A Matter of Equity

When the history of this Great Recession is eventually written, years from now, one of the key lessons will be that businesses playing by different rules – think of the unregistered hedge funds and their recent impact on Wall Street – can cause serious disruptions for everyone, if no one’s watching.

While much of the current focus in Washington is on how to provide better, more consistent regulation of America’s financial institutions, closer to home we have the rumblings of a similar dynamic in dairy production. As farms have gotten larger, some have also become processors, slipping through a regulatory loophole that allows them to disrupt the marketing of milk and undermine the economics of the entire milk marketing system.

Federal Milk Marketing Order regulations were designed to ensure that processors pay farmers – all farmers in a given marketing order – a consistent price, reflecting the total value of all the milk processed in the market. Even though some farmers’ milk may get processed into lower value uses like butter/powder, or cheese, all farmers in a region benefit from the higher valued uses to which milk is put, especially Class I, or bottled milk, which earns the highest price.

But what we’ve seen happening is that as the scale of some farms grows greatly (5% of the largest farms now produce nearly 60% of the nation’s milk), and as they expand into bottling, they’re able to exploit a loophole in the Federal Order regulations that allows them to keep all the benefits of higher Class I prices for themselves. This is the equivalent of having your cake and eating it too: on the one hand, you can compete like a big bottler and sell millions of gallons of milk per year; while at the same time, you’re treated to a special break intended for the small farmer with a bottling shed. The unintended result of this hole in the rules is that a few large producer-handlers ride on the back of many other smaller farmers in the market.

In order to correct this inequity and ensure more consistent treatment of all farms and processors, NMPF is now asking the USDA to end the exemption that larger producer-handlers enjoy from pooling requirements. We believe that the marketing rules need to be adjusted in light of the growing number of huge mega-farms that can exploit this loophole in milk pricing regulations – just as the growth of hedge funds in the past decade fostered an enormous destabilizing influence in the financial system. Thus, we want those farms that bottle more than 450,000 pounds of milk per month to be treated exactly the same as other bottlers that may not be owned by farmers. This will level the playing field and recognize that processing plants of a certain size, regardless of ownership, need to be regulated equitably.

If this effort isn’t successful, it’s not a stretch to envision that in the not-too-distant future, we’ll see a growing number of large producer-handlers producing and packaging fluid milk. By not contributing to the pool, they are ultimately lowering the blend price for every dairy farmer in the market.

Even as we make this request of USDA (and we’re joined in the effort by the International Dairy Foods Association), we are also proposing that smaller farmer-owned bottlers, those below the 450,000 pound per month threshold, remain exempt from the pooling provisions. This will reduce the regulatory burden on truly small farmers with their own modest bottling operations. The 450,000/lb. per month cap equates to a farm size of about 270 cows.

Now, some large-scale, vertically-integrated farms will claim that they should remain exempt from such regulation because they’re more efficient and can sell milk more cheaply. In fact, the only cost advantage they enjoy is their exemption from having to pay into the Class I pool – a loophole giving them, in many cases, a pricing edge of more than 10 cents a gallon, reflecting the fact that they don’t pool more than $1 per hundredweight with other farmers. That’s not efficiency – that’s free riding, while everyone else pays.

If history teaches us anything, especially these days, it’s that a system of regulation with serious loopholes is an accident waiting to happen. We need to learn from the past to avoid repeating it in the dairy business.

National Milk Producers Federation

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