National Milk’s Attempt at Order Reform
Mar 28, 2011
Plenty of questions come with Federal Milk Order Reform, the final part of National Milk’s Foundation for the Future reform package. Will it be more or less complex? And what will it achieve?
A couple of weeks ago, the National Milk Producer Federation (NMPF) issued a press release trumpeting its Federal Milk Order Reform package. It’s the fourth and final part of NMPF’s Foundation For The Future plan to revise U.S. dairy policy.
Like a lot of other folks who read the release, I came away with more questions than answers. So, last week, I did a 20-minute interview with Jim Tillison, NMPF’s Senior VP of Marketing and Economic Research and Chris Galen, NMPF’s Senior VP of Communications. Here’s what I learned:
Tillison and Galen say this is an attempt at simplifying the system into two classes: Fluid milk and manufactured dairy products. Gone are price minimums for Class II, III and IV. Gone are make allowances for cheese. Gone are negative Producer Price Differentials (PPDs). And gone is explicit reliance on the Chicago Mercantile Exchange.
“Some people wanted us to go all the way from the current system to a two-class system based on competitive prices, going from A to Z all at one time,” says Tillison.
But after 10 meetings over 14 months with dairy co-op leaders, it was clear such radical reform was not possible. “Our plan takes us from A to M. It gets us half way there,” Tillison says.
Complexity will remain, however, because the proposed system retains the ghosts of the current four classes.
Current Class I price differentials remain, as does “the higher of” Class III and IV prices to set the Class I price mover. Class II will have a 30¢ per cwt. differential—down from the current 70¢ per cwt.
Though there will be no Class III minimum prices, USDA will conduct regional surveys of proprietary cheese plants outside of California to determine the prices these plants paid for milk that goes into the cheese vat. (California prices will not be included because they are still set by formula rather than competitive pay prices.)
These surveyed prices will be used to determine a cheese price average each month for calculating the Class I mover. Proprietary plants (meaning non-co-op plants) that process more than 250,000 lb. of milk per day will be surveyed. NMPF estimates the survey will cover more than 70% of the daily cheese production.
Class IV prices will be calculated using the current Class IV formula, which uses National Agricultural Statistics Service butter and nonfat powder prices.The higher of the competitive cheese milk price and the Class IV formula price will be used to determine the Class I mover.
Handlers of Class IV milk will still pay into their Federal Order pool if the Class IV formula price exceeds the cheese milk price. They will draw from the pool if the Class IV formula price is below the region’s competitive cheese milk price. But that Class IV handler draw cannot exceed the available pool balance. Thus, the PPD can never be negative.
Though NMPF says the plan is not designed to enhance prices, average PPDs would rise on average 25¢ per cwt. across the system compared to PPDs over the last five years. The lowest increase, due to its low Class I utilization, would be 11¢ in the Upper Midwest. The largest increase, 47¢, could come in the Southwest.
One can argue, and many will, whether this new and improved Federal Order system is more or less complex. And what will it achieve?
Will it reduce volatility? Perhaps. If cheese and powder plants only pay what the market will bear, it’s rational to assume pay prices will go up and come down more gradually than the limit-up and limit-down volatility of the Chicago Merc. But don’t kid yourself: Cheese plants still look to the Merc for spot price guidance. They will not pay more for milk than the value of the cheese they sell.
Will it eliminate make allowances? It certainly will eliminate formulaic cheese make allowances; butter/power makes remain. But no cheese plant can exist very long without some margin to cover manufacturing costs. So cheese make allowances will now be reflected in the price cheese makers can bid for milk.
Will it eliminate negative PPDs? Yes, by definition. But if butter/powder plants can’t draw more from the pool than is in the pool (which in the past allowed them to tap into the PPD), they’ll have fewer dollars to bid for milk.
How quickly could all this be implemented? No one knows. The Federal Order folks I’ve talked with suggest the changes will require a national hearing. Far more detail will have to be hammered out in those hearings to implement the changes.