Should Federal Orders Be Reformed

September 29, 2015 09:29 PM

If anybody missed the memo, milk marketing is a lot different in 2015 than it was in 1999 when the last Federal Milk Marketing Order reform took place, says John Newton, senior director of Economic Research for the National Milk Producers Federation.

Back then, Congress directed USDA to consolidate the 31 marketing areas down to 10 to 14 Federal Orders. USDA settled on 11, and now there are just10, with the Western since voting itself out of existence.

Since then, says Newton, dairy consumption patterns have changed dramatically, with per capita fluid milk and cream consumption continuing to drop. It’s down some 20% in the last 40 years, and on a glide path to even lower numbers. Meanwhile, cheese, yogurt and even butter consumption are all increasing.

The United States is also now the No. 3 exporter of dairy products in the world, behind only the European Union and New Zealand.

And plant make allowances haven’t been updated in a decade, making it difficult for companies and cooperatives to expand processing. That may be one of the reasons processors in the Northeast and Mideast were forced to dump some 800 tanker loads of skim milk during the 2015 spring flush. There simply wasn’t enough capacity to process the milk into dairy products.

The elephant in the room, says Newton, is that between 2015 and 2024, U.S. dairy manufacturers will need to process 40 billion more pounds of milk from expected – according to USDA’s most recent baseline projections. That’s on top of an expected 10 billion lb. annual decline in fluid milk use. That’s 50 billion lb. more milk that will have to be manufactured into dairy products while remaining internationally competitive, he says.

The Federal Order hearing now underway in California could also advance the discussion. One of the proposals includes mandatory pooling for all cheese plants in California. If that provision becomes part of the California order, it’s likely other Federal Orders will be petitioned to do likewise.

Similarly, another proposal in California would do away with the hated Producer Price Differentials (PPDs) by blending them into component prices. While these may be accounting shifts, they would do away with the negative perception of PPDs. But if California could do away with negative PPDs, perhaps Federal Orders with component pricing would want to as well.

So, with the 2014 farm bill debate now history, it may be time to re-visit Federal Order reform, says Newton. The tricky part will be reaching agreement, but Newton says NMPF’s Foundation For the Future Federal Order proposal might be a starting point.

That proposal:

• Moved away from end product formula-based pricing and instead returned to competitive pricing.

• Maintained Class I minimum prices, based on a competitive price and considered modifications to “the higher of” Class III and IV.

• Based Class IV make allowances on an energy index that would allow make allowances to rise and fall with energy prices rather than be fixed.

Newton says new ideas on how to approach Federal Orders are needed now—2024 isn’t that far off. “Farmers are willing to give something if they get something in return, but the end result must grow the pie” he says.



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