Dairy farmers poured out their frustrations with a state-mandated milk premium to regulators Tuesday, saying the payment’s awkward design shortchanges many farmers.
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The Pennsylvania Milk Marketing Board’s nearly five-hour hearing provided a long-sought formal setting for farmers to demand change to the over-order premium, whose quirky rules critics have blasted for years with little sense of improvement.

“We want to see change. We have tried to effect change for 10 years now. We’ve been coming and trying to get some changes, and nothing was happening,” said Tim Wood, a Tioga dairy farmer.

“I want to see action,” said Joel Krall, a farmer from Lebanon County.

Citing growing farmer anger over the premium, Ag Secretary Russell Redding testified before the board — which is independent from the Ag Department — for the first time in his over two decades in Harrisburg.

Redding proposed three principles for how the over-order premium ought to work, ideas that many testifiers supported.

Premium dollars, Redding said, should be distributed uniformly across all Pennsylvania dairy farmers.

The amount charged to consumers must not be substantially more than what farmers get.

And the premium’s design should not encourage processors to avoid paying it.

Currently, milk qualifies for the over-order premium only if it is sold as a fluid product. Farmers get nothing for milk used in other products, like cheese or ice cream.

In addition, farmers get the premium only if their milk stays in Pennsylvania for processing and retail sale. Critics say those rules encourage businesses to ship milk across state lines to avoid paying the premium.

The over-order premium is factored into the state’s minimum retail milk price, also set by the Milk Marketing Board, so consumers essentially pay the premium on every gallon of milk sold in Pennsylvania.

But farmers only receive the premium if their milk meets all the criteria, said David Graybill, chairman of Pennsylvania Farm Bureau’s Dairy and Farm Policy Committee.

“The dairy farmers that receive meaningful premium dollars undoubtedly support the present system, but the dairy farmers that receive little to no support from the system range from indifferent to openly hostile toward the system,” Graybill said.

In its current form, the over-order premium appears to be helping a smallish number of independent dairy farmers while giving relatively little to cooperative members, said Jim Harbach, a Dairy Farmers of America shipper from Loganton.

Using Milk Marketing Board data for a six-month period, Harbach said 640 independent farms — which work directly with a processor, often a fluid plant — received about $4,500 apiece from the premium, while the state’s 4,000 or so co-op members received perhaps $900 per farm.

“To have this disparity be the result of a state-mandated regulatory pricing system intended to help all farmers is unconscionable and unjustified,” Harbach said.

Support From Farmers

Despite the frustrations, some farmers urged the board to continue the over-order premium.

Killing the payment without replacing it would hurt hundreds of farmers without helping any, said Doug Sattazahn, a Womelsdorf farmer representing the Pennsylvania State Grange.

Sattazahn, who ships to independent processor Clover Farms in Reading, receives over $2,000 a month from the over-order premium, which amounts to 35 cents per hundredweight.

Sattazahn credits the premium with helping him qualify for a reduced loan rate on the construction of a new barn and milking parlor.

“I hope you will choose to continue that investment in me,” Sattazahn told the board.

Matthew Espenshade, an Elizabethtown dairy farmer also representing the Grange, milks 75 cows. He receives about $45 per month from the over-order premium on 100,000 pounds of milk through Mount Joy Farmers Co-op.

Though he doesn’t get much from the over-order premium, Espenshade said losing that money would still be a blow at a time of soaring production costs and continued milk check deductions designed to manage milk volume.

Arden Tewksbury, manager of the Meshoppen-based Progressive Agriculture Organization, supported the over-order premium at its inception in the 1980s.

Nearing 90, he continues to back the premium, though he sees it as something of a stopgap.

“Neither the United States Congress or the USDA have done anything about creating a new pricing formula for dairy farmers that would consider a dairy farmer’s cost of producing milk,” he said.

The Pennsylvania Association of Dairy Cooperatives supports Redding’s three-part proposal for reform. But the premium should stay as is until legislation can be passed that would help the board rework the premium, said Troye Cooper, the co-op group’s chairman.

Chuck Turner, president of Turner Dairy Farms in Penn Hills, urged the board to keep the over-order premium.

Turner’s milk qualifies for the over-order premium, which he sees as a reward to his independent farmers for producing a high quality product.

Turner said he would still pay voluntary bonuses if the over-order premium went away, but his farmers might make less from premiums than they do now.

Turner said critics should remember the over-order premium is a relatively small part of a farmer’s milk check, most of which is priced through the Federal Milk Marketing Orders.

“Everybody’s sharing a (federal) blend price of $25, and we’re talking about how we want to share the next incremental buck,” he said.

Still, he said, the over-order premium — so named because it is paid on top of the Federal Order price — is set by a state agency that is more approachable than the national regulators are, so farmers may see the Milk Marketing Board as their most realistic shot at change.

How the Hearing Happened

The Milk Marketing Board created the over-order premium on Sept. 1, 1988, as a way to help farmers through a drought that inflated feed costs at a time when milk prices were down.

The premium was set at $1.05 per hundredweight, nearly identical (ignoring inflation) to today’s rate of $1 per hundredweight plus a fuel adjuster.

Today’s Milk Marketing Board is well aware of farmers’ grievances about the premium and has been working for several years on reforms.

The board enacted a long-sought requirement for cooperatives to list on members’ milk checks the amount of their payment that comes from the premium.

The board has worked with lawmakers on further changes, and has encouraged dialogue, including through a weekly column in Lancaster Farming, to help farmers understand the agency’s complexities.

Pennsylvania Farm Bureau injected new urgency into the debate last November when its members voted to support eliminating the premium, a step that disaffected farmers had long proposed.

Now, said Wood, the Tioga farmer, “there seems to be an effect of a lot of change being at least talked about.”

In February, ahead of the Milk Marketing Board’s seminannual hearing to set the dollar amount of the premium, the Ag Department asked that the board consider reworking the premium, and a few farmers requested that the payment be eliminated.

The Milk Marketing Board blocked those topics from the hearing after the Pennsylvania Association of Milk Dealers objected that it would not have time to prepare a response.

In June, the board accepted the Ag Department’s request for a new hearing that would deal with the big-picture issues relating to the premium.

Next Steps

The three-member Milk Marketing Board will take some time to review this week’s testimony. The agency will likely publish some sort of decision before Sept. 30, when the premium’s current authorization expires.

Still, some of the next steps Redding recommended must come not from the board but from the Legislature.

One of those key pieces is a bill from Rep. John Lawrence, R-Chester, that would allow the state to directly collect and distribute the premium to farmers.

Currently, processors and cooperatives forward the premium to their farmers. As a result, the state doesn’t know where the payments it mandated are going, and farmers are confused about how much they benefit from the premium, Lawrence said.

Lawrence’s bill allows the board to distribute premium dollars to milk producers, dealers and handlers.

Under state law, farmers and cooperatives can both count as producers, so Wendy Yoviene, an attorney for the Pennsylvania Association of Milk Dealers, asked whether the bill would allow the board to send the premium to co-ops rather than directly to farmers.

“I suppose hypothetically it could, but I don’t believe that’s the clear intent of the bill, and I would be shocked if the board went in that direction,” Lawrence said.

The legislation is designed to give the board flexibility in how it structures the premium, he said.

The bill, which passed the House unanimously in April, would also formalize the existence of a “board-established premium” in state law. The over-order premium was created under the Milk Marketing Board’s regulatory powers.

Another bill introduced by Sen. Judy Schwank, D-Berks, would allow the board to license retailers that sell milk in the state. This strategy would provide sales data needed to inform changes to the premium.

Both bills are in the Senate Agriculture and Rural Affairs Committee.

Milk Marketing Board Chairman Rob Barley, who otherwise avoided commenting on testifiers’ ideas during the hearing, said he would appreciate having the tools Lawrence is proposing, arguing they could improve the transparency and potentially the fairness of the premium.

But, Barley said, what a new and better system could look like remains to be seen.

The South Island dairy company Synlait Milk is back in the black as its ingredients division saw higher than normal sales, while its major customer rebalanced inventory levels.

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