By Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
There was a lot of hard work put in this week at the Federal Milk Marketing Order (FMMO) hearing in Carmel, Indiana.
Issue #1, the Milk Component change proposals, were for the most part completed. There are at least two different factors that generated conflicting testimony on Issue #1. These proposals would raise the skim value in Class I, and of course fluid milk buyers vigorously object to that.
The second factor generating conflict is that both proposals want to delay the implementation of the higher component levels by a year to minimize the impact of these proposals on risk management tools. By definition, risk management is about locking in future milk prices and if the FMMO affects these prices by changing the rules, then it creates significant uncertainty, which affects the functioning of the risk management tools. There were voices who wanted the delay to be longer, there were voices who wanted it to be shorter, and others who wanted no delay at all.
Interestingly, the National Milk Producers Federation’s (NMPF) proposal to change milk components seeks a delay in implementation. But in a separate proposal on make allowances, that would also impact Class III and IV prices, they want the changes implemented without a delay. When their witness was asked about this inconsistency, the response was that NMPF had to weigh the various factors, and on balance, this is where the group came out. While some might be critical of this apparent inconsistency, it does point out that the FMMO hearing process is about finding a balance between competing interests, and even within the producer community, there are competing interests that need to be balanced.
The week was not without its legal controversies. As I reported last week, two groups who had submitted proposals that USDA had not accepted for consideration at this hearing filed official objections to the exclusion of their proposals. On Tuesday, USDA gave their response to the objections. This then set off nearly an hour of legal argument about the merits of the exclusion and differing opinions on the administrative law judge’s authority to essentially order the Secretary of Agriculture to reopen the notice of hearing. The USDA attorney’s position is that the judge does not have that authority. The judge took all the argument under advisement, and we will get a ruling from him later.
Thursday saw another hour of legal wrangling as lawyers for the processors tried to put off the expert testimony of Dr. Kaiser from Cornell University, who is an expert in the economics field of price elasticity. The objecting lawyers argued that the NMPF attorney had not let them know the day before that Dr. Kaiser was going to be appearing the next day and so they claimed they were not prepared for cross examination of Dr. Kaiser. NMPF said that Dr. Kaiser’s written testimony had been posted on the USDA website for over a week and that there was no rule that required advanced notice. NMPF also noted that Dr. Kaiser was a professor who could only attend on Thursday, and that the failure to identify his appearance was simply an oversight and not intentional. After an hour of arguing, a compromise was worked out where Dr. Kaiser was allowed to testify, and the lunch hour was expanded to two hours to allow for the opposing attorneys to prepare. This compromise did not remove the formal objections of the processors’ attorneys, but the show did go on. Dr. Kaiser’s testimony was very helpful in understanding the price inelasticity of Class I fluid milk. Dr. Kaiser’s main contention is that the evidence shows that the decline in Class I milk sales over the past twenty years is not primarily due to price, but to other factors. If you have interest in this topic, you can read his testimony here.
Issue #2 for the hearing is Surveyed Commodity Products proposals. There is a proposal to add mozzarella cheese to the list of product prices surveyed for the Class III formula. Some of the questions about this proposal are around the fact that there is not an industry standard mozzarella product or package size. There is very limited price information for mozzarella, and there is no accepted yield standard or manufacturing cost data for mozzarella, and therefore to make this proposal a reality, a lot more information would have to be developed.
The big item in Issue #2 is the proposal by NMPF to eliminate barrel cheese from the surveyed prices. NMPF put on two cooperative cheese plant managers as witnesses who had extensive knowledge of the cheese business. Both made the case that in 2017 the cheddar barrel price relationship to the 40# block price began to diverge in a way that was creating great market instability, which continues to this day. This divergence was estimated to have reduced dairy producer Class III income by over $2 billion since 2017 from the depression in the Class III price caused by the inclusion of barrels in the formula. The chart below from the testimony of Darin Hanson, Foremost Farms, Middleton, Wisconsin, depicts the $2 billion impact to dairy producers.
It was asserted that at least 75% and up to 90% of total cheese in the US is indexed off of the 40# block price and that the inclusion of the barrel price depresses not only Class III, but also Class I prices that include the depressed Class III in the base price.
The witnesses were asked why there has been a divergence since 2017. It seems to be related to the Chicago Mercantile Exchange influence on barrel prices and some of the CME rules which deal with quality and transportation requirements. There was also some discussion around the fact that the whey stream from a barrel operation is potentially of higher value than whey from a block operation, which might explain part of the divergence in the cheese price reported by the different operations. These witnesses provided significant insight into how the cheese markets work and made a strong case that barrel cheese can no longer be used to create a “synthetic 40# block cheese value” since blocks and barrels, which for decades had moved generally together in price, are now separate markets and move in divergent directions. The current formula assumes identical yields and costs for cheddar blocks and barrels, and in the formula automatically adjusts moisture levels and adds three cents per pound to the barrel price as a proxy for the assumed lower packaging costs of barrel cheese.
Also on Friday, six dairy farmers were able to testify virtually, including MPC member Gerben Leyendekker, who testified in favor of the NMPF proposals.
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