If the last seven weeks of hearing testimony is any indication, USDA has a major challenge ahead in formulating proposed changes to the federal milk marketing order and balancing the wish lists of dairy producers and processors.

Since Aug. 23 in Carmel, Indiana, USDA dairy experts have heard testimony and cross-examination on four of the five major topics in the proceedings. All told, USDA is expected to consider 22 different proposals to update the way producers’ milk checks are determined. The National Milk Producers Federation has the most comprehensive proposal, but dairy processors, other dairy stakeholders and farmers have each suggested varying reforms.

The hearings recently began a six-week recess; the discussions will resume for at least two more weeks after Thanksgiving. At the end of the process, which could take another 15 to 18 months, producers will decide whether or not to approve USDA's proposed changes.

Stephen Cain.jpgStephen Cain, NMPF

Stephen Cain, NMPF’s chief economist, said dairy producers have been heavily involved throughout the hearing process both as witnesses in the proceedings and through special time slots afforded to producers for virtual appearances on Friday afternoons.

The testimony has offered great input, thoughtful questions and ensures the process is “understood and supportive of dairy farmers,” Cain told Agri-Pulse. “The last thing they want to do is put something forward that the producer group is upset about or doesn’t want.”

Lucas Sjostrom, Edge Dairy Farmer Cooperative's managing director and a dairy farmer himself, said Edge has tried to be active in the hearing. “Our guidelines are better price discovery, better risk management and maintain federal orders,” Sjostrom said.

“We need to realize the balance of power has really shifted into the hands of the processor or co-op, and obviously co-ops are owned by their dairy farmers. But at the end of the day, we just asked USDA to keep as much power in the hands of the dairy farmers as possible because that pendulum has swung in most areas of the country,” he added.

Dairy processors are also pushing for FMMO reform, including through a more narrow proposal submitted by the International Dairy Foods Association, which represents many of the sector's processors. Mike Brown, IDFA's chief economist, said, “The bottom line is: Federal Milk Marketing Orders need updating to better reflect current market conditions. The FMMOs regulate minimum prices, and minimum prices are just that. It is important that they not equal or exceed the market and allow the market to find the equilibrium.”

Dairy processors want to ensure they can hedge against market disruptions. Brown said it is important to “preserve risk management options for Class I fluid milk to mitigate price risk and stimulate the innovation and investment this category needs.”

Sally Keefe, consultant for the Milk Innovation Group representing 10 national companies including Fairlife and Aurora Organic, told Agri-Pulse MIG is seeking to “reflect the reality of the current industry and consumer marketplace.”

“Fluid milk’s ability to compete, invest and innovate suffers from antiquated rules in today’s modern beverage market. This adversely affects the entire dairy industry as falling Class I fluid milk sales result in lower prices paid to dairy producers. The fluid milk segment of the dairy industry has declined for decades, continues to decline dramatically and struggles to compete on grocery store shelves today,” Keefe said.

MIG sought to have organic milk excluded from the federal order as part of the hearing process, but USDA denied the request. So far, five organic dairy farmers testified and reiterated their call to be excluded from pooling — forming uniform prices based on the end-use of the milk collected from farms — if farmers are paid above the Class I premiums. USDA also rejected a proposal from MIG on extended shelf-life shrinkage.

Adam Warthesen, director of government and industry affairs at CROPP Cooperative and Organic Valley, said the worst-case scenario of all the proposals examined could result in an over 40% increase in their annual pooling obligations. MIG’s proposals could lessen the blow.

NMPF’s proposal seeks a return to the 74-cents-per-hundredweight over the “higher of” the Class III (milk sold for cheese) and Class IV (butter and milk powder) in determining the Class 1 mover. Keefe said other proposals represent a compromise position; IDFA has proposed updating the static 74 cents to a floor adjuster and updating it annually.

Edge has two proposals that eliminate what it calls the negative producer price differentials or “PPD-inducing” advanced pricing. One bases the Base Class I Skim price on cheese plus an adjuster, and the other on the higher-of Class III and IV.

MIG proposes to update the adjuster monthly using a 24-month “look-back” period and a 12-month lag which also offers a rolling adjuster calculation. Farm Bureau also included a proposal to eliminate the advanced pricing components of Class I milk and components and Class II skim milk and components.

“We are weary of the jump to return to what is comfortable versus to head toward something that's a much bigger opportunity we think for the whole industry,” Sjostrom said. “Our research and data show that going to the ‘higher of’ doesn’t eliminate the problem that many of us came here to see fixed.”

Sjostrom said some proponents of returning to the “higher of” before it was changed in the 2018 farm bill claim they hear from farmers “loud and clear” a desire to return to the previous policy. “They don’t say the data shows that farmers are going to be better off, or that we’re going to be solving the problems that we set out to solve,” he said.

Another point of contention is increasing the make allowance — the way a milk check is divided to properly pay for milk and account for processor production costs. Brown explained IDFA wants to see make allowances designed to better reflect the current operating cost environment for processors.

“IDFA recognizes the need for upward adjustments to those make allowances while also tempering the immediate impacts on our producer community by proposing that the revised make allowances be phased in over time,” Brown said.

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But those who represent farmers, including AFBF and Edge, said it is important not to increase the make allowance without first conducting a mandatory industry price survey — which would need to be authorized through legislation — to better understand current production costs.

NMPF has pursued a modest increase to make allowances up front, yet AFBF Chief Economist Roger Cryan said he questions whether this is needed in today’s market. 

Roger-Cryan-300.jpegAmerican Farm Bureau Chief Economist Roger Cryan

“The fact is that we’ve seen the construction of a lot of big new cheese plants that obviously can make money even at the current formulas,” he said. “We question whether there’s a need for an increase in make allowances at all until we see numbers that verify.”

The hearing just started to scratch the surface on the final focus area to update Class I and Class II differentials before it began the six-week recess. NMPF’s lead witness — Jeff Sims, an NMPF board member and the chief market analysis officer for Lone Star Milk Producers — was on the stand for 12 hours and “took the brunt of the initial questions and cross-examination from the other processor groups,” Cain said, noting NMPF has roughly 20 total witnesses lined up to testify on the issue.

Differentials — the cost to move surplus milk from one region to where it’s needed in another — were originally put in place when the federal order was reformed in 2000. NMPF’s proposal updates USDA’s Dairy Sector Stimulator — DSS — to reflect the “real world workings of moving milk from regions around the country,” Cain said.

But the conversation around differentials can quickly become very granular and regional; there are 3,108 differentials established today. “The scope of the differentials is what is going to make this take such a long time,” Cain said.

After hearing the presented testimony and defense, Cryan believes NMPF has done a “reasonable job of taking model results like USDA used 25 years ago and making localized adjustments to put it into operation in ways that are practical.”

But Organic Valley’s Warthesen said NMPF’s proposal on changing differentials for fluid milk nationwide puts Organic Valley and other fluid milk innovators “at a lot of risk because it creates higher Class I differentials.” MIG has a proposal to lower the current base from $1.60 to zero. 

Josh Tranel, an organic dairy producer from Wisconsin, was the first producer to testify during the process and shared the “FMMO pool is a constant, multimillion dollar draw” from CROPP Cooperative.

The hearing will recess until Nov. 27 to get the necessary government officials and all other interested parties back in the room again.

Cain hopes the six-week break can allow those involved to prioritize their questioning and testimony. “A lot of folks are getting burned out at this point,” he said, and a break can help those to return and “hit the ground running.”

There’s anticipation that two more weeks of testimony can help gather all the information needed for USDA to formulate its proposed changes in the months ahead.

Cryan believes it’s 50-50 on whether the hearing can conclude in those two weeks. “It really depends on [NMPF]. They have an enormous amount of details to present. The processing folks have been cross-examining them ad nauseam in order to trip them up,” he said.

If the hearing wraps up by early December 2023, Cain said USDA could offer its recommendations in April, possibly finalizing the language after a comment period by the end of 2024. Cryan said a final decision from USDA could be put up for a producer vote before the end of 2024, possibly concluding the process by early 2025.

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