In the analysis of the recent Federal Milk Marketing Order (FMMO) hearing, one major piece of information has been overlooked: the Class I Mover proposals submitted by the Milk Innovation Group (MIG) and International Dairy Foods Association (IDFA) would have paid dairy farmers on average between 35-40 cents more per cwt than the National Milk Producers Federation “higher-of” proposal over the past two years. Over time, the NMPF, IDFA, and MIG proposals result in roughly equal payments to dairy farmers.
For years, dairy producers and processors have been discussing proposed regulatory changes to ensure the FMMO system better reflects contemporary market realities. Since the last major FMMO changes implemented in 2000, American consumer preferences have shifted to the point where total cheese consumption has increased by 58% while fluid milk consumption has declined by 23%. Other major shocks including COVID-19, supply chain challenges, fuel prices, and high inflation have impacted all of dairy from the farmer and processor to the end customer, whether retail or wholesale, foreign or domestic.
To prepare for the FMMO hearing, dairy stakeholders conducted market and economic research and developed proposals to improve the current system. During the hearing itself, USDA examined that data and analysis with the assistance of witness testimony under oath and before an Administrative Law Judge. Years ago, Congress established this legal procedure to ensure USDA sets FMMO regulations based on thoroughly reviewed facts, economic data, and market principles that would best serve the dairy industry and their consumers. At the direction of the Secretary, the USDA considered six different proposals to update the base Class I skim milk price, or the Class I mover. The dairy processors submitted two proposals, and both suggested changing the mover. Dairy processors agree with farmers that the Class I mover needs updating.
To that end, both IDFA and MIG proposed updating the current average-of Class I mover formula to change the current fixed $0.74 adjuster to address dairy producer criticism when there’s a widespread between Class III and IV milk prices. Specifically, our proposals retain the “average-of” formula, but deploy dynamic adjusters based on the “higher-of” and simple average relationships that will increase the price paid dairy farmers when the spread widens between Class III and IV milk. These proposals will result in about the same returns for farmers as the “higher-of” mover over time, using either monthly or annual adjustments that better reflect the economic changes in the marketplace than the current formula. In fact, the MIG and IDFA Class I mover proposals would have paid dairy farmers significantly more on average over the past two years than the “higher-of” mover proposal.
IDFA and MIG made these proposals to also reflect the reality that Class I processors and their customers are currently hedging fluid milk costs, just like makers of all other dairy products. In particular, numerous Class I processors testified that the current average-of mover encouraged them to hedge their price risk and they are currently utilizing risk management tools. Others testified that they intend to start because their customers are demanding more price stability. These are the same types of risk management tools that farmers and cooperatives currently use to manage their businesses.
Our proposals both protect the dairy farmer and enable Class I market participants to continue to manage price risk. Risk management allows fluid milk processers to provide consumers with more stable, predictable pricing at the shelf and on the menu. We think price stability is critical to stopping the decline of fluid milk consumption and will help maintain dairy’s overall growth, which benefits the dairy farmer, cooperative, processor, and consumer.
The hearing has ended and USDA is working now on all the FMMO pricing changes, including the Class I skim formula. Secretary Vilsack has expressed USDA’s commitment to issue its final decision on Federal Order updates before the end of 2024, consistent with Federal law. Some have demanded Congress step in to immediately restore the “higher-of,” which would serve to preempt the USDA experts and cause more division within our industry. We all know that the dairy industry has fundamentally changed in the last 25 years and the current FMMO system is not supporting growth and prosperity across the dairy supply chain. Let’s all give USDA the time and respect it deserves to amend these complex, outdated formulas to reflect the reality of the modern dairy market and reunite our industry.
Written by: Mike Brown, International Dairy Foods Association’s chief economist and Sally Keefe, an economist consultant to the Milk Innovation Group.
