WCMA Notes: Delayed Relief for Processors

Posted By: John Umhoefer WCMA News,

The Federal Order hearing has finally ended – four months later than planned – but the urgency for quick reforms has not.

The cost to produce dairy products is not subsiding nearly a year after Wisconsin Cheese Makers Association (WCMA) and International Dairy Foods Association (IDFA) asked Dr. Mark Stephenson to survey costs among industry dairy processors and hired Dr. Bill Schiek, dairy economist and director of the Dairy Institute of California, to estimate 2022 production costs based on earlier audited cost data from California regulators.

Inflation in costs since 2008 – the last time make allowances were updated – is just common sense. But soaring costs in recent years, accelerated by the economic tumult of the COVID pandemic, shocked the system. Wages, and costs for transportation, packaging, ingredients, insurance and more spiked and have not subsided. Has your company lowered wages?

Rising costs for insurance have been discussed less than wage rates, shipping and packaging. One Wisconsin cheese manufacturer noted a 36 percent increase in their property/auto/liability coverage in 2023 and a doubling in the premium for umbrella liability coverage (with no increase in limits).

About nine months ago, in the spring of 2023, the combined data from Dr. Stephenson and Dr. Schiek found that dairy plants, on average, needed significantly higher rates per pound to sustainably produce cheddar cheese, butter, nonfat dry milk and dry whey.  That increase, for example, from the current 20 cents per pound for cheddar to the average cost of 28.4 cents per pound, means cheesemakers need a 40% make allowance increase in USDA’s Class 3 milk price formula to match today’s cost to produce.

USDA’s diligent effort to have all voices heard at the national federal order hearing has resulted in a hearing that ended four month later than planned.  Since each step in this regulatory journey to update milk pricing has a stated time frame, it appears that USDA will finish this epic project and make changes effective in the latter half of 2025.

In hearing testimony, WCMA and IDFA proposed phasing in new make allowances. We presumed a starting date of January 1, 2025 – already two years later than Stephenson’s and Schiek’s data showed a need for 28.4 cents a pound to make cheddar.

Then, instead of locking in new make allowances in 2025, our trade organizations proposed slowly stepping up increases in 2025, 2026, 2027 and 2028 to ease in the changes.  That offer will knowingly stress dairy processor bottom lines: processors needing 28.4 cents to make cheddar in 2023 will face a long wait for relief.

How much cost recovery are cheesemakers delaying? Using a baseline of 2023 Class 3 milk volumes and component test levels in federal orders, the stairstep plan to lift make allowances means cheesemakers in 2025 (hopefully the first year of stair stepping) will push $675 million back into the milk price instead of making the 28.4 cents they need.

In the second year of stair stepping toward a 28.4-cent make allowance, cheesemakers will push $451 million back to dairy farm milk prices. In the third year, cheesemakers will push back $225 million to dairy farmers. All told, by delaying their need for 28.4 cents to make cheddar, cheesemakers are sending $1.35 billion they need to cover their costs back to dairy farm milk prices.

The extended timeline of this national hearing will extend the wait for cheesemakers and buttermakers and whey processors and powder driers seeking the make allowances they need. The dairy industry is assured an implementation date for federal order changes that is later than initially thought. Rather than reaching the final stair step for new make allowance in January 2028, as WCMA and IDFA proposed, the lengthened timeline could set the final step set back to late in 2028.

And that presumes USDA will decide to accept dairy processors’ data-driven request to set the new cheddar make at 28.4 cents.  If USDA picks any figure lower than this, processor red ink will flow for years to come – with a new set of fixed make allowances that never reach the level that industry requires. And let’s face it, the 28.4 cents cheesemakers needed in 2022 is already old news. Inflation will continue to push up costs, but the dairy industry will have no stomach for another costly national hearing.  

There is industry consensus around a future where audited USDA surveys of dairy plants could set new make allowances every few years. But that future system is not certain, and its implementation – many years in our future – will be too late to stem make allowance losses in 2024, 2025, 2026, 2027 and 2028.