the FMMO hearing system, a path they say is designed to bring fairness and flexibility back to the U.S. dairy industry.
What’s ahead?
The current farm bill expires in September 2023. There’s no timetable for a potential FMMO hearing. Discussions about the future of the FMMO system have been intensifying, with most recent debate driven by effects of the COVID-19 pandemic and centering on the Class I mover formula, negative producer price differentials (PPDs) and manufacturing or “make” allowances.
Bottom line
Developed through a multi-state dairy policy task force involving producer groups across the Upper Midwest, Edge’s proposal primarily focuses on two key principles: flexibility and fairness. Differences across the FMMO system require added flexibility to meet their respective needs, and current markets driving milk outside the FMMO system point to a need for a standard set of “contracting principles” to build a more fair and equitable pricing system.
To add flexibility, the proposal would give each of 11 individual FMMOs more authority to operate based on the geographic and market makeup of its milkshed, recognizing differences in population, farmer base and product mix.
Driven in part by the change in the Class I mover and the COVID-19 pandemic, current FMMO “uniform price” rules have led to unintended consequences of high-volume depooling and repooling, negative PPDs and declining share of total area milk production pooled on the order. The Edge proposal would create “uniform benefits” to replace “uniform prices” formulas, the mechanics of which would be developed through a collaboration of farmers and processors and then formalized through an FMMO hearing.
Declining fluid milk sales and Class I utilization are a critical threat to the future of the FMMO system, warned Marin Bozic, dairy economist with the University of Minnesota and an Edge advisory board member. He forecasts that the share of U.S. milk production utilized in beverage milk products is likely to fall from 18.3% this year to 14.5% 10 years from now. In addition, the U.S. now exports more milk solids than are used domestically for beverage milk products. Estimates are that, over the next decade, between 45% and 60% of all additional milk solids, skim solids will need to be exported, Bozic said.
Bozic said he did not anticipate a widespread overhaul to FMMOs, but rather changes that provided incentives for milk handlers and processors to remain consistently pooled regardless of milk class or product type. At the same time, producers needed more price certainty to effectively manage risk. He said depooling and negative PPDs in 2020 caught dairy producers by surprise, “making them feel like fools for having engaged with risk management.”
Going forward, specific details must be worked out through an FMMO hearing but may also require separate legislation by Congress, Bozic said. Among congressional requirements, enabling legislation is likely necessary to allow FMMOs to tweak pricing formulas currently used to determine uniform prices. Other legislation – either through a farm bill or a stand-alone bill – would address milk contracting requirements.
10 contracting principles
To provide further guidance, Edge board member Mitch Davis, of Davis Family Dairies in Le Sueur, Minnesota, outlined a set of 10 “contracting principles,” independent of FMMO regulations, to make the milk pricing system fair and equitable and strengthen trust between farmers and processors. The standards would construct contracts and supply arrangements in a way that helps processors compete and innovate. The principles include:
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Written contracts: All milk supply agreements must be in writing.
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Timely payments: Farmers must be paid in a timely manner, every two weeks, and with no more than three weeks lag. Advance checks should be paid in accordance with what is known about the current month’s prices.
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Verification of weights, test and samples: Unless a farmer opts out, third-party, certified organizations should be utilized to verify milk weights, component tests and samples. Verification organizations are also allowed to provide other services to farmers.
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Transparent pricing formulas: For farmers to be able to effectively manage risk and understand financial implications of improvement in farm practices, milk composition and quality incentive formulas (such as somatic cell count, protein and volume premiums) must be clearly spelled out in the milk supply agreements and sufficient advance notice given before incentive formulas change. Processors should be allowed to set pricing formulas as needed to successfully compete in domestic and overseas markets.
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Contract termination notice: Other than in extraordinary circumstances, processors must give a reasonable amount of time as notice before contracts can be terminated.
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Good faith principle: Processors and farmers must act in good faith, and disputes should be addressed through an arbitration process with meaningful penalties for unfair behavior.
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Equal opportunity to all farmers: No special deals should be allowed. Incentive payments offered to one patron must be offered to all patrons meeting the processor’s same criteria, including but not limited to differences for farm location, size and quality.
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Competitive risk management: Farmers should be able to effectively manage price risk using a combination of processor-specific basis contracts and private or government-supported risk management instruments.
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Exclusivity and volume limits: Processors should not impose exclusivity if imposing volume limits or two-tier pricing.
- Equal treatment of processors: These terms should apply to all milk buyers in the U.S., irrespective of their ownership structure or participation in FMMOs.
Bozic, who testified at a House Ag Committee hearing on dairy policy in June, said committee chair U.S. Rep. David Scott (D-Georgia) indicated a willingness to expand 2023 Farm Bill provisions to address fairness in contracting.
Bozic said lack of transparency in producer milk checks, including applications of negative PPDs, is creating questions over fairness and trust among many dairy producers. He cited one producer in the Upper Midwest whose May milk check contained a PPD of -72 cents per hundredweight, even though the base PPD for that FMMO was +13 cents per hundredweight.
Bozic said the change in the Class I mover – approved in consensus between the NMPF and the International Dairy Foods Association in the 2018 Farm Bill – provided a cautionary tale that policy changes must not be drafted too narrowly or without a robust FMMO hearing process.
