WCMA Notes: Consensus on Key Issues Can Get the Federal Order Reform Party Started

Posted By: John Umhoefer WCMA News,

Momentum is building for a national hearing to address reforms for federal milk marketing orders, the dairy industry equivalent to a birthday party for great grandpa.

Despite the advanced age of dairy’s federally-legislated milk pricing and pooling system, a hearing is imperative to the future health of the dairy industry.

This week, Wisconsin Cheese Makers Association released concepts for milk pricing reforms, and support for related programs and USDA services, after months of deliberation by an ad hoc federal order reform committee.

It is gratifying to see that WCMA’s highest priority, updates for product make allowances embedded in federal order pricing formulas, is a priority also touted by National Milk Producers Federation (NMPF).  In fact, three of the six reform issues released by NMPF October 25 match issues highlighted by WCMA.

WCMA ‘s pricing reform issues include:

  1. Adoption of dynamic make allowances for milk price formulas which incorporate regular cost of processing audits and current-cost price adjustors. WCMA recommends mandatory U.S. Department of Agriculture (USDA) staff audits at dairy plants at regular intervals to determine costs to produce dairy products surveyed in the National Dairy Products Sales Report. Audit data gathered from a diverse array of dairy manufacturers can assure formulas do not disadvantage one group of processors versus another group. Informal rulemaking could update make allowances on a regular basis, based on data USDA derives from dairy plant audits.

WCMA believes USDA audits should be supplemented by make allowance price adjustors – publicly-available data series vetted in pre-hearing information sessions, ratified in formal rulemaking, and tracked at regular intervals by USDA. Price adjustors would automatically adjust make allowance values.

  1. USDA collaboration with industry to address the volatility between block cheddar and barrel cheese prices used to value protein in Class 3 milk. The inconsistent difference in these prices creates a cheese milk price that consistently punishes manufacturers who face the lower of these two price series. These two formats of cheese production—block and barrel—represent distinct businesses, including differences in production assets, different end uses and distinct groups of buyers. WCMA recommends that Industry and USDA examine alternatives to the current marketplace value for protein in the Class 3 milk price in pre-hearing meetings and discussions.
  2. USDA collaboration with the dairy industry to develop a new value for other solids in the Class 3 milk price formula. The current value uses the price of dry whey, a product produced only at a small percentage of dairy manufacturing sites in the U.S. Medium and small cheese manufacturers cannot invest in capital-intensive whey processing facilities to produce dry whey, and large processors who meet consumer demand for concentrated whey protein products also do not generate the value of dry whey found in the Class 3 milk price formula. High dry whey prices impose crippling milk price costs on these manufacturers, large and small, leading to business instability and the potential for reduced competition for dairy farmers’ milk. WCMA recommends that industry and USDA examine alternatives to the current value for other solids in the Class 3 milk price in pre-hearing meetings and discussions.

WCMA’s federal order reform committee, with endorsement by our Board of Directors, also affirmed the need to maintain depooling and repooling provisions found in individual orders.

In a government-legislated milk pricing system with mandated minimum prices, the decision to participate or not participate in the milk pool is the only free-market tool dairy processors have to avoid financial losses. It is the “safety valve” on an inflexible system. Without this link to the free market, the federal milk marketing order system would face the potential for annual disassociation of milk purchased by dairy processors. Provisions allowing processors to reduce pool participation, then regain pool access, are necessary to maintain a robust community of milk buyers.

The Dairy Forward Pricing Program is a key component of the current Farm Bill, and sunsets on September 30, 2023. WCMA strongly supports continuation of this key risk management tool for producers and processors in the next (2023) Farm Bill. Permanent authorization of milk price contracting would be the best way to reincorporate the Dairy Forward Pricing Program, but a new five-year commitment in the upcoming Farm Bill is an acceptable second choice.

Finally, also for consideration in the upcoming Farm Bill, WCMA calls for additional staffing and funding for USDA’s Agricultural Marketing Service. Additional expert staff can improve the scope of and industry participation in the National Dairy Product Sales Report, as well as execute mandatory dairy plant cost-of-production audits on a routine (ongoing) basis and analyze results to update make allowances. Additional staff can also study forward-looking concepts for milk classification, pooling and pricing.

It's encouraging to see dairy organizations gather issues for a national federal order hearing.  With a unified set of issues identified, USDA can announce topics for consideration and move forward.  Detailed positions on each issue are a matter for hearing testimony, not pre-hearing hand-wringing. Reforms for issues such as 15-year-old make allowances can’t wait, and great grandpa isn’t getting any younger.