A recent decision by the U.S. Department of Agriculture to reclassify how a popular low-carb dairy beverage is priced will mean less revenue for dairy farmers, and illustrates why the USDA needs to change its rules on pricing fluid milk products, according to the National Milk Producers Federation.

In a legal decision issued October 27, the Administrative Law Judge at the USDA found that H.P. Hood, the maker of “Carb Countdown” milk beverage, was paying farmers too much for the milk used to produce the product.  Until now, Carb Countdown was priced as a Class I product by the USDA, meaning H.P. Hood was obligated to pay producers the highest value for milk under the Federal Milk Marketing Order system.  Hood argued that the USDA was miscalculating the level of milk solids in the product, and that because that level was actually below the USDA’s solids threshold for Class I beverages, its product should be priced at the lower, Class II level. 

The USDA’s judge last week agreed with Hood’s petition, and now Hood will be refunded millions of dollars, money that will be deducted from the milk checks of farmers in regions where Carb Countdown was processed by Hood and several other processors.

The real concern with this ruling, according to NMPF, is that “future sales of this product – and other potential products like it – will return less money to farmers,” according to Jerry Kozak, President and CEO of NMPF.

“Low-carb products such as this one are designed to compete with and replace traditional Class I products like conventional fluid milk,” Kozak said.  “But as a Class II product, they don’t return the same price to farmers, and that is a potentially major threat to our producers’ revenue,” he said.

In light of the potential reduction in sales in the Class I market from products like Carb Countdown that are formulated to meet the Class II pricing threshold,   NMPF earlier this year petitioned the USDA to shift how it classifies fluid milk products.  Rather than keeping the existing solids nonfat threshold of 6.5%, under which low-carb milk beverages are classified as Class II products because of their lower milk solids amounts, NMPF is urging the USDA to shift to a protein threshold for milk products.

Under a protein standard where any product below 2.25% protein is considered Class II, low-carb products, because of their proportionally higher level of dairy proteins, will be returned to the Class I category – meaning that processors of such products will have to pay farmers a higher price for the milk used to make them.

“There’s been some confusion lately in our industry about exactly how fluid milk products are and should be priced,” Kozak said.  “This USDA ruling really helps make the issue simple: if we don’t get the USDA to redefine its Federal Order pricing criteria, then we face the real threat of a loss of Class I sales from products that are priced as Class II.”

Kozak said the current issue is analogous to how some Federal Order pricing regulations had to be adjusted in the 1960s, when skim milk first became widely available.

“Forty years ago, nonfat skim milk was priced at the Class II level, and no one was too concerned because it was felt that milk without fat would never catch on in popularity,” Kozak said.  “But as its sales began to rise at the expense of Class I milk products, dairy producers realized that some adjustments were necessary in how skim milk was priced, otherwise it would have really become a major economic problem for us in the years since.  The situation today, with a new generation of dairy beverages that are competing with and taking sales from conventional Class I products, is no different.”

The National Milk Producers Federation