The Federal Milk Marketing Order system uses classified pricing based on milk use and creates a revenue pool to determine the minimum price of milk that participating handlers pay to dairy farmers. USDA classifies milk into four classes — Class I is used for fluid milk. To compute the base Class I price, USDA uses the Class I mover formula.
The 2018 Farm Bill changed the Class I mover at the urging of dairy processors, who sought greater predictability in managing risk on sales of fluid milk products. The formula was changed from a system that set the mover each month at either the Class III or Class IV price, whichever was higher (the “higher of” formula), to a set $0.74 /cwt added to the average of Class III and Class IV prices. This update reflected historical trends and was designed to be revenue neutral between processors and dairy farmers.
But the COVID-19 crisis dramatically changed price relationships from historic trends, spotlighting a glaring flaw in the mover that must be rectified to ensure orderly markets and a healthy dairy sector. As USDA purchased large amounts of cheese for the Farmers to Families Food Box program, Class III and Class IV prices sharply diverged. As a result, the new Class I mover led to an estimated $725 million in losses for farmers compared to the “higher of” formula. The unequal risk dairy farmers bear compared to processors during unusual market volatility means the mover must change.
The Class I mover was explicitly intended to be a revenue-neutral solution to the concerns of fluid milk processors about hedging their price risk. A modified approach is necessary to preserve these goals now and in the future.
This issue can be addressed through the federal order system at the national level. NMPF supports a proposal to recalculate the current $0.74/cwt every two years using the average of monthly differences between the higher-of, and the average-of, advanced Class III and Class IV prices during the prior 24 months, with the current mover serving as the floor. This preserves the mover predictability that processors sought while addressing the asymmetrical risk currently borne unfairly by farmers under the Class I pricing formula.