As the dairy industry grapples with whether — and how — to best balance the interests of producers and processors that are all suffering from higher production costs, NMPF continues to push a compromise approach to resolving the make allowance dilemma, at least on an interim basis.
At issue is a request by both cooperative and propriety dairy processors to increase the make allowance they are allowed to keep when they manufacture Class III (cheese) and Class IV (butter and nonfat milk powder) products. The U.S. Department of Agriculture held a hearing in January on a proposal to raise the make allowances for those products, because higher energy costs are depressing profit margins at processing plants. Raising the make allowances would improve the economics of cheese and butter/powder manufacturing, but such an adjustment would also reduce dairy producer prices at a time when milk prices are at a three-year low.
After months of speculation, the USDA announced in late June that it would not make a decision on the make allowance issue until it had time to obtain more input from the industry.
“Given the divisions within the dairy sector about this issue, USDA was faced with a no-win situation,” said Jerry Kozak, President and CEO of NMPF. “USDA’s non-decision illustrates that when the industry is divided, it becomes much harder for government regulators to act. That’s why NMPF had developed a proposal that acknowledges the concerns of cooperatives about their economic health, while also addressing the reality that producer prices have to be considered along with manufacturer’s margins.”
NMPF’s proposal, which the USDA ruled out of order during its hearing on make allowance adjustments this past winter, would allow the immediate adjustment of the Class III and IV manufacturing allowances. The make allowances would be tied to an energy formula index, so that if energy prices drop from their current elevated levels, so would the make allowances. Kozak said the NMPF indexing feature “doesn’t create winners and losers, and is a fair approach.”
The other key aspect of the NMPF compromise, and one that blunts the revenue impact of higher make allowances, is to not use the new Class III and IV product prices as the Class I and II price movers. By continuing to price Class I (fluid milk) and Class II (ice cream and yogurt) products off of the current Class III and IV price formulas, the revenue loss for farmers is reduced.
“By holding harmless the Class I and II price formulas, we can partially insulate farmers from an upward adjustment in make allowances,” Kozak said. “We encourage USDA to issue an interim decision based on NMPF’s compromise proposal, while it gathers more input. This gives the department an approach that balances both producer and manufacturer concerns.”