Both dairy producers and processors scored wins in a long-awaited USDA proposal to overhaul federal milk pricing regulations in line with changes in industry practices and market conditions. 

The National Milk Producers Federation (NMPF) and the American Farm Bureau Federation (AFBF) convinced USDA to eliminate a change made by the 2018 farm bill to the way that fluid milk is priced under federal milk marketing orders (FMMO).

The 332-page proposal, which still must be finalized by USDA and approved by producers, would restore a rule that makes the Class 1 (drinking) milk price the higher of the price of Class 3 (milk sold for cheese) and Class 4 (butter and milk powder) for the month, plus a differential that varies by location. The location differentials also were updated. 

The 2018 farm bill had fixed the Class 1 price at 74 cents above the average of the Class 3 and Class 4 prices.

AFBF had appealed to USDA to immediately restore the old pricing rule, using its emergency authority, but USDA did not. 

Still, the proposal is a big win for producers because it should result in higher prices, economists say. NMPF estimates the 2018 farm bill change resulted in a $1.3 billion in losses to farmers.

Producers also will benefit from USDA’s proposal to drop barrel cheese from a report used to track average cheese prices, because it has been running significantly lower than prices for block cheese due to changes in industry practices. 

USDA also tried to address some issues facing processors.

It proposes a separate new formula for milk with an extended shelf life, including products such as ultra-filtered Fairlife milk. ESL products represent about 8% to 10% of the fluid milk market.

The new formula, like the 2018 farm bill provision, aims at removing volatility in pricing for a product that is purchased and marketed over a longer period than conventional fluid milk. The ESL formula does away with the 74-cent differential in the 2018 provision in favor of an adjuster pegged to a moving average of prices.  

“USDA was rather creative in the decision on the Class 1 mover, by sort of giving us two Class 1 movers depending on the kind of milk,” said Peter Vitaliano, vice president of economic policy and market research for NMPF.

AFBF economist Danny Munch said the ESL formula was unexpected. “It looks like the reason they're doing that is just to provide a little bit more market stability for processors who sell that milk,” he said.

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USDA also proposes to increase processors’ "make allowances," or deductions for manufacturing costs. Once again, the department appeared to be looking for middle ground, with the industry split over the issue.

NMPF supported an increase in make allowances, but not as high as USDA provided. The International Dairy Foods Association, for whom increasing make allowances is a high priority, wanted a provision for further increases but didn’t get it.

Wisconsin-based Edge Dairy Farmer Cooperative, which isn’t a member of NMPF, didn’t support increased make allowances. AFBF said adjustments to make allowances should be based on a mandatory survey of processors, which USDA says it doesn’t have authority to do. (Provisions contained in pending farm bill proposals in Congress would require mandatory surveys, but it's unclear when a new farm bill will pass.)

Leonard Polzin, a dairy economist at the University of Wisconsin, said it was too early to tell what the full impact of the USDA proposal will be on producer revenue. Dropping the barrel cheese price is a “definite positive” for producers, and they’ll also benefit from dropping the Class 1 formula change imposed by the 2018 farm bill, he said.

But he said the impact on producers of the increased make allowances is a “big wild card,” because the increases could eventually be passed on to consumers in the form of higher retail prices or could result in reductions to producer returns.

“There were a lot of parties that wanted a lot of different things” addressed in USDA’s review, said Polzin, referring to the varied proposals made to USDA from different sectors of the industry. “And if we can end up in that neutral space afterwards and still have some of these things addressed, I think I'd probably mark that in the success column overall.”

Mike Brown, chief economist for IDFA, said in a statement that “some aspects” of the overall USDA proposal “are responsive to the facts and data presented” to the department during the hearing process. But he noted that processors of non-ESL milk wouldn’t benefit from the alternative Class 1 formula proposed by USDA.

USDA is expected to formally publish the proposal in the Federal Register around July 15, triggering a 60-day comment period, said Munch. The department will have another 60 days to review the comments and finalize the FMMO modifications.

Munch said it’s less clear when USDA would hold the producer referendum or what the rules for voting will be. He said there is no deadline for the voting to take place.  

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