Making Allowances

For the past three years, NMPF has operated Cooperatives Working Together to improve the price that farmers get for their milk. There’s widespread agreement that CWT has played an important role in bringing farmers two years of above-average prices, and we are now looking to expand the program this summer so we can continue making a positive difference in producers’ milk checks into 2007.

At the same time, NMPF also has to consider the business needs of its direct membership, which are dairy cooperatives. Although cooperatives exist to service the marketing needs of farmers, most people in farming understand that cooperatives have to be operated like most any other business. In other words, the cooperative has to be successful and relevant in the marketplace, and should succeed in making money in most years, just like any other business.

Many dairy cooperatives, however, have had a rough time of it lately because of a variety of economic pressures, some of which are tied to the rapid increase in energy costs. Since most of NMPF’s members take raw milk and manufacture it into products like cheese, butter, powder, along with ice cream, yogurt and bottled milk, the surge in natural gas, oil, and electric expenses has presented a huge challenge to the profitability of many dairy co-ops. Dairy production and processing are both energy-intensive enterprises, and there’s no escaping the pressures that come when energy prices soar.

Recognizing that dilemma, National Milk’s Economic Policy Committee decided earlier this year to support efforts to increase the make allowance that farmer-owned co-op processors (as well as proprietary processors) are permitted under the Federal Milk Marketing Order system. Ever since Federal Orders were reformed in 1998, the price that farmers get for their milk has been impacted by the size of the manufacturing, or make, allowances when milk is turned into butter, skim milk powder, cheese and whey. Larger make allowances mean smaller Class III and Class IV milk prices for farmers, and ultimately, lower Class I and II prices as well, because those prices are based on the Class III and IV prices.

NMPF’s Economic Policy committee decided that even though higher manufacturing allowances could mean lower producer prices in the short-term, it’s crucial for the long-term economic health of cooperatives – and ultimately farmers – to support those higher allowances. In the end, if manufacturing cooperatives continue to struggle with profitability issues, that affects the patronage that farmers ultimately receive from being part of the co-op. We’ve already seen an exodus of a number of cheese plants in the East and Midwest, in part due to the higher operating costs of the past several years. Fewer processing outlets for farmers’ milk means greater hauling expenses and less competition for their raw milk.

Just like milk prices, energy prices will probably adjust downward in time. Oil and milk are similar commodities, and they tend to follow patterns of highs and lows due to changes in supply and demand. But NMPF and its members don’t have the luxury of waiting for the return of lower energy costs, particularly because the current energy crunch is a global issue.

But in supporting higher make allowances, we did recognize that prices can move in either direction, and so should those allowances. NMPF’s proposal to USDA on the manufacturing allowance issue is for them to be tied to an energy index. The net result will be higher allowances during times when energy prices are high, but lower allowances, and higher farmer prices, when energy prices adjust. This approach doesn’t create winners and losers and is fair to everyone.

The other compromise the NMPF Economic Policy Committee reached in order to minimize the impact of the higher make allowances on producers was to minimize the impact from Class I and II milk prices at this time. Currently, Class II prices are priced off of Class IV’s monthly price, and Class I is the higher of either Class III or IV. Increasing make allowances for Class III and IV products has the net effect, then, of lowering prices for all four classes of milk.

But NMPF’s position is that even with higher make allowances for Classes III and IV, the prices for Class I and II should be based off of the old make allowance structure until USDA completes a more comprehensive review of all the data. In effect, we would be holding harmless about half of all of the milk utilization nationally from the effect of the higher make allowances, since about 50% of producer milk is used in Classes I and II, while moving immediately to address the Class III and IV make allowances. We’re still awaiting word from USDA about how it will deal with our request, but we are standing firm that the make allowances need to change, but not necessarily in ways that affect every class of milk.

This is a difficult issue for NMPF, coming at a time when milk prices are already suffering. But we remain committed on a variety of fronts to making the tough decisions necessary to improve the economic prospects of both farmers, and their cooperatives. NMPF’s position is a responsible and fair approach to allow things to keep moving at USDA. Choosing to do nothing is not a choice we can allow ourselves.

We call on everybody to rally around NMPF’s position and put aside individual interests. This compromise is best for the entire industry. Leadership is doing the right thing no matter how unpopular it may be – that’s why NMPF is the national leader for not only for producers and their cooperatives, but the entire dairy industry.

National Milk Producers Federation

Navigation

Archive