The Mystery of Make Allowances

Higher make allowance would allow for building more processing capacity, but they also would likely lower farmer pay prices.  ( Rick Mooney )

Dairy plants, particularly in the Northeast and Mideast, are sometimes so stretched beyond capacity that they end up dumping milk, or at least skim solids, because they have no economic way of marketing the milk. 

The dilemma is laid out in a recent issue of Choices magazine, and is authored by Andy Novakovic and Chris Wolf, dairy economists at Cornell and Michigan State, respectively. 

To read the full article, click here

Dumping occurs most frequently in late spring and early summer, when milk production is typically highest. Under Federal Milk Marketing regulations, dumped milk is assigned to “lowest use class,” typically Class IV, sometimes Class III. 

“This allows such [dumped] milk to be counted as ‘delivered’ and subject to pooling provisions of the order. Farmers who produce milk that is assigned to the lowest use class remain eligible to receive the blend price for that order,” explain Novakovic and Wolf. 

Typical percentages of dumped milk are 0.1 to 0.5% in the Mideast, and 0.2 to 0.5% in the Northeast, “but has often averaged two to five times that level in the past four years [in the Northeast],” they write.

And when dumping occurs, co-ops are forced to re-blend the payments of the 98% of milk actually sold, for example, across all of the milk they buy. “This results in a price paid to farmers that is often below the minimum blend price announced by the order,” say the economists. In Michigan, this averaging has resulted in farm milk prices $1 to $1.50/cwt below historic averages.

The obvious solution is to build more plant capacity. But the obvious solution has a number of not-so-obvious problems. The first is that the bulges in milk supply that cause dumping are not uniform throughout the year, so it might not be economically feasible or prudent to build hugely expensive processing for just a month or two of oversupply. 

The other issue is that Federal Order make allowances, the money cooperatives use to operate plants, haven’t been updated since 2007. “The problem is that market prices for non-fat dry milk and protein powders are often barely sufficient to return a profit to existing plants [with current make allowances], must less justify plant investment,” say Novakovic and Wolf. 

A higher make allowance could make processing more profitable and help justify adding processing capacity. But market prices don’t recognize make allowances, so any increase in the make allowance comes out of the price cooperatives can pay farmers. 

“While this would be encouraging news for manufacturers, it would be quite unwelcome news to farmers, who are already enduring a long period of below-average prices,” says the economists. “When the manufacturer is a cooperative, there is a paralyzing conflict of interest as to how best to represent the economic interests of their farmer owners.”

“Although calls to adjust the make allowances in federal pricing formulas are starting to be voiced, this remains a challenging proposition for cooperatives, which must convince farmers to support an action that will lower their minimum farm price just to make it feasible to build manufacturing plants that may well have low-profit performance. At best, this would have the effect of lowering every farmer’s price a bit and reducing or avoiding the re-blending deductions that are costliest to market balancing cooperatives,” says Novakovic and Wolf.

 
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