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NMPF Board Approves Proposal to Improve Risk Management for Fluid Milk

November 16, 2017

At its 2017 annual meeting in Anaheim, Calif., NMPF’s Board of Directors endorsed a proposal to improve the price risk management of fluid milk in a way that also captures for farmers the monetary value of the current fluid milk pricing system. The proposal will be one element of a larger package of farm bill risk management improvements that NMPF will ask Congress to approve in the coming months, as the House and Senate Agriculture committees begin to formulate the next farm bill.

The proposal approved by the board was developed earlier this year by a task force of NMPF members, who engaged in discussions with members of the International Dairy Foods Association to find a mutually acceptable approach to improving the risk management of Class I milk while preserving the farm-level revenue that the Class I formula generates for producers’ milk checks.

The current classified pricing system, established in 2000, uses the higher of the Class III or IV price in each month, plus a location-specific differential in each milk marketing order region, to set the monthly Class I price. Use of the “higher of” makes it difficult for Class I milk handlers to hedge risk because they don’t know which class will be the mover for a particular month. However, the “higher of” calculation as the Class I mover has benefited dairy producers since its implementation, and NMPF task force members made clear that value needed to be reflected in any alternative pricing formula going forward.

Under the terms of the agreement, which will ultimately require approval by Congress, the current Class I system would be adjusted using the simple average of Classes III and IV as the Class I mover.  This will reduce some of the unpredictability of pricing beverage milk, as it gives processors the ability to hedge Class I milk prices using Class III and IV futures.

To compensate for any loss of the “higher-of” pricing approach, this proposal applies a $0.74/cwt increase to the monthly skim milk value in each federal milk marketing order. This represents the average value of the “higher-of” system dating back to 2000. The adjustment is needed so that moving to an average of the two market-determined manufacturing class prices does not diminish the contribution to the blend price provided by Class I revenue.

“This action will improve price risk management by reducing some of the unpredictability of beverage milk prices, as it gives fluid milk handlers and their customers the ability to hedge milk prices using the futures market,” said Jim Mulhern, president and CEO of NMPF. “This change locks in the value of the ‘higher-of’ pricing approach, protects the integrity of the Federal Order system, and aligns the policy interests of dairy farmers and processors as we begin work with Congress on a new farm bill.”