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DMC, FMMO reform highlight House Ag Committee dairy hearing

Progressive Dairy Editor Dave Natzke Published on 24 June 2022

Increased annual milk production caps under the Dairy Margin Coverage (DMC) program, potential Federal Milk Marketing Order (FMMO) reforms and greater milk check transparency were among issues highlighted in oral and written testimony during a House Agriculture Committee hearing, June 22.

The hearing titled “A 2022 Review of the Farm Bill: Dairy Provisions,” primarily analyzed dairy provisions in the 2018 Farm Bill, with House ag committee members seeking ways current policies could be improved under the 2023 Farm Bill.

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The hearing included two panels:

  • One featuring USDA officials, including Dana Coale, deputy administrator of the Ag Marketing Service (AMS) Dairy Program, and Scott Marlow, deputy administrator for Farm Service Agency (FSA) Farm Programs

  • A second panel featuring industry representatives, including Pennsylvania dairy farmer Lolly Lesher, representing the National Milk Producers Federation (NMPF); Mike Durkin, president and CEO of Leprino, representing the International Dairy Foods Association (IDFA); Travis Forgues, vice president of membership with Organic Valley/CROPP; and Marin Bozic, assistant professor of applied economics at the University of Minnesota

DMC

As a review of the 2018 Farm Bill, the DMC program received near unanimous praise among hearing participants.

Lesher, a seventh-generation dairy farmer who owns and operates the 240-cow, 400-acre Way-Har Farms with her husband, William, emphasized the importance of the DMC program. Recent revisions, including adjustments to how hay prices were calculated and the Supplemental DMC program, making temporary production history adjustments, had made the program a more viable safety net for her family’s farm, said Lesher, a member of Dairy Farmers of America (DFA).

“The program has provided important security to my family’s farm, given the volatility that persists in dairy markets,” she said. “We have consistently purchased the maximum available DMC coverage since 2019, at a margin of 9 dollars and 50 cents per hundredweight, knowing that it may not pay out every year, but is intended to serve as a safety net when needed.”

Lesher noted that the current production history adjustment under the Supplemental DMC program is temporary and scheduled to end in 2023. She asked that any provision expanding production levels become a part of DMC under the 2023 Farm Bill.

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“As valuable as the program has been, many farmers have not been able to fully benefit because DMC’s underlying production history calculation is outdated,” Lesher said. “It is critical that farms like mine and my neighbors have an opportunity to update their production history to reflect current on-farm production. 2013 is far too long ago, and other farm safety net programs do not use such an outdated production reference. Many farms have grown to meet market demands or to allow their children to join the farm.”

Although DMC and Supplemental DMC programs are separate, both are scheduled to expire in September 2023 and would require reauthorization in the 2023 Farm Bill to be continued. The USDA’s Coale and Marlow said the two programs could be easily combined when writing the next farm bill.

And while raising DMC production caps could be considered, Marlow said large-scale producers have other USDA Risk Management Agency (RMA) programs, including Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM Dairy), to provide complementary safety nets on milk income.

According to Bozic, earlier concerns that DMC would encourage an oversupply of milk has primarily been offset by creation of base-excess programs by milk buyers.

“By and large, DMC appears to be effective in accomplishing the legislative intent,” Bozic said. “DMC payments substantially stabilized net farm income for dairies with herd sizes up to 250 cows, and the pace of consolidation has slowed" [from a loss of 3,261 dairies in 2018 to 1,794 dairies in 2021].

“Fixed coverage levels and premium rates keep this program simple and affordable to dairy producers,” Bozic said “However, these same design choices may reduce program effectiveness if inflationary pressures persist.”

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Forgues, with Organic Valley/CROPP Cooperative, urged maintaining the DMC program, although the program is not aligned with feed costs related to organic grazing and is unequipped to address rising costs in areas other than feed.

Class I mover

Lesher called for milk pricing improvements during the hearing. She was critical of the change made to the Class I mover pricing formula, noting that the change, combined with the government’s heavy cheese purchases during the COVID-19 pandemic, cost dairy farmers over $750 million in revenue in the final six months of 2020 alone.

“No one could have anticipated COVID-19 when the change was made to the mover, but the events of the last two years have shined a spotlight on the need for an overall update to the Federal Milk Marketing Order system,” she said.

With the formula change, Class I skim milk prices averaged $3.56 per cwt lower during the second half of 2020 than they would have under the previous mover, Lesher explained. While the USDA’s Pandemic Market Volatility Assistance Program (PMVAP) partially reimbursed farmers for these losses, additional funding to close the gap is necessary, especially for those who were adversely impacted by the program’s 5-million-pound milk production limitation, she said.

Lesher said NMPF was working to find consensus on changes to the Class I mover and a range of other improvements to the FMMO system.

FMMO challenges and reforms

Changing milk marketing trends challenge the current the FMMO system, according to Bozic. Declining fluid sales are reducing incentives for milk processors to continue participating in the system, he said.

“In my opinion, in regions other than the Northeast and Southeast, fluid milk sales no longer provide strong enough incentives for dairy manufacturers to choose to stay consistently regulated under FMMOs,” he said.

Bozic forecast a continuing decline in fluid milk sales, from 18.3% of total production in 2022 to 14.5% by 2032. With total milk solids contained in dairy exports now surpassing the volume consumed through fluid milk, he said recent studies show 45%-60% of all additional skim milk solids will need to be marketed through exports.

“If our regulatory framework remains centered on prescribing minimum prices for milk consumed domestically in beverage milk products, it will be increasingly irrelevant for a majority of U.S. regions where milk is primarily used in manufactured dairy products,” he said.

Without reform, Bozic said he lacked confidence to answering a question over whether the FMMO system could deliver fair milk prices to all milk producers.

As Congress considers the 2023 Farm Bill, Coale said any FMMO reforms would have to come through collaboration between the USDA to administer rule-making procedures and industry and producer input during a hearing process. She said the FMMO hearing process provided the most transparency and encouraged the greatest industry participation on dairy policy issues.

Make allowances

Speaking on behalf of fellow processors, Durkin identified policy recommendations developed through IDFA’s Economic Policy Committee. Most important, he said, was establishment of a USDA mandatory manufacturing cost survey, used to collect industry data to identify and adjust FMMO make allowances, money deducted from producer milk prices to cover the cost of converting milk into dairy products.

“Current make allowances have not been adjusted in 15 years and do not reflect the cost of manufacturing today's dairy products,” Durkin said. “Make allowances based on 2007 costs are woefully out of out of date. Coupled with ongoing inflationary pressures, the need to address this lag is increasingly urgent.”

Coale noted a robust manufacturing cost survey, previously conducted through the California Department of Food and Ag, that ended when California joined the FMMO system. A recent voluntary national manufacturing cost survey fell short of both industry and USDA expectations. She said the USDA currently had no authority to conduct a mandatory national survey of manufacturing costs, a step which would require authorization in a future farm bill.

Market accessibility and transparency

Bozic raised other concerns, including market accessibility and transparency, as growing challenges facing the dairy industry.

“The critical missing ingredient is vibrant competition for farm milk,” Bozic said. “Whereas just six or seven years ago, many producers had a choice of where to ship their milk; today it is extremely difficult for most producers to switch from their current buyer to another one,” he said.

Bozic cited the growth in milk supply outpacing processing capacity as one contributing factor.

“Anecdotal evidence … suggests some presence of anti-competitive behavior by some processors,” Bozic said. “Some producers have confided in me that when a prospective milk buyer was willing to take them on as a patron, their current milk buyer stopped that from happening by calling the prospective buyer to inform them of repercussions if such a transfer took place.”

Farmgate milk price discovery is also challenged by a lack of competition, Bozic said.

“Dairy producers used to be able to ‘shop around’ and ask various processors what they would pay for milk. Recently, when some dairy producers have asked for milk price benchmarking information from their educators or consultants, those service providers have, in multiple instances, faced tacit disapproval or even aggressive legal threats from dairy processors.”

Check back later to read more on testimony presented during the House Ag Committee dairy hearing.  end mark

Dave Natzke
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