Dairy farmers make allocation reform a must | Press release

American Farm Bureau Federation economist Danny Munch today presented testimony on behalf of AFBF and its members at the ongoing hearing on the Federal Marketing Order Pricing Formula milk. This is the third time that an AFBF representative has testified at the hearing. The AFBF’s chief economist, Roger Cryan, has already testified on the prices of cheese and butter and the composition of milk.

The testimony focuses on adjusting allowances, or the estimated costs that dairy processors incur to convert milk into consumable dairy products, such as cheese and butter. This price directly impacts the price paid to farmers for their milk.

AFBF advocates that allocations be adjusted based on a mandatory, audited USDA investigation, which USDA says it does not have the authority to conduct. AFBF is pursuing legislation, with the support and assistance of the National Milk Producers Federation and the International Dairy Association, that would direct USDA to conduct such an investigation. AFBF opposes increasing allocations based on potentially biased voluntary survey data that could unfairly reduce prices for farmers.

Below are excerpts from the testimony, which can be read in full here.

A fundamental objective of the AFBF’s proposals is the reduction or elimination of negative producer price differentials and the unbundling they cause. We believe an orderly pool is the key to orderly marketing and ensures that federal milk marketing orders continue to benefit farmers, cooperatives, processors and consumers. The key to an orderly pool, however, lies above all in the proper alignment of the prices of the four classes.

This statement covers Category 3, Class III, and Class IV formula factors, and includes AFBF’s response to Proposition 7, made by the National Milk Producers Federation (NMPF); Proposition 8, made by the Wisconsin Cheese Makers Association; and Proposition 9, made by the International Dairy Foods Association.

Category 3: Class III and Class IV formula factors

Response to Proposals 7, 8, and 9 (NMPF, WCMA, IDFA), all of which propose increasing Class III and IV allocations.

AFBF supports adjusting allocations to reflect changes in costs and technology, following the same general logic as the NMPF petition. We believe, however, that such adjustments cannot be undertaken equitably without using data from a mandatory, audited USDA survey of at least those plants participating in the NDPSR survey.

The testimony continues by noting:

The voluntary survey, conducted among others by Dr Stephenson and used as the primary source for order reform, was one of a series of studies which had been undertaken as a means of assessing and comparing factory costs to profit factory operators. …The 2021 publicly released survey, for example, represents only 60% of nonfat milk powder plants participating in the NDPSR, 29% of dry whey plants, 24% of cheddar cheese plants, and 20% of butter plants . The conclusion must be that it would be unfair to increase allocations on the basis of this investigation. …

Regarding the USDA “tradition” of using two different cost surveys, there is an old saying: “A person who owns one watch always knows what time it is; a person who has two watches never knows what time it is. This is the problem with taking two very different sets of survey results and merging them into one result. It is more of an art than a science, and the USDA has found itself in the difficult position of applying such art in the past. It is better that we have very specific monitoring, such as a mandatory and audited investigation of processing plants.

The last time we knew it was time was in California in 2016 – because the last mandatory audited surveys of dairy processing costs in the United States were those of all manufacturing plants in the State of California in 2016. …Since the 2016 California survey was mandatory, a representative sample of dairy processors was captured, providing an important control for voluntary surveys. …

…On average, less than 20% of the total production of cheese, butter, skimmed milk powder and whey was captured in the NDPSR survey… …Taking into account the various other dairy products sold and not included in the NDPSR , the actual volume of dairy products captured by the NDPSR is likely much lower than 14.8%. …

…Given these statistics, one could easily argue that handlers can benefit from selling a substantial volume of products and product varieties that are not currently captured in the NDPSR and are not exclusively dependent on allowance to make ends meet. This is especially true for handlers who are diversifying their operations, a tactic many farmers are advised to use to protect against income uncertainty. …

…Only a mandatory and audited investigation into costs (and processing yields) can provide a fair basis for adjusting margins (and yield factors) under the current pricing structure, just as has been clearly established that only a mandatory and audited survey of manufacturers’ prices can provide a fair basis for setting monthly prices of milk and components used in FMMOs.

We believe such a survey should be conducted every two years to appropriately balance the value of data and the load on processors.

AFBF submitted nine proposals for consideration at the hearing, and four were accepted by USDA. Furthermore, the AFBF largely supports four of the five proposals submitted by the National Federation of Milk Producers.

AFBF’s proposals build on years of work by dairy producer members, policy established through AFBF’s grassroots policy development process, and recommendations developed at the FMMO Forum, which brought together representatives from all sectors of the dairy industry last October.

AFBF’s full testimony on the commodities studied as submitted to the hearing, including reference sources and charts, is available here. An explanation of the four AFBF proposals accepted for consideration is available here. For more information on all AFBF proposals, including those rejected by the USDA, read Market Intel.

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