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Dairy groups seek multiple component pricing in Appalachian, Southeast FMMOs

Progressive Dairyman Editor Dave Natzke Published on 10 April 2018

Fourteen dairy cooperatives and several dairy trade associations filed a formal request seeking a public hearing to consider implementing multiple component pricing (MCP) in two additional Federal Milk Marketing Orders.

The organizations filed the formal hearing request with the USDA’s Agricultural Marketing Service on April 3. The USDA has 30 days from the date the request was filed to either:

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• issue an action plan to complete the hearing within 120 days

• request additional information

• deny the request

The request would convert FMMOs 5 (Appalachian) and 7 (Southeast) to MCP. If successful, eight of the 10 FMMOs will utilize MCP, with only the Florida and Arizona orders retaining skim-butterfat pricing.

Co-ops filing the request were: Cobblestone Milk Cooperative, Cooperative Regions of Organic Producer Pools, Dairy Farmers of America, Erie Cooperative Association, Foremost Farms USA, LANCO-Pennland Quality Milk Producers Association, Lone Star Milk Producers, Maryland and Virginia Milk Producers Cooperative Association, Michigan Milk Producers, Prairie Farms Dairy, Premier Milk, Scioto Co-Operative Milk Producers Association, Southeast Milk and White Eagle Cooperative Association.

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Producer trade associations supporting the request were: National All-Jersey (NAJ), the Kentucky Dairy Development Council, the Georgia Milk Producers and the North Carolina Dairy Producers Association.

NAJ, an organization representing breeders of Jersey cattle with high-component milk, have long been proponents of MCP. It launched “Project Equity” in 1976 and was at the forefront when the Great Basin FMMO adopted MCP in 1988.

The difference between skim-butterfat pricing and MCP lies in how the skim portion of milk is priced, according to the NAJ Equity Newsletter.

Skim-butterfat pricing assumes all producer milk contains 2.99 percent true protein and 5.69 percent other solids. Producers are paid for their milk and Class II, III and IV processors buy skim based on those default component levels. Under that system, NAJ said, producer milk with higher components is undervalued and milk with lower components is overvalued.

Six benefits listed

“The absence of multiple component pricing for the Southeast and Appalachian markets (Orders 5 and 7) creates and perpetuates marketing inefficiency, lack of uniformity for manufacturing milk prices, inequitable marketing or procurement costs to handlers, and understated revenue to producers,” according to NAJ. It identifies six benefits from converting the FMMOs to MCP:

1. Increase hauling efficiencies. Above-average protein milk in the states on both sides of the border of Orders 5 and 7 is being hauled longer distances to be delivered to processing plants in the MCP orders to realize its protein value. If this milk was delivered to processing plants in Orders 5 and 7, it would lose value because the existing skim-butterfat pricing does not factor its protein into its regulated price. The protein value realized from the MCP orders more than offsets the cost of the additional hauling. However, if Orders 5 and 7 utilized MCP, milk hauling could be made more efficient while realizing the added value from protein. Furthermore, data suggests that below-average protein milk produced outside of Orders 5 and 7 is being trucked into Southeast to minimize its price discount from having below standard protein.

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2. Eliminate transaction losses. When supplemental milk for Order 5 and 7 Class I plants needs to be purchased from the surrounding FMMOs, that milk is purchased using MCP and sold in the Southeast using skim-butterfat pricing. Often these transactions result in a loss to the handler because the milk has greater value when priced using MCP. These transaction losses would not occur if Orders 5 and 7 utilized MCP.

3. Increase regulatory uniformity for manufacturing milk. Currently, Class II, III and IV milk costs are different in the MCP orders than the skim-butterfat orders. Manufacturing plants in the Southeast pay the same price for the skim portion of their milk regardless of its protein or solids-not-fat content. Manufacturing plants in the surrounding MCP orders pay for the solids in the skim. Therefore, milk that contains above- or below-average skim solids will carry a different cost for manufacturers located in Orders 5 and 7 compared to their counterparts located in the MCP orders. Manufactured products compete for markets regionally and even nationally. Having different milk costs creates an uneven starting point for processors located in different orders.

4. Provide better price signals to producers. Consumers value dairy products for their component content, both butterfat and protein. Historical data shows that producers in MCP orders have increased the protein content of their milk over time due to FMMO prices including value for protein.

5. The somatic cell count (SCC) adjustment will incent improved milk quality. Four of the six MCP orders include a small price adjustment based on whether producer milk has an SCC above or below 350,000 cells per milliliter. Historical data shows producers in those orders have reduced their SCC levels over time.

6. Increase the value of pooled milk. While the pooled value of Class I milk will not change with the adoption of MCP, the value of Class II, III and IV milk is expected to increase. FMMO market administrators have estimated the change in value of Class II, III and IV skim solids pooled in Orders 5 and 7 from January 2008 through December 2017 would have added nearly $83 million to pooled revenues during that 10-year period.

Read also: Issues and options for Using multiple component pricing to set pricing in Federal Milk Marketing Orders   end mark

Dave Natzke
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