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Hearing on temporary Class I base price hike requested; concerns raised

Progressive Dairy Editor Dave Natzke Published on 29 April 2020

Editor’s note: On April 29, USDA Ag Marketing Service Administrator Bruce Summers announced the agency would not move forward on the request for a public hearing to consider temporarily raising the Class I base price. Read the full statement here.

The USDA’s Agricultural Marketing Service (AMS) has received a request for an emergency hearing to consider a temporary increase in the Federal Milk Marketing Order (FMMO) Class I base price to help dairy farmers through a period of extremely low milk prices. However, the request is also raising concerns over long-term implications of the proposal.

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In a request sent to Dana Coale, deputy administrator of the USDA’s Agricultural Marketing Service (AMS) on April 27, lawyers representing more than 20 dairy cooperatives asked the USDA to amend all FMMOs to establish a minimum Class I base milk price (also called the Class I price mover) of $15.68 per hundredweight (cwt) for the months of June, July and August 2020.

The request has been posted on the USDA’s FMMO website, along with a list of dairy cooperatives signing on to the hearing request, along with a note that the request is currently being evaluated.

Leading the charge in raising red flags over the proposal is dairy economist Marin Bozic, assistant professor at the University of Minnesota. While recognizing COVID-19 had created extreme hardships to dairy producers, processors and consumers, he’s worried the “well-intentioned proposal is short-sighted and misguided, with dangerous implications on the dairy industry.” Bozic calls the proposal a misuse of the decades-old FMMO system as a risk management tool, instead of keeping it as a milk marketing and price discovery mechanism.

Calculating Class I base

As most things related to FMMOs, an explanation isn’t always easy.

The advance monthly Class I base price is calculated using USDA AMS-surveyed dairy product prices for butter, cheese, skim milk powder and whey. For example, the May 2020 FMMO Class I base price was calculated using dairy product price surveys for April 11 and April 18, which are used to determine the average Class III and Class IV prices. The Class I base is then determined by using the Class III and Class IV price average, plus 74 cents per cwt.

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One predictor of Class I base prices is Chicago Mercantile Exchange (CME) Class III and Class IV milk futures prices. After peaking in late January, those futures prices have crashed with the impact of COVID-19 on dairy markets.

May’s FMMO Class I base price was announced April 22 at $12.95 per cwt, down $3.69 from April. They’re likely headed lower. (The June Class I base price announcement is scheduled for May 20 and will use AMS price surveys for May 9 and May 16.)

As of April 24, 2020, June 2020 Class III futures prices had declined $6.17 per cwt from contract highs in late January, with the June 2020 Class IV futures price down $7.90 per cwt over the same period. July 2020 Class III and Class IV futures prices were down $4.76 and $7.34 per cwt, respectively, and August Class III and Class IV prices were down $3.58 and $6.88 per cwt, respectively, from late January.

Even with some improvement in Class III and Class IV milk futures prices early this week as of the close of CME trading on April 28, the Class I base price would be below $15 per cwt into November 2020.

Initially, cooperatives representing dairy producers in the Southeast U.S., where FMMOs have higher fluid milk (Class I) utilization and the Class I base price has a larger impact of producer pay prices, requested that the USDA set a minimum Class I price mover at $15 per cwt for all FMMOs in an effort to help maintain milk prices necessary to save dairy farms. Read: Weekly Digest: May 2020 Class I base down $6.38 from December.

Proponents of the latest request say it will improve producer revenue without significantly impacting processors or consumers, who will continue to see milk prices well below 10-year averages.

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Separately, on April 23, the Pennsylvania Milk Marketing Board (PMMB) approved an emergency order increasing the over-order premium for May and June 2020 and essentially setting a Class I floor price of $15 per cwt for milk produced and sold in Pennsylvania. For May, the over-order premium, including the 6 cents per cwt fuel adjuster, is $3.11 per cwt.

The PMMB limited application of the emergency order to May and June, citing rapidly changing dairy industry conditions and the adverse competitive impacts on Pennsylvania’s fluid milk processors.

Concerns raised

It’s those longer-term implications on milk marketing channels, FMMOs and more that are raising red flags concerning the proposal.

Lucas Sjostrom, executive director of the Minnesota Milk Producers Association, listed several potential concerns. Like Bozic, he prefers keeping any COVID-19 disaster aid separate from temporary adjustments to existing systems regulating milk pricing. Among the red flags:

  • Changes in the 2018 Farm Bill adjusted how the Class I base is calculated, allowing dairy processors to more accurately estimate milk procurement costs and hedge against price risk. Temporarily disconnecting the Class I base price from those calculations puts that hedging ability in jeopardy.

  • While direct payments to dairy producers spread the impact of the COVID-19 across all taxpayers, a higher floor on the Class I base price unevenly applies the financial burden on producers and processors based on regional milk utilization.

  • Higher Class I prices could also adversely impact fluid milk consumers who are also experiencing job and income losses due to COVID-19.

  • If current caps on the USDA’s Coronavirus Food Assistance Program (CFAP) program payments are lifted, large herds in high Class I utilization regions will see substantially higher federal financial assistance than the Midwest, which has predominantly smaller dairy herds and smaller percentages of Class I milk utilization.

  • Echoing statements by U.S. Ag Secretary Sonny Perdue in announcing the CFAP program, additional disaster aid provisions that minimize the importance of existing risk management tools, such as the Dairy Margin Coverage (DMC) program, essentially create bailouts in the event of disasters, leaving little need to participate in risk management programs.

  • Finally, there’s an overriding concern about the future of the FMMO system. Given the list of co-ops signing onto the request, co-ops bloc voting for their members could likely approve the higher Class I base price. However, statutes regulating FMMOs mean the entire order is opened, and a “no” vote on a specific proposal has the potential to throw out the entire FMMO system.

Dairy COVID-19 proposals

Among previous proposals designed to assist dairy producers through the COVID-19 crisis, two have generated the most support.

The National Milk Producers Federation (NMPF) and International Dairy Foods Association (IDFA) jointly proposed a “Milk Crisis Plan,” designed to cut milk production and stabilize markets, aid others in the dairy supply chain and increase dairy product availability to consumers facing increased food insecurity. It would have created a system to make monthly payments to dairy farmers over a period of six months (April through September 2020). The proposal would pay producers $3 per cwt above the market price on 90% of their production if they cut production by 10% from a March 2020 baseline.

Read: NMPF, IDFA propose ‘Milk Crisis Plan.’

Another was Minnesota Milk’s Dairy CORE (COronavirus REcovery) Program, which proposed making one-time payments based on milk prices.

Read: Dairy CORE proposal seeks immediate cash infusion, regional supply management flexibility.

The NMPF-IDFA proposal establishes nationally mandated production cutbacks to manage milk supplies; the Dairy CORE program encouraged producer-owned cooperatives and private milk buyers to develop local or regional supply adjustment incentive programs.

In release of the CFAP on April 17, Perdue announced a program that follows precedent set in the 2019 Market Facilitation Program and more closely resembles the Dairy CORE proposal: a single direct payment to producers based on estimated financial losses. Read: USDA announces Coronavirus Food Assistance Program; no to DMC and supply management.

Specific details on payment levels and how those losses are calculated have not yet been announced. Several dairy and agricultural groups are also working to remove current caps of $125,000 per commodity and $250,000 per entity from impending or future CFAP payments.  end mark

Dave Natzke
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