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Farm Bureau working group releases FMMO reform recommendations

Progressive Dairy Editor Dave Natzke Published on 07 October 2019

A special task force of the American Farm Bureau Federation (AFBF) has released a report detailing recommended reforms to the Federal Milk Marketing Order (FMMO) system.

AFBF’s Federal Milk Marketing Order Working Group was formed last January. Key recommendations of the report, “Priorities, Principles and Policy Considerations for FMMO Reform,” include:

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  • Eliminating bloc voting by dairy cooperatives on proposed FMMO changes

Bloc voting on FMMO reforms has generated substantial controversy in the past. Under that system, cooperatives are allowed to cast unanimous votes on behalf of all members. Cooperatives are not required to provide each producer a description of the question presented in the referendum together with a statement on how the co-op plans to vote on behalf of the membership. Co-op members who disagree with the co-op vote must request individual ballots, and co-ops must forfeit the opportunity to bloc vote.

The recommendation does not support modified bloc voting. Under modified bloc voting, independent producers receive a ballot and then cooperative-member producers may petition to vote independently. The cooperative can then bloc vote for all remaining members who did not petition for a separate ballot.

The working group supports modifying the referendum approval threshold to require a two-thirds majority of the voting producers and a two-thirds majority of the voting milk volume to amend or issue an FMMO. Currently, a referendum needs only two-thirds of the voting producers or two-thirds of the voting milk to be approved.

Upon the removal of bloc voting, the working group supports the termination of a provision eliminating an entire FMMO following a “no” vote on a referendum to amend the order.

  • Changing product pricing formulas by implementing variable manufacturing or “make” allowance deductions for processors

Current end-product pricing formulas used to determine farmer milk prices include a fixed deduction (make allowance) and yield factors processors can deduct from the pay price to convert raw milk into dairy products. Make allowances are based on an estimate of the costs associated with converting a hundredweight of raw milk into commodity dairy products including butter, cheese or dry milk powder. The yield factor is an estimate of how much product can be produced from a certain quantity of milk components.

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Since make allowances are fixed but milk prices fluctuate, the make allowance as a share of the value of milk is higher when milk prices are lower and lower when milk prices are higher.

For example, in 2014, a $3.17 per hundredweight Class III make allowance was equal to 14% of the annual average Class III price. In 2018, the same Class III make allowance represented 22% of the value of Class III milk.

Over the last decade, make allowances have totaled more than $30 billion in credits to processors. Given milk production and fluid milk utilization trends, aggregate make allowances will continue to increase as more milk is produced and used in manufacturing classes of milk.

The working group supports making make allowances equal to a percentage of the commodity value on a commodity-by-commodity basis. Also, the working group does not support an across-the-board increase in make allowances, the elimination of make allowances or indexing make allowances to factors such as inflation, labor or energy costs.

  • Expanding the USDA’s mandatory price reporting survey to include more information

Dairy mandatory price reporting regulations require the USDA to collect and release dairy product sales information used in FMMO milk pricing formulas. The products include cheddar cheese, butter, dry whey and nonfat dry milk meeting certain product specifications. Current reporting captures only a small percentage of U.S. dairy plants and a small percentage of the milk solids and dairy products produced, according to the AFBF report.

Based on AFBF analysis, current market information is captured from just 20% of butter processing plants, 54% of nonfat dry milk plants, 50% of dry whey plants and 12% of cheddar cheese plants. In total, less than 7% of all manufacturers that produced one or more dairy products are captured in USDA’s mandatory price reporting. This implies that more than 93% of dairy processing plants are not required to report the prices for the dairy products they manufacture and sell.

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  • Reforming pooling criteria and eliminating transportation credits in southeastern U.S. FMMOs

The report cites declining milk production and a wide seasonal range in Class I milk utilization in 12 Southeast states (Louisiana, Arkansas, Missouri, Mississippi, Alabama, Tennessee, Kentucky, Florida, Georgia, South Carolina, North Carolina and Virginia), as well as an increased economic burden due to increasing milk supply balancing costs.

AFBF recommendations include increasing touchbase days required by milk handlers, producers and sellers from outside an order, and reforming transportation credit regulations to eliminate producers in a deficit area bearing costs of transporting milk into the area. The recommendations cover Southeast and Appalachian FMMOs, with tighter qualification criteria in other FMMOs considered on a case-by-case basis.

For background information on FMMOs and the AFBF recommendations, click here.

What’s ahead?

AFBF leaders will convene in January 2020 to consider and vote on these priorities and policy recommendations. Based on the outcome, AFBF staff will work with stakeholders in the dairy industry and policymakers to advance the recommendations.

Any FMMO reforms require multiple steps administered by the USDA’s Ag Marketing Service, including invitations for proposals, public hearings and comment periods.  end mark

Dave Natzke
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