FMMO Formulas Need to Reflect Today’s Realities

Way back in the 1930s, one of the original motivations behind creating the Federal Milk Marketing Order system was to provide incentives for farmers to produce better milk. Much of the milk at the time was Grade B, which was lower quality than the Grade A milk earmarked for fluid consumption. To ensure an adequate supply of higher-quality milk, the FMMO system set up pricing that encouraged its production.

It worked. U.S. milk production is now almost entirely Grade A – even for uses in which Grade B is permissible, such as in certain manufactured dairy products. And in the past quarter century, better animal care, and better science and technology, has improved milk even more in terms of its nutrition, its quality and its premium-value components. For one example – take a look at how the percentage of protein in 100 pounds of milk has evolved since 2000.

Impressive. And just like in the 1930s, it has to do with incentives. The adoption of multiple component pricing in 2000 paid farmers for the protein content in most of their milk, just as they had long been paid for its milkfat content.

That’s the good news. But the bad news is that in many other ways, federal order pricing formulas that often haven’t changed since 2000 don’t reflect the structure of today’s dairy industry. And that disrupts those incentives, to the detriment of everyone who holds a stake in dairy’s success.

For example, Class I differentials – designed to ensure that processors receive an adequate supply of fresh milk to produce fluid milk products – haven’t been updated nationwide since 2000. Make allowances in the federal order product price formulas – which are supposed to cover the cost of converting raw milk components into finished products – have also gone a generation without adjustment, hindering processors that farmers need to thrive.

Simply put, dairy as an industry can’t thrive without adequate updates to federal formulas. So hooray for protein. But many current formulas still don’t work for farmers and the cooperatives they own. The improved quality and availability of American milk comes from farmers’ hard work. And good work should be rewarded.

NMPF FMMO Modernization Comments Put Farmers First

NMPF, the largest U.S. dairy-farmer organization and the industry’s premier policy voice in Washington, submitted its final, formal legal “brief” on their behalf for Federal Milk Marketing Order (FMMO) modernization to the USDA on March 29.

The NMPF brief emphasized that those farmers are the reason the system exists — and that, by law, their priorities are pre-eminent in USDA consideration of a final plan.

“Our proposed package of proposals to the Federal Milk Marketing Order align perfectly with its mission and purpose, which were designed and intended to put farmers first,” said Gregg Doud, president and CEO of NMPF. “We’ve spent nearly three years painstakingly assembling the broad consensus among dairy farmers that modernization of the system needs to succeed. Our approach is careful and comprehensive, and it benefits farmers of all regions and types of operations.”

NMPF’s proposals include:

  • Returning to the “higher of” Class I mover;
  • Discontinuing the use of barrel cheese in the protein component price formula;
  • Extending the current 30-day reporting limit to 45 days on forward priced sales on nonfat dry milk and dry whey to capture more exports sales in the USDA product price reporting;
  • Updating milk component factors for protein, other solids and nonfat solids in the Class III and Class IV skim milk price formulas;
  • Developing a process to ensure make-allowances are reviewed more frequently through legislation directing USDA to conduct mandatory plant-cost studies every two years;
  • Updating dairy product manufacturing allowances contained in the USDA milk price formulas; and
  • Updating the Class I differential price system to reflect changes in the cost of delivering bulk milk to fluid processing plants.

In contrast to proposals driven by narrow self-interest, NMPF’s package of proposals reflect its broad-based membership and consensus-driven approach, which resulted in unanimous approval from its Board of Directors last year. With that unity unbroken, Doud said he looked forward to USDA’s consideration of NMPF’s solid hearing record which was built along with its recently submitted brief, as well as the department’s recommended decision expected at the beginning of July.

“NMPF has taken seriously its role as the policy leader for U.S. dairy farmers and the cooperatives they own, and we continue to draw on the strength of our members,” he said. “Today we’ve taken another big step toward modernization. We continue to look forward to its successful conclusion.”

2023 Promises Policy Progress

A Washington truism is that the period that occurs after an election cycle is complete, but the next one hasn’t yet overtaken everyone’s attention, is when policy gets done. That makes it important for this industry to push for significant progress in 2023, as the 118th Congress convenes and clear policy challenges lie ahead.

High on NMPF’s priorities is leading the way toward federal adoption of a modernized Federal Milk Marketing Order system for producers that promotes a stable industry and provides fairer, more-up-to-date pricing for the nutritious and necessary products dairy farmers and their cooperatives provide. We made tremendous progress on this issue in 2022, driving a consensus approach that gathered many of this industry’s smartest minds and, through more than 100 committee and task force meetings of NMPF Board members and producers, and marketing experts from our member cooperatives, from all regions of the country, arrived at a proposal unanimously endorsed at our annual meeting in October. That’s a lot.

But there’s much more required to bring these efforts to fruition – much, much more. NMPF’s proposal itself isn’t quite complete – an important part of the plan, recommendations on updates to the nation’s  Class I price surface, are expected this month. From there, we will seek a final endorsement that prepares the way for us to request a USDA federal order hearing. That also will require extensive preparation, as the national consensus we’ve built among NMPF members will then form the basis of a conversation in which the entire industry will participate.

We welcome that conversation, which undoubtedly will include some good and not-so-good ideas from multiple interests. But throughout that conversation – and the hearing, and ultimately a producer vote – it will be critical to transcend narrow self-interest and work in a spirit of good faith to ensure that FMMO modernization is truly in the best interests of all producers. NMPF has kept that goal throughout; by crafting the most thoroughly researched, discussed, vetted and voted-upon of all proposals, we are in a strong position to meet the leadership challenge that falls to us as the nation’s dairy producer organization. We look forward to meeting this challenge, which will benefit all of dairy for years to come.

At the same time the FMMO discussions advance, we will be very active in shaping the farm bill due later this year, along with engaging in other legislative opportunities (and challenges) that come dairy’s way.

The twice-a-decade reauthorization of federal farm and nutrition programs sets the rhythm of ag policy in Washington, but it’s also important to remember that, in the end, the 2023 Farm Bill is simply another vehicle for advancing better policy, and it’s far from the only one available. Unlike the previous two farm bills, in which dairy policy clearly required significant change, this time around the main farm bill dairy safety net and risk-management programs – the Dairy Margin Coverage Program created at NMPF’s insistence, and the Dairy Revenue Protection and Livestock Gross Margin programs, which NMPF’s efforts made workable for broad producer participation – need evolution more than revolution.

Let’s not forget that the Farm Bill has many components, including sections governing trade, conservation and other areas critical to agriculture, so we’ll make sure all our priorities in the bill are addressed while pursuing other legislative goals, which range from financial incentives that support dairy’s Net Zero vision to immigration programs that work for dairy, through any means possible.

FMMO modernization and the farm bill alone would be more than enough to fill one year of Washington policy work. But of course, these two items are only the beginning of a long list of what must get done, from other legislative initiatives to federal nutrition policy proposals to overcoming regulatory challenges to expanding overseas markets The Biden Administration needs to pick up the pace on new trade deals even as it aggressively enforces existing ones. Yet another iteration of EPA’s Waters of the U.S. rule – this one going the wrong direction for agriculture – requires a strong response. And of course, we’re still waiting for FDA to give its guidance on labeling of plant-based dairy imitators, eternally hoping the agency charged with enforcing accurate nutrition labeling does what’s right for consumers.

Each year in Washington represents a new beginning. Opportunities are plentiful, and opportunities go to those who seize them. We embrace the challenge and expect that, working with the community that moves dairy forward, we can achieve great policy progress in the year ahead.

President & CEO, NMPF

NMPF Offers Webinar on 2021 Dairy Economy as DMC Deadline Approaches

With deadlines for the Dairy Margin Coverage program and Coronavirus Food Assistance Program signups approaching on Dec. 11, the National Milk Producers Federation is offering dairy farmers, cooperative members and state dairy associations a free webinar Dec. 2 to help them develop effective risk management plans that can protect them in what’s predicted to be a volatile year in 2021.

NMPF Chief Economist Peter Vitaliano, creator of the monthly Dairy Market Report released earlier today, will be discussing the dairy price outlook for next year, and the value of risk management tools including Dairy Margin Coverage, in a webinar moderated by Chris Galen, NMPF’s Senior Vice President for Member Services, at 1:30 p.m. EST on Wednesday, Dec. 2. Participants will be able to ask questions about the year ahead and learn more about how farmers can manage their risk through expected turbulence.

The webinar will examine the milk and feed price forecast, forecast margins, and analyze how the Dairy Margin Coverage program will offer farmers protection against price volatility. To register, click here:

Current USDA calculations predict that the DMC, adopted with NMPF’s leadership in the 2018 farm bill, will offer payments averaging $1.05 per cwt in the first eight months of next year for those at the maximum $9.50 coverage level. That vastly outstrips program premiums, making coverage for a farm’s first 5 million pounds of milk production a no-brainer, Vitaliano said. The DMC also offers affordable protection to all producers against price catastrophes and can be used in tandem with other risk management tools, such as the Dairy-Revenue Protection and the Livestock Gross Margin programs.

To determine the appropriate level of DMC coverage for a specific dairy operation, producers can use the recently updated online dairy decision tool offered through the USDA’s DMC informational page. Dairy producers can also visit NMPF’s page on risk management to learn more about DMC, CFAP and other tools to promote financial security for dairy operations.

A Crisis Should Bring Opportunity – Not Opportunism

There’s an adage applied often in politics that “in the midst of every crisis lies great opportunity.” And while no one would ever wish for what’s happened in dairy markets over the past several months, this crisis does provide opportunities – to reaffirm the importance of cooperatives in marketing producers’ milk; to appreciate robust risk management protection initiatives like the Dairy Margin Coverage program, for which 2021 signup starts Oct. 12; and to remember the power that dairy has when it works together, both to stabilize markets and reassure consumers who turn to it in troubled times.

But it’s also important to distinguish between opportunities — which come from the lessons of a crisis — and opportunism, which exploits a crisis to push policies that may not lead to real improvements or prevent a similar crisis in the future. That contrast is important to remember when discussing what’s been a hot topic in dairy the past few months: the negative Producer Price Differentials that have resulted from the wild gyrations in markets, understandably frustrating farmers who don’t feel they’ve captured the full benefits of the market rebound we’ve seen.

Negative PPDs – which happen when milk-price swings among component classes fall out of sync — create an ugly accounting deduct line on a milk check. They’re frustrating, but they’re rare – in fact, negative PPDs have occurred during only 16 months out of the past 10 years. The ones we’ve seen recently have been based on extremely unusual circumstances, specifically the unprecedented price collapse that accompanied the COVID-19 pandemic and the impact of other factors, including the federal government’s response, which combined to whipsaw dairy markets.

When the pandemic hit this past spring, the nation’s foodservice industry ground to a halt, kneecapping a market that traditionally absorbs well over a third of total U.S. dairy sales and sending commodity markets into a tailspin. NMPF efforts weren’t limited to helping farmers with direct payments; NMPF and allied organizations also pursued federal government support to step in to purchase displaced dairy products and provide them for donation to those in need. Those efforts were hugely successful; they will result in hundreds of millions of dollars in federal government dairy-product purchases provided to food banks and other outlets, feeding families and buoying markets.

It’s important to keep in mind that while the federal government’s purchases of dairy products for donation contributed to bringing about the negative PPDs this summer, that outcome was vastly superior to the alternative of no government and industry action. The intervention sharply raised farm milk prices from catastrophic lows. Without this intervention, we were facing a sustained collapse of the U.S. dairy market, with ongoing massive losses within both the farm and processor communities.

While the government has purchased a variety of dairy products, the largest purchases have been for cheese. Those purchases, along with strong export sales, quickly and forcefully lifted commodity cheese markets from $1 a pound to nearly $3 a pound. That undoubtedly kept cheese plants open and saved family dairy farms – it also, in turn, dramatically boosted Class III milk prices. Meanwhile, the government to date has purchased limited amounts of butter and very little nonfat dry milk. That has resulted in much smaller increases in Class IV prices and created a large gap between Class III and IV.

That gap, along with the Federal Milk Marketing Order program’s standard advance pricing announcement of Class I fluid milk, led to high levels of Class III milk being de-pooled from federal orders rather than pay into the pool to share the revenue across the market. For co-op cheese plants that de-pooled, the revenue stayed within their farmer-owned operations and benefitted their members. Proprietary cheese plants may or may not have shared those monies with their farm suppliers.

The large amount of temporary de-pooling that occurred has certainly raised concerns in some markets. Those concerns could be addressed by looking at whether stronger pooling requirements are needed, something that is available and could be looked at on an order-by-order basis within the FMMO system.

Other, related issues could be examined as well — the FMMO system is always an area worthy of careful thought and consideration. But changes to a system that’s managed milk pricing for generations shouldn’t be the result of a knee-jerk reaction prompted by extremely rare, black swan events. Any suggestion otherwise isn’t one that’s seeking a genuine opportunity – it’s opportunism in a crisis, and it’s an approach of which dairy farmers should be wary.

We all know that making long-term policy changes in response to short-term disruptions and unprecedented conditions, even if challenging, rarely results in good policy. Instead, it can lead to longer-term unintended consequences that could permanently reduce farmer income without remedying any fundamental market shortcomings. Preventing negative PPDs can sound like a good idea – but how might a “fix” affect milk checks in more-normal times? Those are the questions that need to be explored. Concern with negative PPDs is understandable. But negative PPDs will largely go away once markets return to normal function, which ought to be our underlying goal.

At NMPF we are engaged in an ongoing review of the federal order system to identify areas for potential improvement, and for discussion with our members as we examine ways to create consensus among the nation’s dairy farmers and their cooperatives. We welcome input and ideas, and especially appreciate the thoughts expressed by our member cooperatives that so effectively represent their members’ collective judgment. This is what ensures that real opportunity is pursued.

This industry has been through a lot these past few months. Let’s use the time ahead wisely, gaining the most from the lessons we have learned as we seek together to benefit most from the opportunities that are certain to arise. These decisions should be made in a deliberate and organized manner, with dairy farmers and their cooperatives leading the effort.