With eyes on potential reform, several dairy producers and industry representatives told a Senate Ag Committee subcommittee that it’s time to take a comprehensive review of the Federal Milk Marketing Order (FMMO) system.
Natzke dave
Editor / Progressive Dairy

U.S. Senator Kirsten Gillibrand (D-New York), chair of the Senate Agriculture Subcommittee on Livestock, Dairy, Poultry, Local Food Systems, and Food Safety and Security, conducted the hearing on Sept. 15. A recording of the two-hour hearing is available here.

Gillibrand, whose subcommittee has oversight on dairy pricing and policy, said the COVID-19 pandemic’s impact on the dairy industry brought the need for FMMO reforms into sharper focus. The last major reforms to the FMMO were implemented more than 20 years ago.

Dairy producers, processors and dairy economists were among industry representatives making oral and written presentations to the committee. Many cited aging FMMO regulations unable to keep up with a rapidly changing U.S. dairy industry, shortcomings that were exposed by the COVID-19 pandemic and led to depooling and negative producer price differentials (PPDs).

Class I mover targeted

One frequent target of witness testimony was the change in the Class I mover pricing formula, adopted by Congress in the 2018 Farm Bill rather than through a formal FMMO rulemaking process. “The pandemic and the economic downturn are not the only causes of this problem, but they did exacerbate it,” Gillibrand said. “The [Class I mover] formula change is a symptom of the larger problems with our federal orders. The current Federal Milk Marketing Order system is confusing, convoluted and too difficult to fully understand.”

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Urgency required

The pandemic “has created an even greater urgency to revisit orders,” said Catherine H. de Ronde, vice president for economic and legislative affairs for Agri-Mark Cooperative and a member of the National Milk Producers Federation’s (NMPF) economic policy committee. “Negative PPDs had milk checks looking incredibly bizarre; depooling at a level never-before seen became a new phenomenon for many. The change to the underlying Class I mover was a key catalyst of these outcomes.”

Based on NMPF estimates, dairy farmer losses due to the Class I pricing formula change totaled about $750 million. DeRonde estimated about $142 million of that occurred in the Northeast, where Agri-Mark has approximately 720 members marketing about 3.3 billion pounds of milk annually. While 2020 was an “outlier year” that created urgency, de Ronde said milk pricing must be addressed comprehensively through a formal rulemaking process.

As both a dairy farmer and processor, Jim Davenport told the subcommittee he has seen firsthand the effects of FMMOs and the classified pricing system. Despite  extreme market disruptions caused by the COVID pandemic, he identified positives in cooperatives and the federal order system.

A member of Agri-Mark Cooperative, Davenport is owner of a 64-cow Tollgate Farm in Ancramdale, New York. He is also one of nine farmer-owners of a fluid milk processing company, Hudson Valley Fresh Dairy, located in Kingston, New York. “To small farmers like us, and especially those who have no chance to capture more of the consumer with value-added retail sales, I feel completely eliminating the federal order system would be suicide,” Davenport said. He noted that of about 250,000 dairies in the U.S. in 1986, the number had shrunk to less than 32,000 by 2020, with smaller dairies disappearing at a faster rate than large dairies. He said his own dairy has seldom received a milk price that covered the cost of production. “Unfortunately, always striving to be more efficient, the dairy producer is often in an oversupply situation,” he said.

Pandemic's impact

As a processor during the height of the pandemic, Davenport said one Hudson Valley Fresh Dairy distributor moved from taking three tanker loads of milk per week to zero. As a co-op member, Davenport was able to ship some of that milk to Agri-Mark. As the co-op’s processing capacity was stretched, however, he eventually had to dump about 35,000 pounds of milk into his manure storage.

Beyond the pandemic, Davenport called attention to the long-term decline in Class I milk utilization, which has led to both processor and FMMO consolidation in the Northeast. And, with implementation of the new Class I pricing formula, lower Class I prices and negative PPDs resulted in dramatically lower milk prices paid to producers.

Davenport called for another look at the Class I pricing formula. “For the producer, some kind of safety valve against huge product price swings like we saw with COVID could be worked into the calculations,” he said. “Also, continuing to add data regarding prices over time, while tossing out ‘outlier’ product prices from the equation would be beneficial.” He said the FMMO system “has done a good job in the orderly marketing of milk for a long time” but that the Class I price discovery system needed adjustments to match current market conditions and dairy product innovations.

Fluid suppliers hit hard

Mike Ferguson, owner of the 150-cow Ferguson Dairy Farm, near Senatobia, Mississippi, has chaired the Mississippi Farm Bureau’s Dairy Advisory Committee for the last eight years. With just 60 family dairy farms remaining in the state, Mississippi is part of a milk-deficit, high Class I utilization, Southeast-U.S. area that is among those hardest hit by the change in the Class I pricing formula.

“During the initial onset of the COVID-19 pandemic, the traditional pricing mechanisms of Class I milk were skewed tremendously due to the unprecedented purchases of cheese by the federal government that sent Class III prices significantly higher than Class I and created a vast disparity in the true value of Class I milk,” he said. “Across the three Southeastern federal orders, where I farm, the economic impact was more than $150 million in foregone revenue on the milk we pooled on the federal order.”

Among options for consideration, Ferguson said Congress should consider immediately going back to the “higher-of” until the dairy industry can proceed to a national rulemaking process to consider alternative Class I milk pricing rules. He also called for a more frequent review of the national adjustment factor in the Class I mover calculation. “It’s important that we reform the Class I mover to make sure last year’s conditions aren’t repeated,” he said.

Ferguson said the Southeast, Florida and Appalachian FMMOs should look again at joining other FMMOs in implementing multiple component pricing (MCP) to capture a greater value of butterfat, protein and other solids in producer milk. An effort to move those orders to MCP was attempted in 2018 but later withdrawn.

Seeking uniformity

Christina Zuiderveen is part of three family-owned dairies with a total of about 15,000 cows: Black Soil Dairy in Granville, Iowa; and two dairies in South Dakota, Mount Hope Dairy in Beresford and Dakota Plains Dairy in Centerville. Other family members also dairy in California, Indiana and Michigan, giving her both a regional and national perspective across multiple FMMOs. She is also on the board of the Iowa State Dairy Association and a member of Edge Dairy Farmer Cooperative, which is part of a regional milk pricing task force that has already created one FMMO reform proposal if the USDA initiates a formal hearing process. (Read: Moving on Class I: Midwest groups unveil 'Class III Plus’ proposal)

Zuiderveen said her family’s Midwest dairies, which supply milk to the Class III market for cheese, benefitted financially from last year’s milk marketing conditions, cashing some of their largest milk checks ever. Nonetheless, she’s advocating for a level playing field for all producers.

“On the surface, it seems that pooling rules are the problem that led cheese processors to pull unprecedented volumes of milk out of FMMOs last year,” she explained. “But the deeper issue is that FMMOs do not provide market-based incentives to move milk to the processing plants where it is most valuable. For decades, FMMOs encouraged overproduction of cheap non-fat dry milk powder. When fluid milk sales were high, they subsidized milk powder returns. With fluid sales declining, per federal order rules, cheese makers are left to subsidize powder through revenue pooling, and they, of course, declined to do so in 2020. Good intentions to create a system with uniform prices has resulted in a distorted system that is now coming unglued, to the detriment of dairy families whose income depends – at least in part – on the value of a blend of fluid milk, milk powder and butter.

Impact on risk management

One dairy management area where 2020 marketing conditions negatively impacted Zuiderveen concerned risk management. The family uses the Dairy Revenue Protection (Dairy-RP) program and futures and options to lock in floor prices, but due to the volatility of Class III prices, they suffered substantial hedging losses. In addition to limiting a producer’s willingness to hedge milk, “the combination of unpredictable FMMO pooling and ad-hoc government bailouts creates a moral hazard, which further discourages risk management,” she said.

Zuiderveen said modernizing the FMMO system would provide a safeguard against the market power of large milk buyers, while also providing incentives for processors of all classes of milk to focus on plant capacity and innovation, leading to greater production of value-added products. She also called for making milk checks more transparent, helping producers understand their earnings and adjust farm management practices and/or their co-op policies to avoid future deductions.

System creates barriers

The harshest review of FMMOs came from Robert Wills, owner of Cedar Grove Cheese and Clock Shadow Creamery in south-central Wisconsin. He noted that finding benefits in FMMOs are difficult due to their complexity and that marketing orders were not meeting the unprecedented challenges currently faced by the dairy industry. FMMOs have failed to maintain the number of producers and milk buyers, and in many cases, the dairy industry has made advances in product variety, quality and quantity in spite of marketing orders, he said.

“Administered milk pricing, established by Congress, functions opposite to its intent,” Willis said. “Market orders cause higher dairy prices for consumers and lower milk prices for farmers. The system responds slowly and inadequately to changes in costs and demand shocks. The complexities of market orders create opportunities for anticompetitive behavior and promote consolidation among suppliers.”

Willis said time delays in price discovery were another “example of the absurdity” of the system. “[On Sept. 14), I learned the market order price for milk that I bought from farmers on August 1. That is over 40 days after I have sold some of the cheese. In three days, my patrons will learn what they were paid for August milk. They have already made production decisions for September, and probably October, without knowing whether they will make money.”

Willis identified a litany of challenges facing the dairy industry, from climate change to the creation of plant and fermentation technology-based alternative products. “The dairy industry needs to quit squabbling over esoterica of milk marketing and keep its eye on the prize – our customers. The government should step out and let dairy compete. That is the best hope for our farmers,” he concluded.

TIme to update

Christopher Wolf, Cornell University dairy economist, agreed that it is time to modernize the FMMO system, balancing “the interests of all involved parties, including equity as well as economic efficiency.”

“If we were to start over with U.S. dairy policy, it seems unlikely we would arrive at the current system,” Wolf said. Wolf noted that while the formal FMMO hearing process is time-consuming, the Class I pricing formula, changed by Congress instead of through a hearing to collect input from all interested parties, has resulted in unintended consequences that might have been avoided.

The subcommittee hearing was not without its partisanship. Both Sen. Cindy Hyde Smith (R-Mississippi) ranking member, and Sen. John Boozman (R-Arkansas) Senate Ag Committee ranking member, both noted that dairy policy was part of a larger concern among farmers that included escalating input costs and taxation and other regulations proposed by the Biden administration. end mark

Dave Natzke