Our federal Constitution, now closing in on 230 years since its drafting, stands as a sterling exemplar of how a carefully drafted framework of guiding principles can serve as a long-term framework for governance, even as the society that it governs continues to develop and evolve.
For matters of constitutional import, we have our federal courts at the ready to apply our guiding principles to modern situations and laws and to determine, for example, how the collection of DNA evidence is permitted under the Fourth Amendment, as the Supreme Court recently did.
While that particular case split the justices and public opinion, the very fact that our forefathers provided us with the mechanism to peacefully decide this question, a scientific matter unfathomable to them in the late 18th century, is a marvel to behold.
For the majority of U.S. dairy farmers whose milk is priced under the federal milk marketing orders, the “Constitution,” so to speak, is the Agricultural Marketing Agreement Act of 1937 (“AMAA”), which itself is approaching 80 years old, having been first enacted as the Agricultural Agreement Act. (The Agricultural Adjustment Act itself was declared unconstitutional by the Supreme Court, which provides an interesting point of note.)
Much like the Constitution does for our basic rights, the AMAA does not spell out detailed regulations but rather sets forth the principles and guidelines for the milk marketing orders.
Whereas we rely on the federal courts to see that our current laws and matters meet constitutional muster, the dairy industry relies on the USDA to see that the federal milk marketing orders issued under the authority of the AMAA are responsive to the realities of milk production, marketing and processing eight decades after the AMAA was passed.
In a previous article, I wrote that today’s dairy is vastly different than the one the AMAA set out to regulate. Thus far, I have not received any suggestion that I was wrong on that point. But just how different?
The basic structure of the dairy industry has shifted drastically. The number of dairy farms and the size of them has changed dramatically, and so has the number and size of dairy processors.
Looking at just the time since the late 1960s, the number of farms has fallen from 145,000 to 48,000 in 2008. The number of handlers has similarly declined from 1,600 to just more than 300. In the West, a dozen average farms might be able to supply a bottler.
Why does this matter to the federal orders? Well, one of the key goals of the AMAA was to provide the farmer with sufficient protection from the superior bargaining power of handlers.
Milk, being a highly perishable commodity with a continuous production season, demands a stable market for the farmer to be successful.
The dual functions of the federal orders – minimum classified pricing and pooling of returns – serve to meet this end. But since the advent of the AMAA, the relative bargaining power of producer and processor has changed, although certainly the disparity has not been eliminated.
Milk moves great distances. Let’s talk just about the milk products I have personally purchased in the past few weeks. The gallon of milk in my refrigerator was processed in Indiana, about 200 miles from my home.
The half and half for my coffee was processed in Kansas, about 800 miles away. My daughter had milk with her Subway sandwich. It was bottled in Arizona, more than 2,000 miles away. I bought a bottle of a sports drink milk in Burbank, California.
It was bottled in Missouri, and the milk itself was produced in New Mexico. In 1935, most milk moved fewer than 30 miles from farm to bottle to table.
Perishability was a function of milk quality, limited transportation means and even more limited refrigeration and packaging. The necessity for a hyper local outlet was an imperative for every dairy farm.
Today, aside from the examples from my own purchases, we have milk from Michigan and Texas regularly supplying plants in the Southeast. Greek yogurt from New York is sold in Nevada and across the nation.
Cheese plants that are the technological marvel of the industry ship mozzarella and cheddar coast to coast. Still, the foundation for the regulations that price the milk used in these products assumed if milk wasn’t sold in the county of production or close thereto, the farmer would suffer.
Corollary: The market for milk products is now global in nature. In post-Depression America, the thought of dairy products being sold in China, India and Africa was nearly science fiction.
Today, not only are U.S. dairy products sold out of county, they are often a preferred supply in many markets. Fully 10 percent of domestic production ends up sold outside the U.S. Our pricing mechanisms must find a method to accurately reflect this reality.
Forget insulating the producer from international economics. The industry can – rather, must – allow the producer to profit from global demand for U.S. dairy. The larger industry has recognized this need. The federal orders need to keep pace.
The seasonality of milk production has changed. Clearly, milk is still subject to seasonal flush and short periods.
But the variance in seasonal production has been reduced over the last several decades through management practices, coupled with the ability to transport milk greater distances to meet the demands of short markets.
The federal orders have responded to these changes while still reflecting the seasonal differences in production through the rules for polling milk, which vary throughout the year in certain marketing orders.
Still, the justification for polling and classified pricing in its historical and current form is still based on this fluctuation. A 2001 report for the Northeast order found that production was 11 percent higher in May than in November, while demand was higher in September through November.
The practicality of dealing with this paradox is not lost on anyone responsible for marketing milk or filling a plant.
The relative value of milk used in different classifications has come closer to equivalence. An Economic Research Service report for 1949 reports that producers would receive $5.17 for 3.5 percent milk at a fluid plant.
A cheese plant would pay $4.18 for 3.9 percent milk, or $3.82 for 3.5 percent. So fluid milk commanded a 35 percent fluid premium. Today, the fluid milk premium on a national basis is closer to 15 percent.
So in the modern market, the financial “penalty” to the producer to selling to a non-fluid plant compared to the time when the AMAA was enacted is far less impactful.
Are these the only structural changes affecting milk pricing? By no means. Is the current system broken? The answer to that really depends on who you are asking. Many believe it is.
In the original outline of National Milk Producers Federation’s Foundation for the Future, a reform of the FMMO pricing mechanism was to be included. That piece of the package has not, as of this writing, been included in the Dairy Security Act provisions of the farm bill.
I would be surprised, however, if we do not see some type of examination of federal order pricing surface if the farm bill is completed.
When it does, it would behoove all those parties interested in how milk is marketed to take a look at these changes as part of a global examination of how the federal orders can be improved for the benefit of producers, processors and consumers.
Like the Constitution, the AMAA contains the framework to continue to provide a federal program for milk marketing that benefits and enhances the industry. But we owe it to all to re-examine the basic beliefs and premises upon which the regulations are based. PD
Ryan Miltner
Attorney
The Miltner Law Firm LLC
