USDA releases proposed changes to Federal Milk Marketing Orders

Editor’s Note: This is part one of a two-part series discussing recommendations resulting from the Federal Milk Marketing Order hearing process.

MADISON, Wis. — On July 1, the U.S. Department of Agriculture issued their recommended decision on the Federal Milk Marketing Orders hearing process. From August 2023 to January, the USDA considered 22 proposals during 49 hearing days.

To help dairy producers and other industry professionals understand what was proposed, Professional Dairy Producers invited three economic experts to participate in a Dairy Signal webinar July 10: Dr. Charles Nicholson from the Department of Animal & Dairy Sciences and Agricultural & Applied Economics at the University of Wisconsin-Madison; Christopher Wolf, E.V. Baker Professor of Agricultural Economics and Director of Land Grant Affairs at Cornell University; and Mark Stephenson, retired from UW-Madison as Director of Dairy Policy Analysis.

The recommended decision included five categories of amendments: milk composition factors, barrel cheese price, make allowances, base Class I skim milk price, and Class I and Class II differentials. Participants can  comment on the proposed amendments by Sept. 13, and the USDA will consider those comments and possibly make changes before the final amendment is released.

Wolf said the USDA proposes to update milk composition factors to bump up closer to the average for milk production in the U.S. This would equate to 3.3% for protein and 6% for other solids, totaling 9.3% non-fat solids. Currently, it is at 9% non-fat solids.

Secondly, the USDA proposed removing the 500-pound barrel cheese and using only the 40-pound cheddar block to determine the monthly average cheese price when deciding component values.

“Right now, we have a weighted average split between barrels and blocks and there’s been some volatility in recent years,” Wolf said. “When it was originally proposed, there was the idea the barrels would usually be about 3 cents a pound discount to the blocks. Some of those relationships have moved around, sometimes in unexpected ways, for people in the last few years.”

An increase in make allowances was also proposed. The make allowance accounts for the manufacturing costs of turning milk into various products. The proposal increases cheese from 20 cents to 25 cents per pound, butter from 17 cents to 22.5 cents, non-fat dry milk from 16.8 cents to 22.7 cents and dry whey from 20 cents to 26.5 cents. The last time make allowances were changed was in 2008.

“The reason farmers care about this is that if everything else stays the same, increasing that manufacturing allowance is going to lower the component price, which is the milk price,” Wolf said. “What specific effect it’sgoing to have depends on where you’re located, the current situation with premiums, what products we’re talking about and the length of run.”

Wolf shared an example of the butterfat price when comparing the proposed make allowance to the old make allowance. If the butter price is $2per pound, and the yield is 1.211, under the old make allowance the butterfat price would be $2.21 per pound. Under the new make allowance, the butterfat price would be $2.15 a pound.

“If we were to multiply that through by your butter yield right now, then we’d be talking about possibly a quarter per hundredweight, but that’s assuming that nothing else is changing in the base part of your price,” Wolf said.

Stephenson said the make allowances are being used to back calculatethe value of milk brought into a plant.

“If you don’t change this make allowance at all over time, you end up not being able to recapture the margins needed to pay for the milk,” Stephenson said.

The industry had reached that point, he said, and that was part of what was seen with much of the de-pooling that was occurring. A manufacturing plant is not required to be pooled or participate in federal orders. If they cannot recover milk costs with their product prices, then some might choose to opt out of the federal milk marketing order.

“Bringing these make allowances back up takes you in the right direction,” Stephenson said. “They have been updated to probably current average costs but not all the way.
Over the last decade, we’ve seen premiums erode between processors and farms. That’s an indication we’ve got a problem with our pricing formulas. Hopefully this price increase gives us a little bit more margin where we can begin to see premiums grow again.”

In the base Class I skim milk price category, Wolf said the proposed change is to essentially undo what was changed in the 2018 farm bill that went into effect May 2019.

“They moved away from the ‘higher of’ for the Class I, Class III and Class IV to make an ‘average of’ plus 74 cents,” Wolf said. “The new proposalgoes back to the higher-of and that’s certainly something producers have paid a lot of attention to in the last few years as we’ve seen Class III and Class IV diverge in such that higher-of would have been a higher base Class I skim milk price.”

A lot of discussion during the hearing focused on use of or potential use of risk management by fluid processors and the growing extended shelf-life marketing Class I, Wolf said. Class I processors want to think about longer-term agreements and want the ability to know what that was going to be further out so they could assign a three month or a six month or longer contract.

“USDA did what I think is a clever solution,” Wolf said. “For extended shelf life, they changed the base Class I milk price to be a 24-month rolling average with a 12-month lag so that extended shelf-life processors will have some idea what that price is going to be, and they can think about using that for risk management.”

For Class I and Class II differentials, USDA proposes keeping the $1.60 base differential and adopting modified location-specific Class I differential values.

“They’re proposing for Class I differentials based on location across every county in the U.S.,” Wolf said.

Nicholson believes USDA recognized they are taking money out of the hands of farmers to some extent with the increase in make allowances, however, he said raising the Class I differential side is a way of trying to perhaps put money back into the pools shared among dairy farmers by charging the beverage milk processors more for the farm milk used in their products.

“At the end of the day, this isn’t something USDA just says, ‘OK we’re going ahead and doing this,’” Nicholson said. “This is something producers and co-ops are going to have the opportunity to vote on. But if you don’t agree to these changes, then essentially you end up in a situation where there’s no price regulation for your particular area at all. Ultimately, the decision is in the hands of dairy producers and their co-ops.”

Wolf recommends dairy producers have discussions with their co-op board or processor to gauge their thoughts on the proposed amendments and potential impacts of those amendments. Stephenson said if a person does not like the changes, reverting back to the previous federal orders is not possible.

“Either you accept all these changes, or you don’t have a federal milk marketing order,” he said. “Your vote needs to be thinking about, am I better with this modified order or having no order at all?”