USDA must decide how it will proceed on conflicting requests from dairy producers and processors to fix what each side sees as problems with the way producers and processors are compensated through federal milk marketing orders.
Milk marketing orders were created nearly a century ago to establish classified pricing and pooling in the industry. The 11 regional orders across the country — which account for about 75% of the country's milk production — help provide fair pricing for both producers and consumers by establishing minimum prices paid to farmers in a particular region and ensuring payments to farmers are accurate and timely.
Last week, the International Dairy Foods Association filed a petition proposing to update the formulas used to calculate what are known as “make allowances,” rough estimates of what it costs to turn raw milk into a finished product. The Wisconsin Cheese Makers Association has also filed a similar petition, but with a different approach to determining prices across different classes of dairy products.
The National Milk Producers Federation, meanwhile, supports making adjustments to the manufacturing make allowances, but the group also plans to push for a more comprehensive strategy in the FMMO reform process. The American Farm Bureau Federation also wrote a letter to USDA objecting to IDFA and WCMA's petitions, saying they are "incomplete" and lack the "description and quantification of the expected impact on all segments of the industry, including dairy farmers, handlers, consumers and small businesses." Like NMPF, AFBF President Zippy Duvall wrote they are concerned about the limited scope of hearing.
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USDA outlined in a brochure key actions the agency will take over the yearlong process if a hearing is pursued. Here are some important things for you to know about that process and what players see moving forward.
- USDA has until April 29 to decide its next steps. The IDFA and WCMA petitions filed March 30 started a 30-day clock for Agriculture Secretary Tom Vilsack to decide how to proceed. He can deny the petitions for a stated reason, request more information, or issue an action plan that explains future prehearing steps.
- If an action plan is issued, USDA has 120 days to complete the hearing. The action plan would lay out a timetable for a hearing as well as necessary steps for USDA and those wishing to participate in the process. The plan would define the hearing's scope, explain processes for receiving any additional proposals and identify when the hearing would occur, said Andy Novakovic, an agricultural economist at Cornell University.
- Vilsack will determine the scope of the hearing. He already is faced with two petitions, and the third is expected soon from NMPF. Novakovic said he anticipates additional proposals will be submitted and could be included in the overall scope of the hearing.
- The hearing process is heavily weighted to hear from producers. Anyone can present testimony during a hearing, including a processor, cooperative, dairy producer or a consumer, so long as their comments are germane to the hearing notice. Any producer has the option to go to the front of the line each day a hearing is held.
- USDA would issue a recommended decision, allow for additional comments, and then issue a final decision. The department must compile all the testimony, publish a public record of the hearing and allow parties to file corrections to the transcript. Throughout the process, there are additional opportunities to submit briefs as well as comment on any recommended decision issued by USDA before the final vote.
Producers hold the power to approve or reject any final decision from USDA. Vilsack has said he wants producer consensus before moving forward on a hearing because it will require eventual approval by producers. NMPF President and CEO Jim Mulhern said he’s confident they’ve gained that consensus because they have gone to “great lengths” within the producer community holding over 150 meetings over the last two years that NMPF incorporated into their comprehensive proposal.
Edge Dairy Farmer Cooperative believes all producers should have the option to cast individual votes, which is why it has implemented modified bloc voting within its cooperative. Other cooperatives allow en bloc voting for all members. “Producers are often at the mercy of the federal order, and it is essential they have a say in how they are set up,” explained Tim Trotter, CEO of Edge, which is not an NMPF member but has been involved in discussions with other upper Midwest stakeholders on potential changes to the federal order system.
If USDA's proposed changes fail, then the entire FMMO system goes through a process to be terminated. A two-thirds majority is needed to approve a referendum, which would include USDA's final decision after the hearing and public input steps have concluded. Only those votes cast are counted; the total is not based on the number of potential dairy producers who could vote.
The entire order is voted as amended, not a line-item vote for each change. If the referendum fails, USDA starts the process of terminating the order, which takes about six months. This occurred in a western FMMO in 2004, which included parts of Idaho and Utah. To this day, producers there do not participate in a federal milk marketing order to pool or price their milk.
- There’s agreement that changes need to happen, but to what extent will be up for debate. It’s been 15 years since the formulas for make allowances have been changed, but 23 years since Class I fluid milk prices have been adjusted. Other important considerations will include component pricing, the Class I mover and Class I differential price system, said CoBank economist Tanner Ehmke, who recently wrote a paper on how updating make allowances is central to the future of FMMOs cited by IDFA in their petition. Ehmke said there will be issues that have widespread agreement, but the more minute details will be where disagreements can create divisions.
Certain changes called for under some proposals require legislative action. IDFA’s petition proposed an interim solution on the make allowance formulas to account for higher production costs, but it could lower milk costs $1.42 per hundredweight. IDFA recognized a long-term legislative solution would also be needed requiring timely studies to update the formula used to calculate make allowances regularly. Congressional action would be required both to authorize and fund the audits.
“It will likely then take at least another year or two, if not longer, after (not yet introduced, must less passed) legislation before such information can be available,” IDFA’s petition stated.
Mulhern said NMPF intends to seek legislation in the 2023 farm bill that would grant USDA mandatory authority to gather and audit manufacturing cost data from dairy processing plants and to report that information regularly.
The total process can take anywhere from 12 to 18 months, creating potential overlap with farm bill discussions. Edge's Trotter said the co-op would like to see any federal order hearing process postponed until after the new farm bill is passed.
“By the time any potential hearing is complete, a new farm bill will either have passed or be in active consideration. We fully expect it to include legislative changes to the dairy pricing system,” Trotter said. “Federal order hearings are costly, time-consuming and take considerable staff resources. If the rules of the road may change amid the process, we believe it makes the most sense to delay any hearing, regardless of scope, until after the next farm bill is completed.”
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