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Dairy pandemic assistance: The devil is in the details

Progressive Dairy Editor Dave Natzke Published on 26 August 2021

Details, timelines, analysis and comments continue to emerge following a USDA announcement, Aug. 19, unveiling the Pandemic Market Volatility Assistance Program (PMVAP) for dairy.

The PMVAP is part of a trifecta of programs designed to pull the dairy industry out from under the weight of market disruptions resulting from the COVID-19 pandemic and the unintended consequences of federal policies. Those programs include:

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  • Creation of a $400 million Dairy Donation Program to address food insecurity and mitigate food waste and loss – details of that program were released on Aug. 25. Read: Dairy Donation Program details released.

  • Development of a $580 million supplemental Dairy Margin Coverage (DMC) program for small and medium farms – details of that program have not yet been released.

  • Establishment of the PMVAP, providing direct financial aid to address losses incurred due to a change in the Class I milk pricing formula: That change – approved in the 2018 Farm Bill and implemented in May 2019 – converted the “Class I mover” from the “higher of” Class III and Class IV prices to an “average of” Class III and Class IV, plus 74 cents. The USDA will be providing updates on PMVAP over the next couple of weeks. Read: USDA announces Pandemic Market Volatility Assistance Program for dairy.

In addition, the USDA is making changes to the DMC program’s feed cost calculations to recognize higher costs for dairy-quality alfalfa hay, although the timeline is unclear. This feed cost change will be retroactive to January 2020 and is expected to provide additional retroactive payments of about $100 million for 2020 and 2021. Unlike the pandemic assistance, this change will also be part of DMC through the life of the program, set to expire with the current farm bill in 2023. Beyond 2021, the USDA estimates the change will add about $80 million per year in DMC indemnity payments. Full details will be provided when regulations are published in the coming weeks. Dairy farmers should wait until these details are available to contact their local USDA Service Center for more information.

PMVAP outlined

The PMVAP has earmarked approximately $350 million to cover dairy farmer income losses impacted by the Class I price formula change, and that portion of the program is being implemented relatively quickly.

Federal Milk Marketing Orders (FMMOs) publish lists of handlers pooling milk each month and, according to the program outline, those milk handlers and dairy cooperatives whose producers are eligible to receive payments were being notified the week of Aug. 23. The USDA will host an information webinar for eligible handlers and cooperatives who will need to indicate intentions to participate by Sept. 10 and sign program agreements.

Within 30 days of signing an agreement and handler verification of dairy farmer adjusted gross incomes (AGIs), the USDA will transfer monies to the participating handlers or cooperatives, which will then have 30 days to disburse monies to eligible dairy farmers. Each participating handler or cooperative will also be reimbursed for administrative and education costs.

How are payments determined

While the total outlay for the PMVAP is $350 million, the emphasis on Class I milk utilization means dividing those dollars through FMMOs and eventually to individual dairy producers varies widely.

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The difference between actual and estimated Class I prices during that six-month period was dramatically impacted by changes to the Class I mover formula (Table 1). With the change to the “average of” Class I mover formula, FMMO Class I prices averaged about $3.43 per hundredweight (cwt) less than they would have under the previous “higher of” formula during the July-December 2020 period.

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Payments will reimburse qualified dairy farmers for 80% of the revenue difference, per month, for Class I milk marketed during July through December 2020.

Changes to the Class I milk pricing formula had a greater overall negative impact on uniform prices paid to producers within FMMOs with heavy Class I utilization rates. Producers in those FMMOs will see the highest payments, while those in FMMOs with a higher percentage of Class III and Class IV utilization, and those in the West – with a greater proportion of larger dairies impacted by the PMVAP milk production caps, receiving the smallest payments.

In addition, there is also a large disparity in the number of producers supplying milk in each FMMO during the six-month period, from a high of about 9,075 in Northeast FMMO #1 to lows of 110 in Florida FMMO #6 and 70 in Arizona FMMO #131.

According to FMMO data analysis by ever.ag and Blimling and Associates, when total payouts are averaged across all milk marketed through FMMOs during the July-December 2020 period, the average payment would be about 23 cents per cwt, with a high of $1.54 per cwt in the Florida FMMO to a low of just 4 cents per cwt in the California FMMO.

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However, that doesn’t reflect what actual payments to individual producers will look like, since payments won’t be across all milk, or to all producers. Those details are yet to come. Those specifics are being calculated by the USDA.

Class I utilization across all FMMOs averaged about 32% in 2020. During the July-December 2020 period, Class I utilization ranged from lows of 20%-23% in the Upper Midwest, California and Pacific Northwest FMMOs to highs of 68%-87% in Appalachian, Florida and Southeast FMMOs.

Due to FMMO depooling and other market disruptions, not all producers were impacted equally by negative producer price differentials (PPDs) within each order.

Payment caps

Beyond Class I utilization, PMVAP payments are affected by two payment caps. The first limits payments to 5 million pounds of annual milk production. Since the program covers July-December 2020, that essentially limits payments to 2.5 million pounds of milk.

A second potential payment limitation is tied to each dairy farmer’s eligible 2020 adjusted gross income. To be eligible for payments, a person or legal entity must have an average adjusted gross income of less than $900,000 for tax years 2016, 2017 and 2018. However, if 75% of their adjusted gross income comes from farming, ranching or forestry-related activities, the AGI limit of $900,000 does not apply, and the person or legal entity is eligible to receive payments up to the applicable payment limitation.

The AGI limits are the same as the USDA Farm Service Agency Coronavirus Food Assistance Program 2 (CFAP 2). A dairy farmer who received payment under the CFAP 2 also meets the AGI requirements of the PMVAP.

Program payments will be reported on the dairy farmer’s IRS 1099 Form issued by the handler or cooperative.

Education requirement

As part of the agreement, each participating handler or cooperative must provide and verify availability of educational materials (mailings, recorded online trainings, live virtual webinars and/or in-person meetings) to all producers by March 1, 2022. Education efforts may incorporate a wide range of milk marketing and risk management topics, including FMMOs, DMC and Dairy Revenue Protection (Dairy-RP) programs, dairy mandatory price reporting, the Chicago Mercantile Exchange, forward contracting and other relevant dairy topics.

Industry reaction

Awaiting additional details this week, initial dairy organization and producer reaction to the program announcement has been mixed. While most welcomed the financial assistance, many were critical of the size of the aid package and its distribution limitations.

The $350 million earmarked for the program falls well short of the more than $750 million in losses to dairy farmers created by changes to the FMMO Class I mover pricing formula, according to Jim Mulhern, president and CEO of the National Milk Producers Federation (NMPF).

“From the beginning of our discussions with [the USDA], we knew there would not be enough money available to fully compensate producers for all the Class I losses, and that we would need to seek additional assistance from Congress to help fill the gap,” Mulhern said. “Now, in light of the major shortcomings of this formula, additional work will be needed to remedy the revenue losses more fully for all dairy producers. NMPF will work with Congress to seek supplemental funding to close this gap on a more equitable basis for all producers.”

The current Class I mover formula did not proceed through a formal FMMO rule-making process but rather was changed in the 2018 Farm Bill. It remains in place until modified through a further action by Congress or administratively through the FMMO hearing process.

In late April, the NMPF board of directors voted to request an expedited FMMO hearing limited to proposed changes to the Class I mover. However, no formal request or proposal has been submitted.

“We will also look anew at the best approach to updating the current Class I mover [which uses the average of Class III and IV monthly prices] to rectify the problems in Class I pricing that occur when there’s a wide spread between the two manufacturing classes – which resulted last year from USDA’s pandemic-related dairy purchases that focused too heavily on cheese,” Mulhern said.

Payment limitations based on milk production are especially troublesome in the West, where average herd sizes are larger, noted Geoff Vanden Heuvel, director of regulatory and economic affairs for California’s Milk Producers Council (MPC).

“The volume caps imposed on this program are very discriminatory against California producers who were already placed at a competitive disadvantage by USDA’s pandemic-era cheese purchasing preferences,” he said.

Other comments

Representatives of other dairy organizations said they appreciated the initial financial assistance and looked for more policy changes to come.

For John Rettler, Wisconsin dairy farmer and president of Midwest-based FarmFirst Dairy Cooperative, changes to the DMC feed cost formula will better reflect the actual cost dairy farmers pay for high-quality alfalfa hay.

“Making improvements to the Dairy Margin Coverage program has been a priority for FarmFirst, and we are glad to see the change become a permanent part of the safety net program,” Rettler said. “Finessing and perfecting the smaller details of the Dairy Margin Coverage formula allows it to reflect actual costs [and] makes a world of a difference for dairy farmers in that it becomes a much more accurate compensation of losses experienced.”

FarmFirst has also been a long-time advocate for a supplemental DMC program, which will reflect modest increases in farm milk production history for small and medium-sized herds.

Also in the Midwest, a statement from the Dairy Business Association (DBA) and Edge Dairy Farmer Cooperative welcomed the initial assistance. “We can appreciate the difficulty in trying to ensure equitability within a complex system made even more so by the once-in-a-century disruptions caused by the pandemic. We encourage USDA to continue to work toward that goal.”

Looking ahead, the DBA/Edge statement said the situation “demonstrates the critical need for thoughtful and comprehensive reform to the federal milk pricing system.”  end mark

Dave Natzke
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