Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
When the pandemic hit in the Spring of 2020, nationwide stay-at-home orders greatly impacted the dairy industry along with huge sectors of the American economy. Congress responded by authorizing the expenditure of massive amounts of money to help sustain folks through what has ended up being a prolonged period of disruption. Some of the government actions with regards to dairy – done with the best of intentions (like requiring cheese, but not butter be in the Farmers to Food Box Program) – had the practical effect of creating very high cheese prices and therefore high milk prices for dairy farmers selling to cheese plants. This left behind other producers who did not have access to those windfall values, which in turn created real competitive pressures within the dairy community.
For some time now, USDA has been signaling that they were going to use some of the billions of dollars of remaining COVID relief funds to address this unequal result. USDA Secretary Vilsack went to Vermont this week to announce a program to address the issue. It is a bit complicated, and we do not have all the details yet. What USDA has announced is that “payments will reimburse qualified dairy farmers for 80% of the revenue difference per month based on an annual production of up to 5 million pounds of milk marketed and on fluid milk sales from July through December of 2020.” While we are still awaiting final details, the program seems designed to address the shortfall in fluid milk revenue that came from changing the Class I formula from being based on the “higher of” Class III or Class IV, to being based on the “average of” Class III and Class IV. See here for more information on this topic.
The payment will be based on compensating 80% of the difference between what it would have been under the “higher of” compared to what it was under the “average of.” Milk produced between July 2020 and December 2020 will be eligible. The payments will be processed through milk handlers and the payments to producers will be limited to an annual production cap of 5 million pounds, as well as subjecting producer recipients to the standard USDA Adjusted Gross Income (AGI) limits. These caps severely limit how much money California producers will receive from this program.
Here’s how the math works out for California producers:
• For the period July to December 2020, the difference between what the Class I would have been under the “higher of” formula versus what it was under the “average of” formula was $3.56 per cwt.
• There was a little over 11 billion pounds of milk pooled in the California FMMO in July through December 2020, of which about 22% was Class I milk.
• $3.56 (the difference between “higher of” and “average of”) multiplied by 22% Class I milk in the pool equals $0.78 per cwt. for all the milk in the pool, for a total revenue shortfall of $87 million for California (11 billion pounds multiplied by $0.78 per cwt.).
• Then the USDA program says its intent is to compensate 80% of that, which takes the total compensation for California down to just under $70 million.
• Dividing $70 million by the 11 billion pounds that was pooled equals $0.62 per cwt.
But then USDA says they will only cover up to 5 million pounds annual production per producer and since this program is for 6 months only, the effective cap is 2.5 million pounds.
• Bottom line, 2.5 million pounds multiplied by $0.62 equals about $15,000 per producer. If there are 800 eligible producers in California and they all get about $15,000 then that would send about $12 million to California producers instead of the $70 million before the cap.
• USDA’s announcement states that it “will provide about $350 million in pandemic assistance payments to dairy farmers.” California’s contribution to the U.S. milk supply is nearly 20%, which seems to correspond to the $70 million that California producers would receive BEFORE the cap. Given that there are many other states with large herds that will be capped out as well, it is hard to understand how USDA will distribute $350 million with these rules.
There will be more details about all this in the weeks to come, but the volume caps imposed on this program are very discriminatory against California producers who were already placed at a competitive disadvantage by USDA’s pandemic-era cheese purchasing preferences.