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

Progressive Dairy Editor Dave Natzke Published on 28 April 2021
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With the possibility of a USDA hearing to consider revamping the Federal Milk Marketing Order (FMMO) “Class I mover” price formula, leaders of four Midwestern dairy groups unveiled a proposal which they say will improve fluid milk pricing within the FMMO system.

On April 23, the National Milk Producers Federation’s (NMPF) board of directors voted to request the USDA hearing. A formal request for a hearing is expected to be submitted in early May, according to NMPF.

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Read: NMPF requests FMMO hearing on Class I mover and NMPF moving toward request for limited FMMO hearing.

Once the USDA receives a formal request, the agency has 30 days to issue an action plan that would determine whether the USDA would act on an emergency basis. NMPF’s request would limit the FMMO hearing specifically to proposed changes to the Class I mover.

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 from the previous formula 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 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.

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.

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Class III Plus unveiled

In preparation for the potential hearing, another proposal was announced on April 27 by leaders of the Dairy Business Association (DBA) and Edge Dairy Farmer Cooperative, based in Wisconsin; the Minnesota Milk Producers Association; and the Nebraska State Dairy Association. In a conference call with media, they said the proposal, titled “Class III Plus,” creates long-term stability in fluid milk pricing and would reduce the likelihood of negative PPDs that cut into farmers’ revenue in the past year. The NMPF proposal, they said, largely focuses on the short term and attempts to recoup the revenue that farmers did not earn in 2020 over a shorter period.

“Our proposal looks to the future. It would make lasting changes to the milk pricing system that will limit negative PPDs in the future and the possible negative effects from future crises,” said Amy Penterman, DBA president and a Wisconsin dairy farmer.

“We want to make sure that if a hearing is granted, the result will be lasting, beneficial changes to the pricing formula,” said Brody Stapel, a Wisconsin dairy farmer and president of Edge Dairy Farmer Cooperative. “Federal Milk Marketing Orders need to be reformed, but an extremely limited hearing now, which NMPF is seeking, would destabilize the system rather than solve fundamental issues, which is our ultimate goal.”

Proposal described

According to the Midwest dairy leaders, revamping the current Class I pricing formula by implementing components of Class III Plus would provide a long-term fix to several existing milk pricing problems, including negative PPDs and depooling. In a one-page fact sheet, the organizations outlined the core components and practical effects of their proposal.

Unlike the expected NMPF proposal, which maintains the “average of” formula, 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.

And, unlike NMPF’s call for a review every two years, the Class III Plus proposal would require the USDA to revise the Class I skim milk price adjuster each September for the forthcoming calendar year. The Class I skim milk price adjuster would be equal to the average of the monthly differences between the higher of Class III and Class IV skim milk prices and the Class III skim milk price during the prior 36 months of August through July.

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The Midwest officials said the proposal ensures that Class I milk price remains, on average, the highest of the four FMMO milk class prices via annual updates to the adjuster. The formula also accounts for any inversions in manufacturing prices (in event the Class IV price exceeds the Class III price). By tying Class III (cheese) pricing to Class I (fluid) pricing, incentive for Class III plants to depool would be reduced.

To offset revenue that never made it into FMMO pools in 2020, the Class I skim milk price adjuster for 2021-25 would not be lower than 36 cents per cwt.

The proposal calls for an end to “advanced” price formulas, seen as one cause of negative PPDs, and replaced with “announced” prices in all FMMOs.

According to the summary, the proposal limits any one-year market shocks, but also takes into account the changing nature of milk processing. It is viewed as “revenue-neutral” and does not increase prices to customers in the long term. Finally, it improves risk management and hedging capabilities for both dairy farmers and processors, they said.

“Cooperatives in our area have long called for a focus on Class III issues,” said Lucas Sjostrom, executive director of Minnesota Milk. “While those are unfortunately outside the scope of [NMPF’s] hearing request, keeping Class I milk the highest in most scenarios will keep Class III plants in the pool and provide more orderly marketing for all FMMOs. This is a win for customers, a win for farmers and a win for processors.”

Kris Bousquet, executive director of the Nebraska State Dairy Association, said dairy farmers in his state are “extremely concerned” about the status of the FMMOs and how the current structure negatively impacts their milk price.

“The Nebraska State Dairy Association’s priorities while working on this proposal were that we wanted the pricing structure to be fair to all and to bring back the farmers’ ability to forward contract. Our joint proposal does just that and is the best path forward for the Nebraska dairy industry,” Bousquet said.

The groups also said NMPF’s proposal would likely result in requests for additional FMMO hearings and more changes just two years from now, causing further disruption and potentially jeopardizing the entire order system.

While the four organizations primarily represent Midwest dairy producers and their cooperatives, Sjostrom said they had consulted with dairy leaders in other regions, including those with higher Class I utilization, to come up with a plan that works across al FMMOs.

If the USDA grants the request for a hearing, proposals from other organizations regarding the Class I pricing formula and other FMMO reforms may be forthcoming as well.

Additional information

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

PHOTO: Photo by Sal Gomez.

Dave Natzke
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