Federal Order discussions bog down

February 11, 2009 06:00 PM
 

To a person, be they processor or co-op leader, everyone agrees Federal Milk Marketing Orders (FMMO) need to be streamlined and simplified.

Yet, deep, meaningful reform is years away—if it ever comes at all.

That's the good news and the bad news that came out of discussions at Dairy Forum 2009 held in Orlando in January.

"Conceptually, a lot of people agree that Federal Orders need to be changed. But the devil is in the details,” says Dave Fuhrmann, CEO of Foremost Farms USA

Cooperative, Baraboo, Wis., and chair of the National Milk Producers Federation committee on FMMO reform.

One proposal, backed by processors, is to have only Class I fluid milk regulated and allow all other classes to compete on an open market.

"It just seems to make sense,” says Fuhrmann. "But it was not accepted by the majority of cooperatives. If you go to just one regulated class of milk, you cannot look dairy farmers in the eye and say, ‘This is good for you.'”  

John Kaneb,chairman of HP Hood LLC, Lynnfield, Mass., is Fuhrmann's counterpart on the processing side, chairing the FMMO reform committee for the International Dairy Foods Association.

He blames Federal Orders, at least in part, for the current economic crisis facing the dairy industry. In 2001, he says, the change was made to drive the Class I price by the "higher of” either Class III or Class IV.

"That little ticking time bomb blew up in 2007,” he says. "Powder (Class IV) went through the roof and dragged Class I with it.”

The resulting high prices encouraged excess milk production, decreased consumption and drove consumers and institutional dairy users to find substitutes. "If we didn't have $21 milk last year, we wouldn't have $9 milk this year,” Kaneb asserts.

He also believes Federal Orders are driving processor consolidation. Dean Foods, he says, bought up numerous small and moderate-sized fluid plants that weren't profitable, closing some and increasing efficiencies in others. Dean has now become the Number 1 fluid processor in the country, often able to dictate where the fluid market heads. For example, HP Hood's move to BST-free milk was driven by the need to remain competitive with Deans, he says.

"Dean Foods understood what is going on in the fluid milk business and acted rationally,” says Kaneb. "But it's also testimony to how sick this business is.”

One approach to drive change would be a Federal Blue Ribbon Commission. "Sometimes a process benefits from having an outside solution imposed if the parties can't agree themselves,” says Kaneb. "That's how labor disputes get solved with binding arbitration.”

Fuhrmann disagrees. Plus, dairy producers and their co-ops hold all the chips because they're the ones who vote to make Federal Order changes. "Change is not going to happen until the co-ops get on board,” Fuhrmann says.

"And we [co-ops] might never reach consensus. We're not any better prepared to change the system than we were 10 years ago.”  

Small stuff first

At past Dairy Forums, processor executives almost competed with each other calling for dissolution of the Federal Milk Marketing Order (FMMO) system.

Now, most recognize that dissolution is not an option:     

  • It's not going to happen unless dairy co-ops, which control the FMMO voting process, allow it to happen.     
  • And if the system were dissolved, state orders would likely spring up to protect their producers, creating even greater balkanization.

"Going around and saying we have to blow up the system in not helpful,” says Mike McCully, director of dairy procurement for Kraft Foods. What's needed is leadership and education, and more collaboration between co-ops and proprietary plants to make the system work.

"The reality is, we have to move in small steps. We need to fix those things we can fix, pick up a couple more and work on those,” says John Wilson, Senior VP of Marketing and Industry Affairs for Dairy Farmers of America.

One example where there is agreement is the producer/handler issue. Back when dairy producers milked several hundred cows at most and markets were localized, it made sense to exempt these so-called "producer/handlers” from Federal Order rules. But in today's dairy economy, where one producer can control tens of thousands of cows, that exemption can create unfair and "disorderly” marketing.

Another area of agreement, at least in concept, is to stop piling additional costs onto Class I fluid milk. "I don't disagree,” says Dave Fuhrmann, CEO of Foremost Farms USA. "It doesn't make sense to add higher prices to Class I because consumption decreases. But we do have to control the price so it's not a race to the bottom.

"In the end, I think we have to have some deregulation for the health of the industry along with strong USDA oversight,” says Fuhrmann. "We should lower Class I differentials, and have a free market for Class III and IV to get more milk solids sold. But the devil is in the details.”  

Both processors and co-ops agree that discussions must continue. The alternative is not an option.


                  
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