The U.S. Department of Agriculture’s proposed changes to how milk should be priced have been characterized as a mixed bag for dairy farmers, with some reforms impacting California producers more negatively than those in other states.
Released earlier this month, USDA’s recommended decision came after the department considered 21 proposals that sought updates to pricing provisions and formulas in the nation’s 11 federal milk marketing orders, or FMMOs. The department heard testimony on the proposals during a 49-day public hearing in Carmel, Indiana, that started in August 2023 and ran until late January.
FMMOs set minimum prices that processors must pay dairy farmers for raw milk and its components. The pricing system is based on four classifications of how milk is used, with Class 1 being fluid milk; Class 2, ice cream and yogurt; Class 3, cheese and whey; and Class 4, butter and powder.
The department made recommendations that address milk composition factors; product surveys to determine the monthly average cheese price; manufacturing cost allowances; formula factors for Class 3 and Class 4; and differential values for Class 1.
The proposed rule was published in the Federal Register on Monday, with a deadline to comment set for Sept. 13. USDA will then have 60 days to issue a final decision on which dairy farmers will vote to approve or reject. A two-thirds majority is needed to pass, with changes to take effect sometime in 2025. A “no” vote would end the FMMO altogether, resulting in deregulation.
Groups representing dairy farmers, including the American Farm Bureau Federation, praised the decision for returning to a pricing formula for Class 1 milk that is based on the higher of either the Class 3 cheese value or the Class 4 butter and nonfat dry milk value. This had been the formula historically, but it changed in 2018 to one that uses the average price of Class 3 and Class 4, plus 74 cents for every hundred pounds of milk.
Producers say the current formula caused them to miss out on an estimated $1 billion of revenue in recent years, especially during the pandemic, when the price of milk used to make cheese soared but milk used to make butter and nonfat dry milk did not.
Restoration of the so-called “higher-of” formula should raise producer prices on fluid milk, analysts say. But the gains are offset by USDA’s proposal to raise make allowances, or what dairy farmers pay manufacturers to process their milk into the various dairy products.
The proposed increases are particularly concerning to California dairy farmers because only about 20% of their milk is bottled, with nearly 74% of it used to make cheese, butter and powder. Under the proposal, producers would see the make allowance for cheese go up by nearly 90 cents per hundredweight and about 75 cents per cwt. for butter and powder.
“For California, it’s pretty clear that the losses are greater,” said Lynne McBride, executive director of California Dairy Campaign, pointing to USDA’s economic impact analysis on the proposed changes.
Under the proposal, the pricing formula for Class 1 milk used to make shelf-stable milk and other extended shelf-life products won’t be based on the “higher-off” formula, however. Instead, USDA proposed a 24-month rolling adjuster that incorporates the “averaging” method. Groups such as Wisconsin-based American Dairy Coalition questioned the approach, saying it’s unclear how the split pricing within Class 1 would affect competition.
McBride said even though her group supported returning to the “higher-of” formula, there was not enough benefit “to merit opening up this whole process and seeing these unprecedented increases in the make allowance,” which would dent California dairy farmer milk checks.
Noting that USDA last adjusted make allowances in 2008, Geoff Vanden Heuvel, director of regulatory and economic affairs for Milk Producers Council, said “it’s very hard to make the argument” that manufacturing costs haven’t gone up during the past 16 years and that processors should not be entitled to an increase.
In its proposal, National Milk Producers Federation, which represents dairy-farmer cooperatives, asked for increases of about 55 to 60 cents per cwt. for Class 3 and Class 4 milk, while processors called for increases of about $1.35 to $1.55 per cwt.
Vanden Heuvel said USDA’s proposed increases were bigger than he expected, but the decision spelled out how the department arrived at its numbers, and “I cannot argue with their approach.”
“It could have been worse,” he said. “(The increases) could have gone up much higher, and they didn’t.”
In California, most of the butter and milk powder is made by producer-owned cooperatives. While raising the make allowance on these products lowers the price the cooperatives pay for the milk, they’re essentially buying their own milk, Vanden Heuvel said.
“It really is just shifting the money from one pocket to the other,” he said, noting the cooperatives have been losing money on manufacturing butter and powder.
For cheese manufacturers such as Leprino Foods and Hilmar Cheese Co., the increases to the make allowance would allow them to buy their milk at a lower price, “and that’s going to hurt the people that sell them milk,” Vanden Heuvel said.
Looking at USDA’s entire decision, Vanden Heuvel said he doesn’t think the proposed changes would necessarily result in “a huge negative” for California producers, as “there’s some positives, too.”
One of those positives is on the pricing survey, he said. USDA has proposed dropping the use of 500-pound barrel cheddar cheese prices in the formula and relying solely on the 40-pound block cheddar cheese price to determine the monthly average cheese price. Vanden Heuvel noted barrel cheese prices during the past several years have at times been 30 to 40 cents a pound less than block cheese prices, resulting in “a huge discounted factor on the Class 3 price.”
In a letter to its members, Rob Vandenheuvel of California Dairies Inc., the state’s largest dairy cooperative, said member-owners of the co-op should view USDA’s decision “as a critical improvement to the FMMO system.”
He noted CDI was “heavily involved” in the work done by National Milk Producers Federation, which submitted a proposal to USDA that initiated the hearing. That process involved cooperatives with and without significant manufacturing infrastructure investment, he said, with CDI being the former. The federation’s proposal took a balanced approach, he added, and USDA “clearly saw value in” it, as many elements of NMPF’s proposal were reflected in the department’s recommended decision.
Kings County dairy farmer Joaquin Contente, who serves as president of California Dairy Campaign, agreed that USDA’s decision tried to balance the concerns of producers and processors, though he stopped short of saying the department was “fair.”
He characterized the draft decision to return to the “higher-of” formula as “the bone they threw back at the producers.” He said he was disappointed USDA rejected CDC’s proposal to add mozzarella prices to the cheese-pricing formula, as doing so would more accurately reflect the value of the current cheese market. USDA said CDC’s proposal lacked data to support adoption.
CDC’s Lynne McBride said such data would need to come from mozzarella cheese makers, and to get it, there would need to be a legislative mandate.
Producer groups including AFBF and CDC have also called for mandatory, audited surveys of processors’ costs before make allowances are raised. Current cost surveys are voluntary and unaudited. In a statement, AFBF President Zippy Duvall said, “dairy farmers deserve fairness in their milk checks and transparency in the formula, but the milk marketing order system can’t deliver that unless make allowances are based on accurate and unbiased data.”
Even with more reliable data, McBride said her group does not agree that farmers should be required to shoulder increased processing costs, because unlike processors, farmers can’t pass on their costs.
In its decision, USDA maintains that it’s inappropriate to consider producer income in determining make-allowance levels. The department said even though “many stakeholders look to the FMMO program to provide stability,” its formulas are market-oriented and reflect supply-and-demand conditions.
“Time will tell how it works out, but the market will adjust,” Geoff Vanden Heuvel of Milk Producers Council said, “and I expect it will be many years before we have another make-allowance hearing.”
(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)