The Biden administration’s offer of pandemic assistance to dairy producers, coupled with a return to more normal markets, has helped quiet a battle in the industry over the future of the milk pricing system - at least for now.
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Market turmoil during the COVID-19 pandemic in 2020 spurred producers to make competing proposals to rework changes to the pricing formula that were included in the 2018 farm bill.

However, the $350 million in pandemic assistance that Agriculture Secretary Tom Vilsack announced in August will offset many of the losses that some producers saw during the pandemic.

“Secretary Vilsack has a lot on his agenda from climate change to social justice, and having a kerfuffle in his backyard” over milk pricing “is something that is a distraction,” said Marin Bozic, a University of Minnesota economist who helped develop one of the competition industry proposals. “And I believe that USDA hopes that the Market Volatility Assistance Program will just make that issue go away.”

Some of the urgency in the pricing issue has also gone away because producers are currently earning more money from the new pricing formula than they were with the previous one that the farm bill replaced, said Bozic.

That wasn’t the case for many producers of fluid milk during the second half of 2020.

Cheese prices skyrocketed as the Trump administration implemented the Food Box donation program, which was designed to help address the disruptions of food supply channels and a sudden hunger crisis due to the pandemic. But fluid milk producers didn’t benefit from the cheese-buying splurge, in part because of the complex rules for pricing under the federal milk marketing order system, together with the change by the 2018 farm bill.

The National Milk Producers Federation is asking Congress to supplement the USDA program to help larger producers who were affected by the 5-million-pound cap. Some large fluid milk producers, especially in the Southeast and Southwest, were hit particularly hard by the market disruptions.

In the meantime, NMPF is continuing its search for possible reforms to the pricing formula. The group has reconvened its producer-led economic policy committee “to discuss longer-term fixes to Class I mover as well as other critical marketing-order issues,” said Paul Bleiberg, senior vice president of government relations for NMPF. “Our goal is to reach a national consensus both on the solutions needed and the best way to achieve them.”

The farm bill modification was the result of an agreement between NMPF and the International Dairy Foods Association. The price of fluid milk (Class I) was set at 74 cents per hundredweight over an average of the prices for Class III (milk sold for cheese) and Class IV (butter and milk powder).

Under the old system, that “mover” for fluid milk was set as a premium over the price paid for either Class III or Class IV, whichever was higher. The change made in the 2018 farm bill was intended to eliminate price spikes and provide companies buying fluid milk with more predictability.

NMPF proposed earlier this year to adjust the mover for fluid milk every two years based on conditions over the prior 24 months, with the current mover remaining the floor.

Several other dairy organizations — the Dairy Business Association, Edge Dairy Farmer Cooperative, the Minnesota Milk Producers Association and the Nebraska State Dairy Association — offered an alternative plan with Bozic’s help called “Class III Plus.” The groups said it would provide a longer-term solution to the concerns with the formula. The plan would tie the Class I (fluid) skim milk price to the Class III (cheese) skim milk price, plus an adjuster, and the practice of advanced pricing.

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Vilsack has indicated that USDA isn’t going to consider changing the formula until there is industry agreement on what to do.

IDFA, meanwhile, hasn’t taken sides and continues to study the issue. The group’s members have long favored more market-based changes.

“When dairy is united and remains focused on building a future together, we can accomplish almost any shared objective. … Our members continue to support market-based FMMO (federal milk marketing order) policies and would support a process to develop a collaborative solution that can unify the industry,” said IDFA spokesman Matt Herrick.

A recent analysis of the industry proposals by the American Farm Bureau Federation found no clear winner, although some could be better than others for producers depending on the time frame.

During 2020, producers would have done better under the old formula or the Class III Plus proposal, the AFBF analysis found. Starting this spring and running into 2023, the NMPF proposal would have resulted in higher prices as a result of the two-year recalculation that would be required. After that two-year window, the NMPF formula may not be as advantageous as the other formulas, said AFBF economist Danny Munch.

Munch agreed with Bozic that the existing pricing formula is currently better for producers than the old one that the farm bill replaced.

“We’re now back in a pre-COVID area where the current pricing option is actually more advantageous,” he said.

Bozic believes the industry debate over the FMMO pricing system will be rekindled after the completion of a University of Wisconsin study for the industry on “make allowances,” the pricing adjustments that are allowed for processor costs. If USDA is going to consider changes in make allowances, producers will want the department “to take a broader look at other things that need to be modernized about federal marketing orders,” he said.

Milk price predictions continue to rise with ANZ bumping up its 2021-22 forecast by 60c yesterday to $8.80/kg ms.

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