Make Allowance Updates Are Needed Now: Here's Proof

Posted By: John Umhoefer WCMA News,

There’s consensus in the dairy industry on updating make allowances in the milk price formulas at the heart of federal milk marketing orders. Halleluiah. 

These formulas, which set the prices for Class 3 cheese milk and Class 4 milk for butter and nonfat dry milk (and serve as the starting point for Class 1 and 2 milk), ideally would be updated regularly, but the mechanism for making changes is embedded in USDA’s rulemaking and public hearing process: a costly and time-consuming barrier.  

The formulas produce new classified milk prices each month, offering dairy farmers the full value of block cheddar cheese, butter, dry whey and nonfat dry milk based on a weekly survey of industry sales prices. Only the manufacturer’s cut – the allowance they’re given to make those products, pay their workers, purchase electricity, buy cheese cultures and salt, pay off debt and market and ship products – doesn’t change. Or, more accurately, it hasn’t changed in 15 years.  

It's not just the time and cost of a cumbersome rulemaking process that has stopped make allowances from being changed, it’s the sensitive nature of adjusting milk prices. In the last six months, National Milk Producers Federation, International Dairy Food Association and Wisconsin Cheese Makers Association have acknowledged that the economic health of the dairy industry requires that the make allowances in USDA’s milk price formulas need to change through time. And that time is now. 

Mechanically, adjusting make allowances is simple. Learn today’s costs for making a pound of cheddar cheese, butter, whey dry and nonfat dry milk and reset the make allowances.  The dairy industry needs this reset immediately, and it needs a mechanism to execute this accounting exercise on a regular basis – not through rulemaking and hearings that emerge as rarely as cicadas. 

Because make allowances are just data. Long term, USDA should be given the power to audit dairy manufacturing plants to track changing costs. But it will take years to grant new audit powers to USDA through the upcoming Farm Bill and then execute rulemaking and hearings and hand-wringing on how to set up this new system.  

The industry can’t wait. Updates are needed now.  And here’s a snapshot of why. 

One Upper Midwest cheddar cheese manufacturer kindly shared detailed manufacturing cost data with WCMA , not looking back through 15 years of cost increases – just looking back to 2019. This is a large, commercial cheddar block producing operation that shared examples of costs increases and – wait for it – their overall cost to produce a pound of cheddar cheese. 

Spoiler alert: their overall cost is higher than the 20-cent-per-pound make allowance offered in the Class 3 milk price. 

Base wage: Up 8.4 percent 

This manufacturer has seen their base hourly worker wage rise from $16.35/hour in 2019 to $17.72/hour in 2022. 

Health Insurance: Up 53.5 percent 

The cost of premiums for a single person policy rose nearly $300 from 2019 to 2022. 

Natural Gas: Up 106.6 percent 

The facility compared their December 2019 unit rate (MMBtu) cost to the unit rate cost in December 2022.  

40-pound block boxes: Up 25.6 percent 

The unit cost of the cardboard boxes that hold cheddar blocks has increased 12 cents in four years. 

Cultures: Up 14.3 percent 

The average per-unit increase in the factory’s top three cultures to make cheddar. 

Diesel: Up 44.9 percent  

Costs have soared to fuel the milk pick-up fleet for this cheese manufacturer. 

Salt: Up 25.3 percent 

A key ingredient in cheddar, salt prices have risen sharply since 2019. 

Nitric Acid: Up 48.1 percent  

This common chemical is used daily in the cleaning and sanitizing of dairy equipment. 

40-pound block bags: Up 68.8 percent 

Every cheddar block is sealed in a plastic film bag, and like all plastic packaging, the cost of this key protective barrier is way up since 2019.  

Electricity: Up 21.1 percent 

This manufacturer compared dollar cost per kilowatt in December 2019 to the cost in December 2022.  

Software: Up 72.8 percent 

The cost to lease the same software package for plant operations rose starkly in four years. 

Pallets: Up 15.8 percent 

Every line item cost in making cheese, including several more not shown, rose in the last four years.  

This list is just a portion of all costs involved in making and marketing a pound of cheddar cheese. This manufacturer’s software adds in dozens more lines of data to yield an overall cost of production.  In 2021, this cheddar maker’s cost of production was 30 cents/pound. That’s 50 percent higher than the 15-year-old make allowance for cheddar in the Class 3 price formula. 

Make allowance updates are needed now.