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Action Needed to Close the USDA-stimulated Gap Between Class III & IV Milk Prices

Geoff Vanden Heuvel

Director of Regulatory and Economic Affairs

Whether intentional – or more likely unintentional – USDA’s operation of the pandemic-inspired Farmers to Families Food Box program had a profound impact on milk prices in the United States. This massive program spent nearly $4 billion contracting with vendors to put together boxes of food to be distributed throughout the country to anyone who wanted it. USDA required that each box include a pound of cheese and a gallon of milk and then 4-5 additional pounds of dairy products in addition to other fresh food items. Butter was not a required item.

When the program went into place in late May, cash cheese prices at the Chicago Mercantile Exchange took off because of the strong demand for cheddar cheese created by the Food Box requirement. This dramatic increase in cheddar cheese prices had a profound impact on dairy producer milk checks. Because of the rules of the Federal Milk Marketing Order (FMMO) program, cheese plants can drop out of the regulated system and not share cheese sales revenue with the market-wide pool. In normal times, when prices for milk used for cheese/dry whey (Class III) and milk used for butter/powder (Class IV) operate within a narrower range, even if cheese or butter/powder plants do drop out of the pool, the effects are not that significant. But these were not normal times.

To add additional injury to producers not selling to cheese plants, the FMMO Class I price formula was changed in 2018 from using the “higher of” either the cheese/dry whey complex or the butter/powder complex as the base price from which Class I price differentials are added in the various regions, to the “average of” cheese/dry whey prices and butter/powder prices. While there may have been good reasons to do this, and every effort was made to make this change revenue neutral for producers, the Food Box generated disparity between cheese prices and all other dairy product prices created huge differences between what individual producers were paid for their milk. The whole point of a milk order program is to have order in the operation of the market for dairy producers. The FMMO program, which has operated successfully for over 80 years, does walk a fine line between government requirements and free market principles. Class I is required to be part of the order, but Classes III and IV are not. That allows for market competition and incentivizes dairy processors to move up the value chain to enable them to compete for milk which is ultimately good for producers. But as we have witnessed in 2020, when the government uses its purchasing power to favor one part of the industry over another, it can have a profound negative impact on the unfavored part of the community.

USDA seems to understand that there are problems with the Farmers to Families Food Box program. They conducted a “listening session” this week to take input from the public on the topic. Over 240 people signed up to speak for a maximum of 3 minutes each. It took 10 hours to get through them all. USDA is also accepting written comments that they will consider as they plan out how to use the additional multiple billions of dollars Congress has told them to spend on food assistance programs. The deadline for submitting comments is March 31. More information on commenting is available here. National Milk Producers Federation has submitted comments urging USDA to use “balance” in their dairy purchases. Cooperatives who make a lot of butter and powder are more explicit. They are requesting that any continued Food Box program require equal amounts of butter and cheese be in the box. You can read comments made by California Dairies, Inc. here.

While in the near-term U.S. futures prices are forecasting a Class III price about $2 per cwt. higher than Class IV prices, when you look at international prices for cheese and butter/powder and run those through the FMMO Class III and IV formulas you see the opposite. Spot prices for cheese, butter and powder from the March 20 Global Dairy Trade (GDT) auction would translate to a $19.68 Class III and a $21.85 Class IV. This is down slightly from the March 6 GDT auction spot price equivalent of $19.81 for Class III and $22.04 for Class IV. There is a big gap right now between U.S. domestic prices and world prices.

The good news is the U.S. industry can and does trade in the world market. There are big challenges, but over time these markets do converge. Right now, the imperative is for USDA to do no further harm and hopefully do some good to bring some balance back into the U.S. dairy market.

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