Stakeholders Discuss Various Strategies To Reform FMMOs
During this year’s CheeseCon, held April 4-6 in Madison, Wisconsin, and hosted by the Wisconsin Cheese Makers Association (WCMA) and the Center for Dairy Research, a panel of producer, processor, and market executives convened to discuss “Milk Pricing Reform in Federal Milk Marketing Orders” (FMMOs).
The panel follows petitions submitted last week by the International Dairy Foods Association (IDFA) and WCMA to USDA’s Agricultural Marketing Service (AMS) seeking a national hearing on updating the federal milk marketing order (FMMO) system. The petitions, submitted on March 28, specifically focus on one component of possible FMMOs modernization or reform: manufacturing or “make” allowances.
Following the submission of petitions by IDFA and WCMA, the National Milk Producers Federation (NMPF) sent a letter to Bruce Summers, AMS administrator, saying it opposes the petitions submitted by IDFA and WCMA, noting they would be economically harmful to the nation’s dairy producers by addressing the single issue of make allowances in isolation without consideration of a number of other provisions of the current FMMO program in need of review and update.
Stakeholders on both sides of the issue were part of the CheeseCon FMMO panel on Wednesday, which was moderated by WCMA Executive Director John Umhoefer and featured Jim Mulhern, president and CEO of NMPF; Mike Brown, chief economist at IDFA; Marin Bozic, president of Bozic LLC and board advisor for Edge Dairy Farmer Cooperative; and Mark Stephenson, retiring director of Policy & Markets, University of Wisconsin-Madison.
Stephenson provided an overview of the history of FMMOs, noting that the program first was established to address issues including seasonal price volatility, adequate supply of milk to consumers and destructive competition.
Looking at the same issues today, Stephenson notes seasonal price volatility is minimal compared to other sources of volatility.
“We now have futures markets and government-subsidized programs to address price risk,” he says.
Regarding the issue of an adequate milk supply to consumers, Stephenson says this goal largely has been met.
The FMMO system, as originally designed, was meant to promote orderly marketing conditions in fluid milk markets; improve the income situation of dairy farmers; supervise the terms of trade in milk markets in such a manner as to achieve more equality of bargaining between milk producers and processors; and secure consumers adequate supplies of good quality milk at sustainable prices, Stephenson says.
“FMMOs were a fluid milk solution to producer problems — is a fluid milk solution the right mechanism in a manufacturing world?” he asks.
“I would love to see us ask the harder questions, identify the flaws that markets may not be able to solve on their own,” he adds. “Then we could begin to craft a modern solution to those problems. Today’s dairy industry is way more complicated than when I got started.”
Stephenson says while some aspects of FMMOs are useful, such as audited public market data and enforcement of timely payments, others may not be as necessary, such as classified pricing and pooling. He notes most other countries don’t use this even where there is government regulation.
Technology also has allowed dairy markets to become more complex, he adds.
Stephenson notes that FMMO authorization and guardrails are permanent legislation, which would need to be changed by Congress.
“In my opinion, small measures of change to FMMOs won’t be enough in the long run,” he says. “We need to think boldly about the future of the industry and work our way incrementally — or radically — toward those goals.”
Bozic shared some of his insights as a board advisor to Edge Dairy Farmer Cooperative, including the co-op’s “Class III+” proposal, aspects of which include:
• To facilitate producer risk management and reduce the likelihood of depooling and negative producer price differentials (PPDs) — an ongoing topic of concern, particularly during COVID — the Class I skim milk price would be calculated as Class III skim milk price plus Class I skim milk price adjuster. In all FMMO pricing formulas, advanced prices are replaced with announced prices.
• To facilitate orderly marketing and abundant supply of beverage milk, USDA would publish a revised Class I skim milk price adjuster each September for the forthcoming calendar year. The Class I skim milk price adjuster would be equal to the average of the monthly differences between the higher of advanced Class III and Class IV skim milk pricing factors, and the Class III skim milk pricing factor during the prior 36 months of August through July.
• To facilitate faster convergence toward revenue neutrality after COVID, the Class I skim milk price adjuster for 2021-2025 shall not be lower than 36 cents per hundredweight.
Bozic says what elevates this proposal over others is that it allows consumer packaged goods and foodservice companies to hedge Class I milk exposure. It also is the only proposal that removes advanced prices, leading to one less cause of negative PPDs and depooling.
He adds the annually updated adjuster ensures revenue neutrality and lowers price volatility for retailers.
Umhoefer shared some of the WCMA Order Reform Committee’s milk pricing and farm bill priorities, which include:
• Update make allowances with survey data, then adjust with regular, mandatory plant audits and cost indices;
• Resolve the block/barrel spread with new product mix to value protein;
• Move off dry whey to value other solids;
• Support depooling/repooling provisions in FMMOs;
• Support permanent legislative authority for forward contracts; and
• Expand funding for USDA’s AMS for expanded services.
Umhoefer and Brown also discussed aspects of WCMA and IDFA’s petitions to USDA. (For more information, see last week’s article or view the petitions online.)
Mulhern says NMPF will submit its own petition to USDA later this month. He notes NMPF modernization recommendations that have been approved by the organization’s board include:
• Return to the “higher of” Class I mover;
• Update Class I differentials throughout the United States;
• Discontinue use of barrel cheese in the protein component price formula;
• Extend current 30-day reporting limit to 45 days on forward-priced sales of nonfat dry milk and dry whey;
• Update the milk component factors for protein, other solids and nonfat solids in the Class III and Class IV skim milk price formulas;
• Develop a process to ensure make allowances are reviewed on a more frequent basis by enacting legislation authorizing USDA to conduct mandatory plant cost studies every two years and report results to the dairy industry; and
• Proposed interim make allowance adjustments including cheese at $0.2400 per pound (versus $0.2003), dry whey at $0.2300 versus $0.1991, butter at $0.2100 versus $0.1715 and nonfat dry milk at $0.2100 versus $0.1678.
Mulhern adds updates are needed as the cost data used for current federal order manufacturing allowances is more than 15 years old, and inflation has made plant margin issues worse over the past two years.
He notes while make allowances do need to be adjusted, a more pressing issue is reliable, accurate data.
“We don’t want to put reform off for the farm bill, but we want to address more than one issue,” he says.
Stakeholders say they expect to hear from USDA within 30 days, with a possible hearing being set for this summer or fall.
“This is not a fast process,” Mulhern cautions. “It will take a year-and-a-half from beginning to end, and it likely will end on a vote on a recommended decision from USDA.”
Brown adds USDA is well aware of the urgency of many of these issues.
“They likely will get other proposals. We may have started the clock, but other people will have positions as part of the process,” he says.
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Source: Cheese Market News
