Jim Dickrell is the editor of Dairy Herd Management and is based in Monticello, Minn.
Federal Order Issues Frustrate Dairy Reforms
Jan 03, 2011
The biggest obstacle to passage of the National Milk Producers Federation (NMPF) “Foundation for the Future” dairy reform proposal won’t be MILC payments or supply management. Those can and will be dealt with.
The biggest stumbling block has been and continues to be issues involving the Federal Milk Market Orders. Still unresolved is what to do with Class IV pricing. The biggest bugaboo is trying to come up with a new system with California still outside the Federal Orders and not prone to join.
But even dealing with Class IV issues within the Federal Order system is no walk through the alfalfa. Consider the issue of “higher of” pricing.
Recall that “higher of” pricing came in with the last round of Federal Order reform in 2000. It stipulates that the “higher of” advanced Class III or IV prices will become the Class I mover. The logic is that the Class I price must exceed manufacturing prices (both Class III and IV) to encourage cheese and powder manufacturers to supply Class I fluid needs. If there’s no economic incentive to move milk to fluid plants, cheese and powder producers will simply keep producing cheese and powder. Simple enough.
The Foundation for the Future does away with “higher of” pricing. In its place, the plan calls for some kind of (yet to be determined) competitive pay price based on what Midwest cheese plants pay for milk.
The Dairy Cooperative Marketing Association (DCMA), made up primarily of southern dairy co-ops, released a position paper on its “higher of” concerns last month. It notes that since Federal Order reforms took place on Jan. 1, 2000, Class IV prices were the “higher of” 58 (44%) of those 132 months. Had the “higher of” provision not been in place, dairy producers who share in Class I proceeds would have lost on average 48¢/cwt., or $213 million per year. Times 11 years, that’s a revenue loss of $2.343 billion. That’s a big chunk of money, with losses concentrated in high Class I regions. So it’s not surprising that these folks are concerned.
NMPF believes using a competitive pay price, where cheese plants actually bid for milk, would likely result in higher Class III prices. And so there would be less need, if any, for “higher of” pricing.
Well, maybe. The need for competitive Class III pricing comes from a strong belief, bordering on religious fanaticism among some producers, that the Chicago Mercantile Exchange (CME) is not a free and competitive market. Many of these producers believe the CME is a den of iniquity, manipulative speculators and processor cronies who set prices at their whim and only to their benefit.
But a more rational view (yes, admittedly, prices can be bid up and down on emotion) is the CME is fairly and generally reflective of supply and demand. Whether you’d see huge and sustained increases in cheese prices when plants are forced to bid for milk is open to debate.
For the sake of argument, assume that CME prices are within a plus/minus 5% spread of what cheese plants would bid. (I used +/-5% because that’s well within the 48¢/cwt. “higher of” difference mentioned in the DCMA analysis.) When I did, I found that Class III prices surpassed Class IV prices 24 of those 58 “higher of” months cited in the DCMA position paper. In four of those months, it only took a 1% jump in Class III to make it the “higher of.” But it took a full 5% jump in eight months to push Class III above Class IV.
Remember, though, that competition works both ways. If milk is plentiful and cheese plants are full, you might see even lower Class III prices. (And keep in mind, the Foundation plan would also do away with price supports. So there would be no floor to how far prices could fall when no one wants or needs your milk.) When I ran my analysis, Class IV would have become the “higher of” 19 more months if Class III prices fell 1% to 5%.
The bottom line is that there are no easy answers. Producers, cooperatives and processors are going to have to make some very tough choices. Informed decisions, based on good data, are our best hope. Even then, leaps of faith, hope and charity will have to be made.