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FarmFirst will propose returning to ‘higher of’ Class I price formula

Progressive Dairy Editor Dave Natzke Published on 06 May 2021

If and when USDA grants a hearing request on Federal Milk Marketing Order (FMMO) milk pricing issues, the head of FarmFirst Dairy Cooperative said his organization will recommend a return to the ”Class I mover” formula used prior to May 2019.

FarmFirst Dairy Cooperative, based in Madison, Wisconsin, represents farmers in Wisconsin, Minnesota, South Dakota, Michigan, Iowa, Illinois and Indiana. In an announcement on May 5, Jeff Lyon, FarmFirst general manager, said that if a hearing is scheduled, the co-op would submit a proposal to revert back to using the “higher of” the Class III or Class IV price in calculating the monthly FMMO Class I mover. The “higher of” formula was replaced about two years ago by a formula using Class III-Class IV price averaging, plus an adjustment factor, to set the advanced Class I milk price.

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In late April, the National Milk Producers Federation’s (NMPF) board of directors voted to request an expedited FMMO hearing limited to proposed changes to the Class I mover. As of May 6, the formal request had not been submitted to the USDA’s Agricultural Marketing Service. If and when a formal request is submitted, the USDA has 30 days to issue an action plan that would determine whether the USDA would act on an emergency basis.

Read: NMPF moving toward request for limited FMMO hearing.

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.

The change provided fluid milk processors additional price risk management protection and was meant to be revenue neutral for dairy farmers. However, with the onset of the COVID-19 pandemic and USDA Farmers to Food Box program dairy product purchases, the unintended consequences of the change were increased price volatility, resulting in record-large negative producer price differentials (PPDs) and large-scale depooling of milk from FMMOs. Those conditions cost U.S. dairy farmers over $725 million in lost income, according to NMPF.

FarmFirst: Back to the future

“Prior to using the current formula to determine the Class I mover, the industry used the ‘higher of’ the Class III or Class IV price with few issues since its adoption,” Lyon said. “When reviewing other proposals and options, we came back to using the ‘higher of’ since it was fully vetted in a national hearing process nearly 20 years ago and has served the industry well. It is clean, simpler and straight forward.

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“In our review, none of the proposals that have been suggested to date will eliminate negative producer price differentials, but a quick analysis for [Upper Midwest FMMO #30] showed that overall, the ‘higher of’ performed better than the actual PPD since the current formula started in May 2019,” he said. “We believe going back to using the 'higher of' best addresses the large negative PPDs in 2020 due to reasons related to the COVID-19 pandemic, the large spread between Class III and Class IV prices, and lastly, the large increase in Class III prices over a short period of time which encouraged Class III handlers to significantly depool their milk from their respective federal order,” Lyon noted.

If an emergency hearing is not granted, Lyon said FarmFirst would wait until any future hearing incorporating broader FMMO reforms is held.

“There are several changes industry stakeholders would like to see to the federal orders, but the pressing matter at hand is addressing negative PPDs,” Lyon added. “Returning to the higher of Class III or Class IV will get us back to the original intent to create favorable milk prices for farmers. Minimizing negative PPDs will provide more stability in milk prices, which will set the stage for additional order reform in the future.”

Other proposals

NMPF has not publicly released its complete reform proposal. However, Jim Mulhern, NMPF president and CEO, has said the proposal will maintain the current Class I price formula using the “average of” the Class III-Class IV prices implemented in May 2019. The proposal would increase the adjuster, using the current 74 cents per hundredweight (cwt) as the floor. The proposal also calls for the USDA to recalculate that adjuster every two years, based on market conditions.

If the NMPF hearing is granted, other proposals are likely to be accepted for consideration. One proposal that has already surfaced was announced on April 27, by leaders of Wisconsin-based Dairy Business Association and Edge Dairy Farmer Cooperative, the Minnesota Milk Producers Association and the Nebraska State Dairy Association.

Unlike the expected NMPF proposal, the coalition’s Class III Plus calculates the Class I skim milk price by starting with the Class III skim milk price and adding a Class I price adjuster. That proposal would require the USDA to revise the Class I skim milk price adjuster each September for the forthcoming calendar year. A recorded video of a webinar discussing the proposal is available here.

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Read: Moving on Class I: Midwest groups unveil ’Class III Plus’ proposal.

Based on Progressive Dairy analysis, milk marketing factors leading to negative PPDs and depooling – a wide spread in the monthly Class III-Class IV milk price and Class I-Class III price inversions – will continue through much of 2021.

Read: April Class III-IV milk prices improve but gap widens and March negative PPDs continue to climb out of 2020 depths.

FMMO hearing information

The USDA’s Agricultural Marketing Service provides several fact sheets and publications related to FMMOs, milk pricing formulas and hearing/amendment processes:

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