Milk-Pricing Modernization: Consensus Can Help Pick Up the Pace
May 3, 2023
The thing about any long journey is, even after you’ve come a long way, you still more steps to take.
But with proper preparation and a clear plan, the rest of your journey may be smoother. That’s our hope now that we’ve submitted to USDA our comprehensive proposal for Federal Milk Marketing Order reform.
Without torturing the metaphor further by saying we have the wind at our backs, I will say that our disciplined approach has had encouraging results. More than 150 meetings over nearly two years, with many of the industry’s best minds, including producers of all sizes and in all regions of the country, as well as the cooperative-led processing community, has generated a strong consensus among producers that portends well for the proposal we’ve presented USDA. The Federal Milk Marketing Order system is, in the end, focused on farmers – and we’ve gained unanimity among our producer-leaders in backing this proposal.
And it’s not just us at NMPF. We deeply appreciate the collaborative spirit and helpful conversations we’ve had with numerous national, state and regional groups, including the American Farm Bureau Federation. Many of these groups have their own perspectives specific to their circumstances, and we’ve appreciated the good faith efforts to find consensus. Those conversations have made our proposal stronger as it’s deepened our producer support.
A lot of work has gone into this effort. We have examined the program in great detail and come up with a plan to modernize and update federal milk marketing orders so they can work better for today’s dairy industry. And it’s also important to note, to everyone involved, how much the elements of our proposal rely on one another to succeed.
Take the make allowance, for example – a key priority of our hearing request. That specific portion of federal orders, which helps cover processing costs, is of intense interest to some, but still needs to be addressed in a way that benefits all. The make allowance is important; it hasn’t seen a meaningful update in 15 years. But handling that issue in isolation would have the effect of reducing milk prices to farmers, a non-starter in a program that’s ultimately supported by a vote from producers.
And the make allowance is far from the only issue the USDA needs to address. That’s why we have the make allowance issue in our proposal, but as one of five provisions on which we’re seeking a hearing. Other necessary updates to milk pricing help economically offset our proposed make allowance adjustment, by bringing pricing formulas up-to-date and minimizing disruption to markets.
One example of a needed update is changes to formulas that are based on the composition of milk itself. Key pricing factors are tied to the protein, solids-not-fat and the other solids content of milk. The factors currently in use date to the late 1990s, before the last major change in the federal order program in 2000. A quarter-century later, the protein content, the solids-not-fat, and the other solids content of milk coming off the farm is higher. We need to adjust those factors, because they have an impact on the price that is reported and then, ultimately, paid to producers. That’s one issue.
Another example is Class I fluid milk pricing. Given the example of the pandemic, which showed how a change in the Class I pricing system we supported in the 2018 Farm Bill ended up placing too much price risk on farmers, we’re calling for a return to the “higher of” approach that priced milk off Class III and Class IV prices. While the pandemic exposed the problems with the new formula, the problems occurred last year as well, demonstrating the need to return to the “higher of.”
We’ve also updated the Class I differentials, a fixed price per hundredweight of milk, in each of the 11 federal orders around the country. The fluid market – the bottles of milk you see in the stores – is a higher-cost market to service, and farmers need a federal order system that more accurately reflects costs and manages risks than what we have today, rather than the environment of 2000, when the current Class I differentials were set. Updating differentials and returning to the higher of are key components of furthering the key purpose of the Federal Milk Marketing Order system – to ensure orderly milk markets nationwide.
Returning to the make allowance: While it’s clear that updates to make allowances are needed, it’s also become clear that a fair, lasting solution is going to require sound, higher quality data, from which we then can build producer consensus.
To move toward that outcome, we’re first proposing an interim increase in the make allowance of cheese, whey, butter and nonfat dry milk. This increase already has support from producers, who unanimously endorsed it at our NMPF annual meeting last October. But to go much further on adjusting make allowances, we need to address the need for solid data, so we can make changes that reflect current conditions with greater certainty than what is now possible.
For that, we need to go to Congress to get authority for USDA to conduct a mandatory manufacturing cost survey. We are going to pursue that in the farm bill, through a provision from Congress that gives USDA the authority to do a mandatory, auditable survey of plants that are reporting their price information to USDA and get further information from them on their manufacturing costs.
By reporting that every two years to the industry, we then can have a mechanism to more regularly update make allowances going forward. That’s important for a truly modernized system. It’s also critically important to get it right, which is why we’re taking the path we’ve chosen.
Modernization of the Federal Milk Marketing Order system has been due for some time, and the pandemic experience, which exposed disorderliness in the system, underscored just how overdue this effort has been and created the necessary momentum for change. Yes, we’ve been deliberate – but we wanted solutions that had benefits for everyone, and we wanted to make sure that we addressed the concern that Agriculture Secretary Vilsack had stated, well over a year ago, when he said it was important to have consensus within the producer community.
We have achieved that consensus. I’ve been very heartened by the strong degree of support for the proposal that we submitted to USDA on Monday. To keep this momentum going, we now need to prepare to make the best case possible before USDA. And we’ll need to maintain the strong consensus we’ve achieved. That’s important for the best outcome, and it’s important for keeping the pledge we made at the outset to pursue modernization that leaves this industry better positioned to meet today’s – and tomorrow’s – challenges.
The key to a successful journey is to prepare well, anticipate the challenges in advance, go in with a plan, and execute that plan without wasting energy. We’ve been dedicated to those principles so far, and they will continue to guide this process. That’s not just how you reach a destination. It’s how you succeed – and in less time than others may have thought possible.
Thank you to everyone who has helped bring us this far. It’s time now to move forward.
President & CEO, NMPF