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NMPF To Consider Proposal to Improve Class I Price Risk Management

October 18, 2017

NMPF’s Board Officers have endorsed a proposal to improve the price risk management of fluid milk, without reducing the revenue generated by Class I prices. The proposal was developed by a  task force of NMPF members, who engaged in discussions this year 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. After a series of meetings, the two groups have agreed on a proposal that would achieve both objectives. The proposal will be reviewed and voted on later this month by the NMPF Board of Directors.

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 would have to be reflected in any alternative pricing formula going forward.

Under the terms of the agreement – which ultimately will 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 keep the proposal revenue-neutral, it would boost Class I differentials by $0.74 per hundredweight in each federal milk marketing order.  This premium represents the average value of the higher-of system, dating back to 2000.  The larger differential 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.

The agreement creates a positive outcome for farmers and processors, because it addresses fluid bottlers’ desire for improved risk management, while protecting the integrity of Federal Milk Marketing Orders, and locking in the value that the “higher of” has provided. Also important, the agreement will unite NMPF and IDFA in support of the dairy title of the farm bill, which is also expected to contain badly-needed improvements in the Margin Protection Program. Given the ongoing federal budget challenges in developing a new farm bill, a unified dairy industry will be critically important to legislative success. The NMPF Board Officers unanimously endorsed the recommendation of the NMPF task force member, and are recommending approval by the Board.