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Class I pricing changes part of NMPF policy priorities; Canada dairy remains target in NAFTA objectives

Progressive Dairyman Editor Dave Natzke Published on 20 November 2017

The National Milk Producers Federation (NMPF) board endorsed a proposal to change how federal milk marketing order (FMMO) Class I base prices are calculated. The proposal will be one element of a larger package of risk management improvements that NMPF will ask Congress to approve as the House and Senate agriculture committees begin to formulate the 2018 Farm Bill.

The proposal was developed earlier this year by a task force of NMPF members, meeting with members of the International Dairy Foods Association (IDFA), to find a mutually acceptable approach to improving the risk management of Class I milk, while preserving the farm-level revenue that the Class I formula generates for producers' milk checks. Read: NMPF considering Class I price formula change proposal.

The current classified pricing system, established in 2000, uses the higher of the Class III or IV price in each month, plus a location-specific differential in each milk marketing order region, to set the monthly Class I price. According to IDFA, use of the “higher of” makes it difficult for Class I milk handlers to hedge risk because they don’t know which class will be the mover for a particular month. However, the “higher of” calculation as the Class I mover has benefited dairy producers since its implementation, and NMPF task force members said that value needed to be reflected in any alternative pricing formula going forward.

Under the proposed changes, the Class I system would be adjusted using the simple average of Classes III and IV as the Class I mover. To compensate for any loss of the “higher-of” pricing approach, the proposal applies a 74-cent-per-cwt increase to the monthly skim milk value in each federal milk marketing order. This represents the average value of the “higher-of” system dating back to 2000. The adjustment is needed so that moving to an average of the two market-determined manufacturing class prices does not diminish the contribution to the blend price provided by Class I revenue.

Analysis by John Newton, market intelligence director with the American Farm Bureau Federation (AFBF), indicated the unpredictability of pricing beverage milk has increased risks for processors attempting to hedge Class I milk prices using Class III and Class IV futures. Read Newton's article and analysis: “Proposed changes to fluid milk pricing, and why farmers need to care.”

Historically, from 2001 to 2017, the basis risk when using the Class III milk futures contract to cross-hedge Class I milk averaged 47 cents per cwt and ranged from a low of minus 78 cents to plus $4.64 per cwt. During this same time, the basis risk when using the Class IV milk futures contract averaged 90 cents per cwt and ranged from a low of minus 77 cents to a high of plus $6.68 per cwt.

“This action will improve price risk management by reducing some of the unpredictability of beverage milk prices, as it gives fluid milk handlers and their customers the ability to hedge milk prices using the futures market,” said Jim Mulhern, president and CEO of NMPF. “This change locks in the value of the ‘higher-of’ pricing approach, protects the integrity of the federal order system and aligns the policy interests of dairy farmers and processors as we begin work with Congress on a new farm bill.”

Read also: Could FMMO Class I price formula changes reduce risk, fluid milk slide?

NAFTA renegotiation objectives updated

The Office of the U.S. Trade Representative (USTR) amended the North American Free Trade Agreement (NAFTA) negotiation objectives last week, including a focus on Canadian policies impacting U.S. dairy products, according to the International Dairy Foods Association (IDFA). The fifth round of negotiations were set to wrap up on Nov. 21 in Mexico City, Mexico. Further rounds have now being scheduled into the first quarter of 2018.

“[We] seek to eliminate unjustified measures that unfairly limit access to Canada’s markets and unfairly decrease market access opportunities in third countries for U.S. dairy products, such as cross subsidization, price discrimination and price undercutting,” according to objectives outlined by USTR Robert Lighthizer.

The revisions remain subject to change at the discretion of the USTR and the White House, and will be updated regularly and released publicly as the U.S. continues in NAFTA renegotiations.

Earlier last week, IDFA and 168 other food and agriculture groups sent letters to every state governor, agriculture commissioners and leaders of economic development that a withdrawal from NAFTA would be detrimental to U.S. agriculture. The groups urged the state government leaders to contact President Donald Trump and support efforts to modernize the trade agreement. The letter specifically mentioned dairy, saying that ending the agreement would cause tariff rates to soar and would undermine the market for U.S. dairy exports in Mexico.

The groups called out the harm a withdrawal would cause the U.S. dairy industry.

“Over 1 billion dollars a year in U.S. dairy products are shipped to Mexico,” the groups said. They added that if the U.S., Mexico and Canada return to pre-NAFTA tariff rates, they could “range from 20 to 60 percent on cheese and up to 45 percent for skim milk powder, undermining the largest market by far for U.S. dairy exports at a time when Mexico is preparing to finalize negotiations with the EU, the world’s largest dairy exporter and a region keen to act as a substitute for U.S. dairy.”

In addition to the potential destabilization NAFTA withdrawal would have on the global dairy industry, the groups said a withdrawal could cause a loss of 256,000 U.S. jobs, including at least 50,000 U.S. food and agriculture jobs, and a drop in the U.S. global domestic product of $13 billion in the farm sector.  end mark

Dave Natzke
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