With discussions about the future of the Federal Milk Marketing Order (FMMO) system intensifying, leaders and advisers of Edge Dairy Farmer Cooperative said a two-track path through Congress and the FMMO hearing process is necessary to bring fairness and flexibility back to the U.S. dairy industry.
“Edge is intently focused on strengthening the relationship between farmers and processors in a way that increases transparency, fairness and competition, and gives farmers a reasonable amount of price certainty,” the cooperative’s CEO, Tim Trotter, said in a press conference, June 27.
Based on milk volume produced by its members, Edge is the third largest dairy cooperative in the country, with member farms located in Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Ohio, South Dakota and Wisconsin. Headquartered in Green Bay, Wisconsin, Edge does not market or process milk but serves as an FMMO verification cooperative and policy advocacy organization for dairy farmers. Members do business with more than 30 private processors.
More than a year ago, Edge unveiled a “Class III Plus” plan to address widespread unhappiness over 2018 Farm Bill changes to the “Class I mover,” which dramatically reduced producer revenues on fluid milk marketed through FMMOs. Since then, FMMO debate has also focused on negative producer price differentials (PPDs), manufacturing or “make” allowances and other issues.
Developed through a multi-state dairy policy task force involving producer groups across the Upper Midwest, Edge’s broader proposal primarily focuses on two key pillars for both producers and processors ― flexibility and fairness.
To add flexibility, the proposal would give each of 11 individual FMMOs more authority to operate based on the geographic and market makeup of its milkshed, recognizing differences in population, farmer base and product mix.
“More regional flexibility in the federal orders would benefit everyone,” said Mitch Davis of Davis Family Dairies in Le Sueur, Minnesota. Davis, whose company is involved in both milk production and processing, is a member of Edge’s board of directors and participated in the Upper Midwest task force. “With our proposal, each order would have the authority to operate its milkshed in a way that makes sense for that order.”
Driven in part by the change in the Class I mover and the COVID pandemic, current FMMO “uniform price” rules have led to unintended consequences of high-volume depooling and repooling, negative PPDs and declining share of total area milk production pooled on the order. (Read: Milk marketings through FMMOs are falling and here’s why.) The Edge proposal would create “uniform benefits” to replace “uniform prices” formulas, the mechanics of which would be developed through a collaboration of farmers and processors and then formalized through an FMMO hearing.
Bozic: FMMOs losing relevancy
Declining fluid milk sales and Class I utilization are a critical threat to the future of the FMMO system, warned Marin Bozic, dairy economist with the University of Minnesota and an Edge advisory board member. He forecasts that the share of U.S. milk production utilized in beverage milk products is likely to fall from 18.3% this year to 14.5% 10 years from now. In addition, the U.S. now exports more milk solids than are used domestically for beverage milk products. Estimates are that over the next decade between 45% and 60% of all additional milk solids, skim solids will need to be exported, Bozic said.
Under uniform pricing formulas, those market forces mean one type of dairy product manufacturer has to subsidize another type of manufacturer, said Bozic, citing recent Class III and Class IV depooling practices.
“We're not talking just about future FMMOs. We're talking about the present-day situation,” he said. “The only way that federal orders do not become irrelevant, first of all in the Upper Midwest but later also to other regions where most milk goes to manufacture their products, is if we go back to basics,” Bozic said.
Bozic said he did not anticipate a widespread overhaul to FMMOs but rather changes that provided incentives for milk handlers and processors to remain consistently pooled regardless of milk class or product type. At the same time, producers needed more price certainty to effectively manage risk. He said depooling and negative PPDs in 2020 caught dairy producers by surprise, “making them feel like fools for having engaged with risk management.”
Going forward, specific details must be worked out through an FMMO hearing but may also require separate legislation by Congress, Bozic said. Among Congressional requirements, enabling legislation is likely necessary to allow FMMOS to tweak pricing formulas currently used to determine uniform prices. Other legislation – either through a farm bill or a stand-alone bill – would address milk contracting requirements.
10 contracting principles
To provide further guidance on fairness, Davis a outlined a set of 10 “contracting principles,” independent of FMMO regulations, to make the milk pricing system fair and equitable and strengthen trust between farmers and processors. He noted that certain FMMO requirements, such as regular payment and verification, do not currently apply to depooled milk and would no longer be mandated if FMMOs were disbanded.
The standards would also construct contracts and supply arrangements in a way that helps processors compete and innovate. The principles include:
- Written contracts: All milk supply agreements must be in writing.
- Timely payments: Farmers must be paid in a timely manner, every two weeks, and with no more than three weeks lag. Advance checks should be paid in accordance with what is known about the current month’s prices.
- Verification of weights, test and samples: Unless a farmer opts out, third-party, certified organizations should be utilized to verify milk weights, component tests and samples. Verification organizations are also allowed to provide other services to farmers.
- Transparent pricing formulas: For farmers to be able to effectively manage risk, and understand financial implications of improvement in farm practices, milk composition and quality incentive formulas (such as somatic cell count, protein and volume premiums) must be clearly spelled out in the milk supply agreements and sufficient advance notice given before incentive formulas change. Processors should be allowed to set pricing formulas as needed to successfully compete in domestic and overseas markets.
- Contract termination notice: Other than in extraordinary circumstances, processors must give a reasonable amount of time as notice before contracts can be terminated.
- Good faith principle: Processors and farmers must act in good faith, and disputes should be addressed through an arbitration process with meaningful penalties for unfair behavior.
- Equal opportunity to all farmers: No special deals should be allowed. Incentive payments offered to one patron must be offered to all patrons meeting the processor’s same criteria, including but not limited to differences for farm location, size and quality.
- Competitive risk management: Farmers should be able to effectively manage price risk using a combination of processor-specific basis contracts and private or government-supported risk management instruments.
- Exclusivity and volume limits: Processors should not impose exclusivity if imposing volume limits or two-tier pricing.
- Equal treatment of processors: These terms should apply to all milk buyers in the U.S., irrespective of their ownership structure or participation in FMMOs.
Bozic, who testified at a House Ag Committee hearing on dairy policy, June 22 (Read: DMC, FMMO reform highlight House Ag Committee dairy hearing), said committee chair U.S. Rep. David Scott (D-Georgia) indicated a willingness to expand 2023 Farm Bill provisions to address fairness in contracting.
“Fairness in contracting requires political will but does not require billions or even hundreds or maybe even 10s of millions of dollars for implementing it,” Bozic said.
Bozic said lack of transparency in producer milk checks, including applications of negative PPDs, is creating questions over fairness and trust among many dairy producers. He cited one producer in the Upper Midwest whose May milk check contained a PPD of -72 cents per hundredweight, even though the base PPD for that FMMO was 13 cents per hundredweight.
“We need to go beyond federal orders; we need to set a new foundation for success and trust between producers and processors,” Bozic said.
Trotter said the priorities outlined in the press conference were goals, with continued collaboration and communication necessary to implement them. He and Bozic said coming to a consensus on dairy pricing policies would require involvement of producers, processors, trade associations and other organizations.
Bozic said the change in the Class I mover – approved in consensus between the National Milk Producers Federation and the International Dairy Foods Association in the 2018 Farm Bill – provided a cautionary tale that policy changes must not be drafted too narrowly or without a robust FMMO hearing process.
“There's a lot more conversation that has to take place,” Davis added. “Both sides of the equation need to have a lot more conversation to understand what a productive, mutually beneficial and equitable contracting situation would look like.”