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What happened? What’s next? - Is the market fixing itself?

Progressive Dairy Editor Dave Natzke Published on 11 June 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.




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


What happened?

While you were busy planting, harvesting hay, milking cows and generally coming out of COVID-19 hibernation, a lot happened – and not much has happened, too.

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 a month later, NMPF was working through technical issues before submitting a formal hearing request and reform proposal to the USDA’s Agricultural Marketing Service.

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.


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 proponents or deny the request.

Bottom line

Some Southeast U.S. dairy producers – producing milk in FMMOs with the highest Class I utilization rates and most affected by the Class I mover change – say they can’t wait for a potential hearing to supply a fix.

In a letter directed to U.S. Ag Secretary Tom Vilsack, Southeastern producers asked for direct aid from federal COVID-19 stimulus funds to cover some of those losses, without waiting for a hearing. According to the letter, FMMO revenue losses resulting from changes in the Class I mover formula totaled about $750 million in 2020. And, the Southeast producers charge, those losses have not been shared equitably among all dairy farmers.

Through depooling, producers marketing milk through cheese plants were able to receive the full advantage of record Class III prices in 2020. In contrast, producers marketing milk production in Class I markets (fluid) suffered the most.


Losses in the three FMMOs covering the Southeast U.S. – Appalachian, Florida and Southeast – lost about $155 million (21%) of the total $750 million, even though the percentage of milk produced in the three marketing areas represents just 5.5% of the FMMO total. The $155 million equated to a reduction in the 2020 blend price of about $1.25 per hundredweight (cwt).

NMPF has not publicly released its reform proposal. However, it is believed 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.

Another possible proposal, from FarmFirst Dairy Cooperative representing dairy farmers in Wisconsin, Minnesota, South Dakota, Michigan, Iowa, Illinois and Indiana, calls for a return to the “higher of” formula in place for about two decades prior to the May 2019 change.

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.

In a follow-up letter to Vilsack, the Wisconsin, Minnesota and Nebraska groups, joined by the South Dakota Dairy Producers, said they did not have a strong desire to have a FMMO hearing but wanted to call attention to opinions and proposals that differed from that considered by the NMPF. If a hearing is held, the scope should go beyond the Class I mover and address broader reforms, they wrote.


What happened?

After a couple of months of recovery, producer price differentials (PPDs) took a small step back in April and were again negative in the seven FMMOs utilizing multiple component pricing.

While April uniform prices at standardized test were higher in all 11 FMMOs, PPDs went the other direction, dipping 39 to 87 cents from March. The PPD in the Northeast FMMO No. 1 moved into negative territory for the first month since January. PPDs in the other six FMMOs ranged between -$1.02 and -$1.79 per cwt.

While some dairy analysts view negative PPDs as simply an accounting tool to balance the value of milk flowing through FMMOs, six FMMOs have now seen negative PPDs every month since June 2020, and the PPD in the California FMMO has been negative for 15 consecutive months, since February 2020.

PPDs have zone differentials, so they’ll vary slightly within each FMMO. In addition, PPDs’ impacts on individual milk checks are based on individual milk handlers.

What’s next?

It won’t account for past losses, but the markets might be “fixing” themselves.

Bottom line

Marin Bozic, assistant professor and dairy economist with the University of Minnesota, has outlined six primary factors driving PPDs:

  1. Long-term milk class utilization rates, highlighted by declining Class I (fluid) milk sales and increased use of milk in manufactured products.

  2. Rising milk protein tests and differences in how protein value is collected and distributed

  3. The spread in Class III-Class IV milk prices

  4. The discrepancy between the advanced fluid price issued before the month starts and the full-month average price

  5. The new formula used to calculate the Class I mover

  6. Depooling

Based on Bozic’s analysis, individual FMMOs were affected differently by each factor. Some of those (lower Class I fluid milk sales and higher milk protein tests) are long-term trends and not likely to change anytime soon. However, the Class III-Class IV milk price spread and depooling, often linked to that spread, were the two biggest factors impacting PPDs. Those may be changing.

Read: March negative ppds continue to climb out of 2020 depths

First, though, a look back. The FMMO Class III-Class IV price spread averaged about $2.27 per cwt over the first four months of 2021. That price relationship provided incentive for depooling the higher-valued Class III milk. On both a volume and percentage basis, April levels of Class III milk utilization and pooling were steady or lower than March levels in almost all FMMOs. On a volume basis, total Class III milk pooled across all FMMOs in April 2021 was about 1.37 billion pounds, down from 4.55 billion pounds a year earlier, just prior to major milk marketing disruptions caused by COVID-19. On a percentage basis, Class III utilization was about 13% of all FMMO milk marketings in April 2021, well below the 33% pre-pandemic utilization rate in April 2020 and far below the average of 41% for all of 2019.

Now, a look ahead. As a simple predictor of PPDs and FMMO pooling behavior, Chicago Mercantile Exchange (CME) futures prices (as of the close of trading on May 24) indicated the spread will shrink to $1.87 per cwt in the second quarter of 2021, $1.07 per cwt in the third quarter and $1.04 per cwt in the fourth quarter.

Longer-term, the Class III-Class IV spread virtually disappears in 2022 (based on current futures prices), and with it a major incentive for depooling is also eliminated. Also, the debate over the “higher of” and “average of” Class I mover formula becomes less relevant.

As always, markets are subject to change. If you’re prone to motion sickness, keep the dimenhydrinate handy.  end mark

Dave Natzke
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