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What happened? What’s next? - Dean FMMO payments

Progressive Dairy Editor Dave Natzke Published on 24 February 2021

In this column, Progressive Dairy summarizes issues in the news and attempts to describe how they might affect dairy farmers. Look for more extensive background and details at www.progressivedairy.com.

Items in this column are compiled from Progressive Dairy staff news sources. Send news items to Dave Natzke.

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DEAN FMMO PAYMENTS

What happened?

In January, Dean Foods was ordered to pay more than $29 million it owed to Federal Milk Marketing Orders (FMMO) for milk procured last spring prior to the company’s bankruptcy sale. The amount represents about 90% of Dean’s delinquent payments for milk marketed through FMMOs from April 1 – May 4, 2020.

What’s next?

The order requires Dean to make the $29.1 million payment within 30 days, according to the USDA’s Agricultural Marketing Service (AMS).

Upon receipt of the payment, the USDA will remit monies owed to FMMO-regulated handlers and dairy and fluid milk promotion boards. Once handlers receive payments from the USDA, FMMO regulations require that the money be promptly remitted to producers. Procedures for handler payments to producers will be communicated through the respective FMMO market administrators.

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Dean’s $16 million pre-petition debt owed to the USDA is not covered by the order. The USDA will continue to pursue payment of those claims through the bankruptcy proceeding.

Bottom line

On Nov. 12, 2019, Southern Foods Group LLC, et al., (Dean Foods) filed for Chapter 11 bankruptcy. Among several “first-day motions,” the company sought and received access to debtor-in-possession (DIP) financing to continue operations and pay “critical vendors,” including dairy farmers supplying milk. At that time, Dean had 43 plants regulated by the FMMO system.

In May 2020, however, several FMMO administrators sent letters to milk handlers indicating Dean had failed to make timely producer settlement fund payments. According to USDA Ag Marketing Service, Dean was fully regulated on nine FMMOs – all except Arizona and the Pacific Northwest. The office confirmed payments were not made in any of those nine orders.

In addition, Dean owed monies to the FMMOs for producer marketing services, transportation credits and administrative services, as well as the National Dairy Research and Promotion Program and the National Fluid Milk Processor Promotion Program. The total owed was more than $32.3 million, according to court documents.

When producer settlement fund payments are not made, FMMO regulations stipulate that distribution of available money is prorated uniformly to all milk handlers, including co-ops, in the FMMO, who then distribute the money to producers. Handlers were notified of the nonpayment and the pro-ration of available producer settlement monies. That resulted in lower milk payments to all dairy farmers pooling in each affected FMMO.

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CALIFORNIA QUOTA IMPLEMENTATION PLAN (QIP)

What happened?

In an order signed by California Department of Food and Agriculture Secretary Karen Ross on Jan. 25, California dairy producers will vote on a plan to sunset the state’s Quota Implementation Plan (QIP).

What’s next?

The referendum will be conducted March 4 – June 1. For the referendum to pass, 51% of eligible producers must vote. As of last fall, there were 948 eligible voters, meaning about 485 producers will have to cast a vote regarding the referendum for it to be valid, according to Geoff Vanden Heuvel, director of regulatory and economic affairs with the California Milk Producers Council.

Of those who vote, 65% of the voters producing 51% of the voting milk (or) 51% of the voters producing 65% of the voting milk must vote yes for the referendum to pass.

Bottom line

The referendum follows a multiyear legal and administrative effort which Progressive Dairy has covered extensively in the past. The plan equalizes regional quota adjusters such that the quota premium in all counties equals $1.43 per hundredweight (cwt). The QIP would then be terminated, effective March 1, 2025. Read Vanden Heuvel’s collection of QIP-related articles at www.milkproducerscouncil.org/quota.

CHAPTER 12 BANKRUPTCY FILINGS

What happened?

Based on district bankruptcy court caseload statistics, the number of Chapter 12 bankruptcy filings declined to 552 in 2020, down 43 (about 7%) from 2019, according to analysis from American Farm Bureau Federation chief economist John Newton.

What’s next?

Looking ahead, cash receipts from the sales of crops and some livestock are expected to increase in 2021. That’s not the case for dairy, where milk prices are expected to be lower, expenses are increasing and federal support is expected to be lower.

Bottom line

Ongoing government financial support and recent higher commodity prices likely slowed the pace of Chapter 12 farm bankruptcy filings in 2020. However, the decline should not be considered a sign that the farm economy has recovered. In addition to agricultural financial factors, off-farm income has also been a challenge given COVID-19 restrictions.

One other condition may be factored in the decline in 2020 bankruptcy numbers: Due to the COVID-19 pandemic, only online filings were completed.

Among the 24 major dairy states, Chapter 12 filings totaled 364 for the year ending Dec. 31, 2020, down 34 from the year before. (The total does not necessarily mean all filings were dairy operations.) Chapter 12 bankruptcies in two Wisconsin districts totaled 69 in 2020, up 12 from 2019; bankruptcies in other dairy states were up slightly in Colorado, Indiana, Iowa, Oregon, New Mexico and South Dakota.

DMC PRODUCTION HISTORY

What happened?

The COVID-19 relief package, signed into law at the end of December, created a provision for Dairy Margin Coverage (DMC) program supplemental payments for small and medium-sized dairies in any month when DMC indemnity payments are triggered.

What’s next?

The USDA’s Farm Service Agency (FSA) must establish a sign-up period for eligible producers to make DMC production history adjustments. Sign-up details were not yet available at Progressive Dairy’s latest deadline.

The adjusted milk production baseline is effective January 2021 through the life of the current Farm Bill and DMC program, ending in 2023, and is not retroactive to 2019-20. The January 2021 DMC margin won’t be announced until Feb. 26.

Bottom line

While the original DMC program established an eligible baseline on milk production in years 2011-13, some producers can now use actual milk production in 2019. During months DMC indemnity payments are triggered, the supplemental payments would cover 75% of the difference between the production history established in 2011-13 and 2019 actual milk production. No supplemental payments will be made on milk production above the DMC Tier I production limit of 5 million pounds. Those eligible to make production history adjustments must be enrolled in DMC for 2021. Any increase in coverage also means the producer will have to pay the additional premiums on that milk. All 2021 DMC indemnity payments are subject to a 5.7% sequestration deduction.

The USDA did adjust 2021 Dairy Margin Coverage (DMC) program enrollment numbers higher. As of Jan. 18, 18,497 dairy operations (about 73.4% of those with established milk production history) had enrolled in the 2021 DMC program. Milk production enrolled for 2021 was estimated at 161.3 billion pounds, about 79.6% of the established history.  end mark

Dave Natzke
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