WCMA Notes: Avoid the Quick Fix for Federal Orders

Another emergency “quick fix” for federal milk marketing orders? That’s hardly the answer.

On April 23, National Milk Producers Federation voted to seek an emergency hearing to try another patch for this creaky regulatory system, knowing that among its flaws, the order system’s regular hearings can take years to reach a conclusion at a cost of millions of dollars in legal fees.

Other agriculture groups, including Edge Dairy Cooperative and American Dairy Coalition joined have joined the call for an emergency hearing.

The issue? Negative PPDs in 2020 caused by pandemic-induced gyrations in the Class III milk price – the price for milk used in cheesemaking. To avoid these massive negative PPDs in the future, National Milk Producers Federation is seeking an emergency hearing to change the Class I mover – an adjuster designed to maintain the Class I (bottled milk) price above Class III and Class IV (the price for milk used in butter and nonfat dry milk).

In 2020, the Class III price soared above the value of bottled milk, causing negative PPDs. “The cause of any negative PPD is that the Class III price is greater than the average value of the blend price [the uniform price],” Professor Mark Stephenson explained to Edge Cooperative producers in their April 2021 newsletter. When cheese manufacturers depool some or all of their milk in a month with a negative PPD, that decline in Class III milk in the pool can drag PPDs even lower.

But there’s a misconception that negative PPDs equate entirely to “lost money” for dairy farms. That’s not true. Most dairy plants chose to return all or a portion of their earnings to farms, even when they depooled some or all milk from federal orders.

In Wisconsin, the average pay price dairy farmers received at the mailbox (USDA’s announced Mailbox Milk Price) was higher than the average Class III price for 2020. Did farmers “miss out” on the big Class III money during these pandemic months? Not according to the data. Negative PPDs were announced, but overall, farmers in Wisconsin were paid an average $18.52/cwt in 2020 at the mailbox and the Class III price averaged $18.16/cwt. Similarly, the Wisconsin All Milk Price averaged $18.89/cwt, well above the Class III average price.

If you expand from Wisconsin to the entire Upper Midwest federal order, the Mailbox Milk Price in 2020 averaged $18.88, again higher than the Class III milk price. From the perspective of the blend price – the Statistical Uniform Price announced by the Order – dairy processors paid more than $2/cwt higher than the blend price demanded. Even in a crisis year, cheesemakers moved more money to dairy farms than the order expected.

Dr. Stephenson concurs: “As mentioned, most plants’ checks that I’ve seen have paid their producers more than the federal order blend price….In other words,” Stephenson wrote in the Edge newsletter, “your plant has chosen to share that value with you and keep some of it.”

“Before anyone gets judgmental about a plant keeping some of the negative PPD, I would point out that plants have experienced significant additional costs during the pandemic which have not been reflected as a change in the make allowance,” Stephenson added.

That’s a point you’re not hearing amid the cries for emergency changes to milk pricing in federal milk marketing orders. In the spring of 2020, many cheese manufacturers kept their doors and milk intakes open, knowing that buyers for their cheese had disappeared. Cheesemakers faced new storage costs, new costs for employee protection and PPE, new costs for finding replacement markets for cheese, (still) soaring costs for packaging materials and product delivery, and higher costs to repair machinery. And through it all, the make allowance in the federal order system – the cheesemakers’ share of money in federal orders – remained unchanged at its 2008 level.

Any discussion of an emergency “fix” for federal milk marketing orders is incomplete without a discussion of an update to 13-year-old make allowances. Relatedly, the wild spreads between block and barrel cheddar prices, used in the Class III milk price formula, need discussion. And so does the inflated use of dry whey prices in the Class III milk price, the continuing role of cash commodity markets to set classified milk prices, pooling issues, forward contracting, and a host of other issues.

And the fact that a regular hearing to fix any of this requires a ponderous, multi-year slog, needs discussion.

It’s no wonder the last fix for federal orders – the Class I mover these farm groups wish to change again – was run through Congress instead of the federal order hearing process. And it’s no wonder that a once-in-a-century economic upset upended this old pricing construct. Federal milk marketing orders need a comprehensive review, not a quick fix.