Citing a “significant and unprecedented imbalance” between milk supply and demand, Dairy Farmers of America (DFA) is requesting increased milk pooling flexibility in the Northeast federal milk marketing order (FMMO 1).
In a letter to Northeast market administrator Erik Rasmussen on Jan. 12, Elvin Hollon, DFA vice president of fluid marketing/economic analysis, outlined the need to temporarily ease pooling restrictions. DFA’s request involves interpretation and application of the “Dairy Farmer for Other Markets” (DFOM) provision of FMMO 1 language.
Pooling, depooling and repooling
Trying to explain all the factors behind federal order pooling under a classified pricing system would take a chapter in a book. In layman’s terms, milk and its value are pooled within a FMMO marketing area. Processors purchase the milk, paying different prices based on its use into a pool. Producers are then paid a weighted average or “blend” price for all milk pooled in that order.
In the not-too-distant past (and yet today), depooling occurred due to the nature of FMMO price announcements and cheese price volatility. Monthly Class I (fluid) and Class II milk prices are announced in advance, while Class III and Class IV prices are announced after end-product pricing formulas have determined their values.
With the Class I price announced in advance, there were times when cheese prices rocketed higher, making the Class III milk price higher than Class I price in a given month. Co-ops with cheese plants seeking to capture the full value of the higher Class III milk would depool it – instead of pooling it and paying into the fund to share in the order blend price. Then, when class prices returned to normal, milk would be “repooled” to capture the value of the blend price.
Concerned that depooling would create wide month-to-month gyrations in milk available for fluid purposes, federal orders tightened depooling/repooling rules.
As you’ll see, the current Northeast situation is somewhat different. Instead of depooling to capture the full value of a class of milk in the pool, DFA’s proposal seeks to depool milk to limit the negative impact and spread the costs of getting rid of excess milk.
Northeast pooling requirements strict
When it comes to pooling requirements, all 11 federal orders have the same types of regulation, but they play out differently depending on the market, Hollon said in an interview with Progressive Dairyman. The Northeast FMMO rules are the most restrictive, forged by federal order history in the highly populated area.
Prior to FMMO reforms and consolidation, there were a large number of orders in the Northeast. Due to the close proximity, tight pooling restrictions were implemented to avoid order jumping for a higher milk price.
So, while other federal orders allow depooling/pooling on a monthly basis, any milk depooled in FMMO 1 – even for a couple of days per month – faces much more restrictive rules for returning to the pool. “As a result, there’s virtually no milk depooled in the Northeast,” Hollon said.
The Northeast market
FMMO 1 encompasses Connecticut, Delaware, Massachusetts, Maryland, New Hampshire, New Jersey, Rhode Island and Vermont as well as portions of New York, Pennsylvania and Virginia. It’s an area of substantial milk production growth at a time when fluid milk consumption and milk processing capacity have been on the decline.
Comparing the third quarter of 2016 to the same period in 2015, Hollon said milk production in the 11 states comprising FMMO 1 rose 140.2 million pounds, an increase of 25 tanker loads per day. All of that growth has come from increased milk production per cow: Cow numbers in the 11 states were down 12,600 head during the same period, based on USDA data.
As Hollon says, ”It’s been pretty good to be a cow in the Northeast. The market is pretty awash with milk. There’s been growth almost every where.”
While milk production has increased substantially, variability in Class I needs and reduced dairy plant capacity and processing schedules in the marketing area have led to periods of surplus milk.
While reduced processing capacity due to plant closures is somewhat offset by the expansion or construction of another plant, Hollon estimates the marketing area has lost about 165 million pounds of monthly processing capacity since 2013.
Entering 2017 flush production months, milk oversupply pressure will increase. And, adding to the imbalance, there’s also concern over Canada’s policy effectively restricting markets to U.S.-produced ultra-filtered (UF) milk. According to Hollon, industry analysts estimate that manufacturers in New York alone are selling more than 300 million pounds of skim milk equivalent annually. If Canada’s policy remains in place, milk previously headed north of the border will need to find a market outlet in an already surplus situation.
What to do with excess milk?
Every federal order has provisions for dumping pooled milk, although generally those allowances pertain to quality or safety issues. In almost all cases, the milk has to be received in a processing plant. There are exceptions, such as following last year’s Snowstorm Goliath in Texas and New Mexico, where milk was disposed of on farms.
Since the spring flush season of 2014, the FMMO 1 market administrator has allowed special provisions to deal with excess milk.
In some cases, the cream has been skimmed off and marketed, with the remaining portion either dried if it had a market or disposed of. In extreme cases, excess milk has been dumped into farm manure pits, saving on transportation and in-plant disposal costs.
In both cases and with proper documentation, the milk was pooled on the Northeast order, enabling farmers to receive at least some payment.
For pooled milk dumped on the farm, co-op members received the difference between the lowest class price and the blend price. For example, during April-August 2016, producer prices for dumped milk ranged between $1.38 to $2.32 per cwt. For milk that was salvaged for cream, payments averaged between $7-$8 per cwt.
“Dumping milk returns less than $2 per cwt, but $2 is better than $0; $8 is better than $2, and fully pooling is better than cream salvage, but you work with the options you have,” Hollon said.
Co-op members, non-members treated differently
A second rule coming into play – common in all federal orders – regards the federal minimum blend price paid for milk within the order.
Under the Capper-Volstead Act and federal order rules, cooperatives are not bound to pay the minimum blend price. According to Hollon, the exemption recognizes that members share in the co-op’s profits and losses, and there are times when a co-op has financial obligations related to plant expansion or construction of new facilities, or times of the year when a plant is losing money.
However, for producers who are not co-op members but market milk through the co-op, they do not share in co-op profits nor are they obligated to share in costs or loses. So, non-members receive the minimum blend price all the time.
Through its marketing arm, Dairy Marketing Services, DFA markets milk for about 5,000 producers in the Northeast order. Of those, about 4,100 are members of DFA or DMS affiliated co-ops, and 900 are independent producers.
Due to federal order blend price payment rules, the balancing costs to move or dispose of pooled excess milk can only be spread across co-op members
“Intense milk production has cut into milk premiums,” Hollon said. “Due to the large volumes of excess milk, current balancing costs – which can’t be spread to non-members have become excessive.”
DFA’s request seeks pooling/depooling flexibility on an as-needed basis for a six-month period, April 1-Sept. 30, 2017. Outside of that time frame, DFOM restrictions would be interpreted as they currently are.
DFA contends the temporary interpretation of the DFOM provision, allowing short-term depooling without the long-term repooling restrictions, would allow producers to receive the federal order blend price on a majority of milk produced during the month, seeing a lesser value only on the depooled surplus milk.
Rasmussen originally set a Feb. 10 deadline for input on DFA’s proposal. That’s since been pushed back to March 10.
Despite the extension, DFA is sticking to its request to ease pooling restrictions on April 1, sending letters to all producers informing them of the potential change.
Without that provision, many independent producers in FMMO 1 would be forced to accept a significant price reduction for all milk, since all their milk would be de-pooled. Additionally, milk assembly and transportation costs will increase noticeably to accommodate pooling the excess milk.
“In a situation where the market is so long, that would be economically difficult for the independent farms,” Hollon said. “These are all family farmers, just like our members. We’re trying to give them advance notice. We want to give them a choice of either joining another co-op, join DFA if they choose, or find a milk market with a proprietary plant. The doors are open.”
Pennsylvania: State restrictions
In addition to the Northeast FMMO, DFA has also taken its request to the Pennsylvania Milk Marketing Board, which has similar pooling/depooling restrictions for milk produced and marketed within the state.
Upper Midwest: A different request
While the situation in the Northeast is unique, processing capacities are also being stretched in Upper Midwest FMMO 30, where milk production is growing in combination with plant closures and a decline in fluid use. In late December, members of two organizations requested reduced Class I shipping requirements and diversion limits in that federal order.
Making the request were members of the Central Milk Producers Cooperative (CMPC), which includes DFA, FarmFirst Dairy Co-op, Foremost Farms USA, Land O’Lakes, National Farmers Organization, Scenic Central Milk Producers Cooperative and Swiss Valley Farms.
An identical request was submitted by members of the Upper Midwest Marketing Agency (UMMA). In addition to DFA, NFO, Land O’Lakes and Foremost Farms, UMMA members include Associated Milk Producers Inc., Bongards Creamery, First District Association, Ellsworth Creamer and Plainview Milk Products.
The deadline for comment on that request was recently extended until March 1.
- Progressive Dairyman
- Email Dave Natzke