Current Progressive Dairy digital edition
Advertisement

Economic Update: Negative PPDs revisited; pace of CFAP payments slows

Progressive Dairy Editor Dave Natzke Published on 28 July 2020

Update Highlights

Newton: June depooling likely near 5 billion pounds of milk

Data from USDA’s Agricultural Marketing Service revealed that in the seven Federal Milk Marketing Orders (FMMOs) utilizing multiple component pricing, the total difference between the classified value of milk pooled on the FMMO in June 2020 and the component value of milk was -$528 million, according to John Newton, chief economist with the American Farm Bureau Federation.

advertisement

advertisement

Read: Revisiting record-large negative PPDs on milk checks.

In multiple component pricing FMMOs, proceeds from the pool are based on the difference between the classified value of the milk and the component value of the milk. When the component value of the milk exceeds the classified value of the milk, the proceeds from the pool are negative and result in a negative producer price differential (PPDs).

The difference was the largest in the California FMMO at -$135 million, followed by the Pacific Northwest FMMO at -$100 million. The magnitude of the difference depends on the weighted average component levels in the market, the volume of milk pooled on the FMMO and the utilization of milk on the FMMO.

Across the seven component pricing orders, 8.2 billion pounds of milk were pooled in June, down nearly 5 billion pounds (37%) from the prior year’s pool volume. The largest change in pool volume was the Upper Midwest FMMO, where 2.2 billion fewer pounds of milk were pooled in June 2020 compared to 2019, a 66% decrease. Given that milk production in June was higher year over year, it’s highly likely that the change in the pool volume is due to depooled milk. Moreover, had this milk been part of the FMMO pool, PPDs across the U.S. would have been less negative, Newton said.

Given the July Class I milk price has already been announced at $16.56 per hundredweight (cwt) and is below the current Class III value of $24 per cwt, large negative PPDs are also expected for July. The wide price spread between the Class III and Class IV milk price, approximately $6 per cwt, could lead to negative PPDs into the fall.

advertisement

The negative PPDs and depooling have renewed interest in FMMO reforms. Eliminating the advanced pricing component, reconsidering the higher-of pricing formula and requiring mandatory pooling of milk in all classes are among the most talked-about options.

AFBF releases FMMO reform recommendations

With negative PPDs and depooling in the news, the American Farm Bureau Federation (AFBF) has released its final report on priorities for milk pricing reform.

A Farm Bureau Federal Milk Marketing Order Working Group, consisting of grass-root dairy farmer members, worked for a year to examine the system and develop recommendations to modernize the current FMMO system. The organization initially unveiled recommendations last fall. (Read: Farm Bureau working group releases FMMO reform recommendations.)

Although FMMOs have been a pillar of the dairy industry for more than 80 years, outside of the 2018 Farm Bill, the program has not undergone substantial change in almost two decades.

“COVID-19 has resulted in unprecedented volatility in agricultural markets, especially milk and dairy commodity prices,” said John Newton, AFBF chief economist. “The price volatility, a record-large spread between prices for the various milk classes, mass depooling and record-large milk check deductions take money out of farmers’ pockets at a time when they desperately need it. Moreover, it highlights the urgent need for dairy farmers and the industry to collectively consider ways to modernize the FMMO system and improve prices paid to farmers.”

Among AFBF’s priorities is amending the Agricultural Marketing Agreement Act to allow modified bloc voting on FMMO issues. Currently, dairy farmers who are independent and not members of cooperatives may cast individual ballots. Cooperatives may allow their members to vote independently, but then lose their ability to bloc vote on behalf of their nonparticipating members.

advertisement

“Farm Bureau has been outspoken on the disparities in the beef and hog markets, and we are just as concerned about the large imbalances in the pricing and pooling of milk – which ultimately cost dairy farmers hundreds of millions of dollars,” said AFBF President Zippy Duvall. “Wild price swings during the COVID-19 pandemic have highlighted how important fair systems are to the well-being of America’s farmers and ranchers. By giving dairy farmers a seat at the table, we can begin addressing the challenges of the current FMMO system and work toward a more equitable compensation system for the hardworking men and women in the dairy industry.”

Other recommendations in the final report include expanding price discovery and examining alternative ways to price fluid milk and improve risk-sharing between farmers and processors.

To read a summary of the recommendations, click here.

Depooling, not negative PPDs, is the problem

Negative producer price differentials (PPDs) have resulted in massive depooling of milk from FMMOs. This depooling – and not the negative PPDs that led to it – is the real threat to dairy farm income, according to Dick Bylsma, director of milk sales for National Farmers.

In a recent blog post, Bylsma explains how FMMO pricing formulas led to negative PPDs and high levels of depooling on June 2020 milk marketings. To prevent that, National Farmers has proposed a single national FMMO that covers all of the milk all of the time.

Read Bylsma’s post here.

Dairy Stream podcast: PPDs explained

Still looking for a basic understanding of producer price differentials (PPDs)?

In the latest episode of the Dairy Stream podcast, co-produced by the Dairy Business Association and Edge Dairy Cooperative, PPDs and the many factors that go into the price paid to dairy farmers are discussed.

Dairy Stream host Mike Austin talked with Mark Stephenson, director of dairy policy analysis at the University of Wisconsin – Madison, about the FMMO PPDs: what they are and how they are calculated, what causes a negative PPD, the fluctuations in milk prices and the future outlook for milk checks.

To hear the podcast, click here.

CFAP dairy payments near $1.29 billion

Direct payments to dairy producers under the USDA’s Coronavirus Food Assistance Program (CFAP) continued to slow as the program wrapped up its second month.

Sign-up for the program began May 26. As of July 27, dairy applications processed by USDA Farm Service Agency (FSA) offices stood at 21,738, with direct payments totaling just under $1.29 billion. Applicants and payments were up 629 and $40 million, respectively, from the week before.

The top states for CFAP dairy payments as of July 27 were:

1. Wisconsin: $259.3 million – 5,484 applicants

2. California: $186.9 million – 914 applicants

3. New York: $124.3 – 2,407 applicants

4. Minnesota: $78.7 million – 2,249 applicants

5. Pennsylvania: $76.1 million – 2,329 applicants

6. Michigan: $67.5 million – 832 applicants

7. Idaho: $54.3 million – 299 applicants

8. Iowa: $38.8 million – 888 applicants

9. Ohio: $37.1 million – 843 applicants

10. Texas: $36.6 million – 272 applicants

11. Washington: $35.6 million – 260 applicants

Through July 27, dairy represented about 20% of total CFAP payments. In addition to dairy, payments totaled $3.3 billion to livestock producers, $1.73 billion to producers of non-specialty crops and $228 million to producers of specialty crops. Overall, the USDA FSA had approved about $6.55 billion in payments to more than 473,120 agricultural producers.

Applications will be accepted through Aug. 28, 2020, at FSA offices.

The USDA split dairy payments into two installments. Producers who already applied should have received the first installment, representing 80% of their maximum total payment. Bill Northey, USDA’s undersecretary, said there would be enough money to make the second payment installment by the end of August.

For dairy farmers, the total CFAP payment rate will equal about $6.20 per cwt on their first-quarter 2020 milk production. The first installment payment equaled $4.71 per cwt on a producer’s certified milk production for the first quarter (January-March) of calendar year 2020. The second installment payment is based on a national 1.4% adjustment in milk production (1.014 X first-quarter milk production) multiplied by $1.47 per cwt. Payment caps apply.  end mark

Dave Natzke
  • Dave Natzke

  • Editor
  • Progressive Dairy
  • Email Dave Natzke

LATEST BLOG

LATEST NEWS