While producer opinions differed greatly on most proposals during the Federal Milk Marketing Order (FMMO) Pricing Formula Hearing, one potential change that many agreed with is the need to return to the “higher of” Class III or IV in the Class I mover formula. The Class I mover formula was changed to the average of Class III and Class IV plus 74 cents in the 2018 Farm Bill and not through an FMMO hearing process.
Vermont dairywoman Clara Ayer testified on behalf of Agri-Mark in support of the National Milk Producers Federation's (NMPF) proposals and spoke specifically about Proposal 13 and the need to update the Class I mover formula.
“As expert witnesses have testified, the current formula creates asymmetric risk for dairy farmers,” Ayer said in her testimony. “It puts a ceiling on how much more Class I skim revenue can be generated for producers than the old formula, with no downside limit on how much revenue can be lost. Since implemented, the change has cost dairy farms nationwide more than 900 million dollars in Class I revenue, with the Northeast order suffering the largest share. The impact was felt by all farmers, regardless of farm size, and was an unintended and unanticipated consequence to changing the formula.”
Michigan dairyman Doug Chapin testified in support of Proposal 13 and shared feedback he received from fellow producers.
“As chairman for Michigan Milk Producers Association, I received many concerns and questions from our dairy producers on the Class I mover,” Chapin said in his testimony. “The frustration I heard in their voices was real and well-founded by what they were witnessing in the marketplace and in their own businesses. The change to the ‘average of’ [Class] III and [Class] IV plus 74 cents was so visibly damaging to producers that the government responded with help by enacting the Pandemic Market Volatility Assistance Program.”
While he says he “appreciated this response,” it “fell short of the full impact” and “didn’t cover all the milk.”
Chapin serves on NMPF’s Economic Policy Committee and provided insight into NMPF’s proposal development process.
“I heard producers and co-op leaders from around the country state the damage caused by the current program,” he said. “The task force developed a couple plans to present to the committee. One plan was a complicated rolling average that over an extended period of time would make producers whole. The committee wanted nothing to do with complex plans that delayed the value of Class I milk getting into producer milk checks. It is in times like right now when we have tight margins and are losing value on Class I because the spread between [Class] III and [Class] IV is over a dollar and 48 cents. Today is when our farmers need that value for their businesses and their families.”
Wisconsin dairyman Kevin Krentz testified in support of reforming the dairy pricing formula back to the higher of as opposed to the average of, reducing economic incentive for de-pooling and eliminating advanced pricing of Class I milk and Class II skim milk. He emphasized that both processors and producers must be profitable.
“We need a pricing system that works for dairy farmers and pays them for the commodity they produce,” Krentz said in his testimony. “Without these reforms, we’ll continue to see small farms leave and greater consolidation in the industry. These priorities are not only in keeping with Wisconsin’s Dairyland heritage but will benefit farms across the order."
Jennifer Lawrence echoed the sentiments of other producers as she described the detrimental effects of the current Class I mover formula. Lawrence, a Maryland & Virginia Milk Producers Cooperative Association Inc. member from Pennsylvania, testified in support of the NMPF proposal to restore the Class I mover to the higher of Class III and Class IV.
“Using the ‘higher of’ in the Class I skim milk price formula would help to assure that shifts in demand for any of the products in the two classes would not lower the Class I value,” Lawrence said in her testimony. “Consequently, this would also help to reduce volatility in milk prices from month to month, bringing more stability and predictability to farmer income.”
California dairy producer and DFA member Sietse Tollenaar testified in support of the proposal and spoke to how the average of plus 74 cents Class I mover formula has impacted his farm and others in the industry.
“In 2019, the dairy industry agreed to ‘experiment’ with a Class I mover that utilized the average of the advanced Class III and Class IV skim milk prices plus 74 cents per hundredweight instead of the ‘higher of’,” Tollenaar said in his testimony. “We were told this change was important to the Class I processing industry to allow them to hedge their Class I milk. I’m not sure how that worked out for them other than our dairy’s blend price has been lower due to this change. This experiment has failed for dairy farmers, and it would benefit farmers to immediately fix the mover and return the revenue to my blend price on a monthly basis.”
Lone Star Milk Producers member Brian Hemann, who operates four farms in southwestern Kansas and the Oklahoma Panhandle, testified in support of Proposal 13, emphasizing the importance of taking “immediate action to rectify the situation.”
“The implications of the existing formula, with its inherent flaws and unintended consequences, have had a profound and detrimental impact on dairy farmers and the stability of the industry as a whole,” Hemann said in his testimony.
He described how the change to the Class I mover affected his farm’s risk management strategy.
“My farm risk management strategy is built on the ability to forecast Federal Order blend prices and blend price changes. The current formula disrupts blend price forecasting due to the significant increase in the incidence of depooling and hinders my effective hedging against the blend price, causing instability and financial vulnerability for my dairy farms. Other Lone Star members have also experienced the same hedging difficulties, and we all have felt the impact of lower Class I prices in our monthly milk checks,” Hemann said.
A producer in the Southeast said the change to the Class I mover also had negative effects in her area.
“The change has caused significant negative price impacts at the farm level,” Florida dairy producer Brittany Nickerson-Thurlow said in her testimony. “Some of those were certainly exacerbated by extraordinary events like COVID. However, even three years later after the pandemic, we are seeing negative impacts to our pay price today because of this change.”
Nickerson-Thurlow is a Southeast Milk Inc. member and testified in support of all five NMPF proposals, specifically testifying to Proposals 13 and 19. She spoke about how the change to the Class I mover has impacted her farm.
“If I compare the current calculation to the previous calculation from 2019 to June of 2023, and use a standardized 3.5 percent butterfat, my family’s farm has lost almost 600,000 dollars over a four-year period,” she said. "While that may sound small in the grand scheme, as a family farm, that is a lot of money to us. Furthermore, if we use the same formula to estimate the total impact to the Federal Order 6 market, it totals nearly 43 million dollars farmers have lost because of this change. A 43 million dollar loss is in no way revenue-neutral to farmers.”
In closing, she encouraged the USDA to think about the farm first when making their decisions.
“This Federal Order hearing will change the future of the dairy industry,” Nickerson-Thurlow said. “Without our farms, there are no processors, there are no checkoff organizations, there are no Federal Orders, and the economic impact to suppliers, employees and rural economies is lost. The farms are who feed this supply chain from top to bottom and from left to right.”
Florida has lost a significant number of dairy farms in recent years, and she says that may continue if something doesn’t change.
“Without significant changes in the dairy industry, especially in updating the pricing formulas in Federal Orders, we will have more dairy farm attrition,” Nickerson-Thurlow said. “Our Southeast dairy farms have been economically hindered by both the Class I differentials and the Class I mover calculation change. If continuing to ensure an orderly market for Class I milk and keeping a local food supply remain the intent of the Federal Order, we need meaningful changes, and we need them as soon as possible!”
