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What happened? What’s next? - FMMO reform, risk management changes

Progressive Dairy Editor Dave Natzke Published on 25 May 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 Progressive Dairy.

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

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FMMO hearing and ‘Class I mover’ proposals

What happened?

In late April, the National Milk Producers Federation’s (NMPF) board of directors voted to request an expedited Federal Milk Marketing Order (FMMO) hearing limited to proposed changes to the “Class I mover.” At Progressive Dairy’s deadline two weeks later, the formal request had not been submitted to the USDA’s Agricultural Marketing Service but was expected soon.

What’s next?

If and when a formal request is submitted, the USDA has 30 days to issue an action plan designed to complete the hearing within 120 days, request additional information from proponent(s), or deny the request.

If a hearing is approved, hearing date(s), as well as the scope of topics to be covered, are established. A brochure designed to provide an overview of the FMMO amendment process is available on the FMMO website (USDA Agricultural Marketing Service).

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The current Class I mover formula was implemented in May 2019 through the 2018 Farm Bill and remains in place until modified through a further action by Congress or administratively through the FMMO hearing process.

Bottom line

As noted above, NMPF’s hearing request will center on the formula to determine the base price for Class I milk, called the Class I mover, affecting the price of milk used in fluid products. In May 2019, that formula was changed from using the “higher of” Class III-Class IV milk prices to the “average of” Class III-Class IV prices, plus a 74-cent-per- hundredweight adjuster.

The change provided fluid milk processors additional price risk management protection because they can hedge Class III and Class IV prices. Based on historical averages and “normal” marketing conditions, it was meant to be revenue neutral for dairy farmers. However, with the onset of the COVID-19 pandemic and the USDA Farmers to Families Food Box program’s dairy product purchases, the unintended consequences of the change were increased price volatility, resulting in wide spreads in Class III and Class IV milk prices and occasional inversions in Class I and Class III milk prices. Those factors have led to record-large negative producer price differentials (PPDs) and large-scale depooling of milk from FMMOs.

According to an NMPF analysis, pandemic-induced price disruptions caused second-half 2020 Class I skim milk prices calculated under the new formula to average $3.56 per cwt lower than they would have under the old formula, sinking to -$4.74 and -$5.19 per cwt lower in August and December 2020, respectively. The cumulative net loss in Class I skim milk revenues to dairy producers was more than $725 million since the change was implemented in May 2019.

Back to if and when a hearing is held: Multiple proposals to consider changes to the Class I mover have already been unveiled.

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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 but would increase the adjuster, using the current 74 cents per cwt as the floor. The proposal also calls for the USDA to recalculate that adjuster every two years, based on market conditions.

Leaders of Wisconsin-based Dairy Business Association and Edge Dairy Farmer Cooperative, the Minnesota Milk Producers Association and the Nebraska State Dairy Association have provided details of a plan called “Class III Plus,” which 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 adjuster each September for the forthcoming calendar year.

A third proposal outlined prior to Progressive Dairy’s deadline is from FarmFirst Dairy Cooperative, representing dairy farmers in Wisconsin, Minnesota, South Dakota, Michigan, Iowa, Illinois and Indiana. That proposal calls for a return to the higher-of formula in place for about two decades prior to the May 2019 change.

If the NMPF hearing is granted, other proposals are likely to be accepted for consideration. Michael Dykes, president and CEO of the International Dairy Foods Association (IDFA), the nation’s dairy processor organization, said his organization is evaluating potential solutions.

NEGATIVE PPDs

What happened?

The depth of negative PPDs has subsided somewhat since 2020. However, without changes to the Class I mover, two major drivers of negative PPDs – the relationship between Class III and Class IV milk prices and depooling – look like they will continue. FMMO Class III and Class IV milk prices both improved in April, but the spread between the two class prices also widened.

What’s next?

FMMO uniform prices and PPDs for April milk marketings were released shortly after Progressive Dairy’s deadline, so check our website for updates.

Bottom line

April 2021 Class III and Class IV milk prices were announced at $17.67 and $15.42 per cwt, respectively. As a result, the April Class III-Class IV price spread increased about 28 cents from March, to $2.25 per cwt. In addition, the inverted spread between the advanced April 2021 Class I base price ($15.51 per cwt) and the Class III price also grew wider, at -$2.16 per cwt. Those price relationships are incentives for Class III depooling.

Markets change, but based on milk futures prices, the wide Class III-Class IV price spread will continue until late in the fourth quarter of 2021. As of the close of trading on the Chicago Mercantile Exchange (CME), May 6, the monthly Class III-Class IV price spread increased to $2.83 per cwt in May and remains above $1.90 through September. If realized, the Class III-Class IV price gap would average $1.96 for the year.

CHANGES TO DAIRY-RP, LGM-DAIRY

What happened?

Dairy farmers can’t protect against negative PPDs using existing risk management tools. However, the USDA’s Risk Management Agency (RMA) announced updates to livestock insurance policies, including the Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy), designed to improve those programs in other areas.

What’s next?

The changes become effective for the 2022 crop year, beginning July 1, 2021. The insurance policies are sold and delivered solely through private crop-insurance agents. A list of certified agents is available online using the RMA Agent Locator (UDSA -Tools/Agent Locator Page).

Bottom line

Changes for Dairy-RP include modifying the weekend sales period to end on Sunday at 9 a.m. (Central time) and relaxing records requirements by allowing monthly – instead of daily – total pounds of milk and milk components (butterfat and protein) to be acceptable records. Additionally, RMA will ensure the class pricing option remains available for purchase even when either the Class III or Class IV milk price is not published. Specific to Georgia, milk yields will no longer be grouped with nearby states.

Changes for LGM-Dairy include allowing producers to purchase coverage on a weekly basis instead of monthly. The price discovery period will be Tuesday, Wednesday and Thursday, with the sales period held on Thursday and closed on Friday morning.

In addition to Dairy-RP and LGM, another insurance option for livestock producers is Livestock Risk Protection (LRP), available for feeder cattle, fed cattle and swine. It provides protection against declining market prices. Recent changes include increased head limits and additional subsidy increases.  end mark

Dave Natzke
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