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Federal Milk Marketing Order Hearing Report -- Week 5

The Federal Milk Marketing Order (FMMO) hearing in Carmel, Indiana only met three days this week because the venue where the hearing is held was not available on Thursday and Friday. On Monday, the processors, represented by the International Dairy Foods Association (IDFA), wrapped up their testimony on make allowances.

Later on Monday, Select Milk Producers cooperative submitted proposals 10, 11 and 12 into the hearing. Proposal 10 seeks to increase the butterfat recovery percentage in the Class III formula from the current 90% to 93%. Proposal 11 seeks to eliminate the farm to plant shrink factors in the current Class III and IV formulas and proposal 12 seeks to change the Class IV skim milk factor to account for the Class IV solids that end up in the buttermilk instead of nonfat dry milk. All three of these proposals would increase producer prices. Select submitted significant testimony and data from their own operations and experiences as well as expert testimony from an academic with significant cheese making expertise. The major opposition to Select came from California Dairies, Inc. and National Milk Producers Federation (NMPF) who, while acknowledging that Select had a point, stated that there is not enough verified data to make changes in yields and shrink factors at this time. They testified that this issue should be revisited once a mandatory and audited manufacturing plant survey was conducted in the future. Furthermore, they pointed out that the yield questions did cause NMPF to propose lower make allowance changes than the manufacturing cost summaries would suggest is necessary to cover the increased processing costs since the last make allowance adjustment in 2008.

NMPF on Tuesday introduced proposal 13 to revert the Class I base price back to the “higher of” Class III or IV instead of the current “average of Class III and IV plus $0.74”. The NMPF witness spent considerable time explaining that because of the change to the “average of” in 2019, producers missed out on hundreds of millions of dollars of Class I revenue that would have been generated if the Class I formula had remained based on the “higher of.” The cross examination on this issue was excruciating to listen to. The path to where we are is messy. Back in 2018, IDFA approached NMPF and asked for this change to make hedging of Class I milk easier. NMPF was willing to accommodate the IDFA request, provided that the impact to producers was revenue-neutral. It was calculated that adding 74 cents per cwt. to the “average of” price would equate to what the “higher of” formula would produce. No one could contemplate a situation where Class III and Class IV could be as much as $11 per cwt. different. But that is what happened during the pandemic and historically larger differences between Class III and Class IV have continued since the pandemic. During 2020-2021 when Class III and Class IV significantly diverged, NMPF and all of us on the producer side in the U.S. pleaded with IDFA to support asking USDA to make adjustments in the Class I formula to address this massive shortfall producers were experiencing. Many proposals were drafted and submitted to IDFA and all were rebuffed by them. So now, NMPF with overwhelming support from most of the producer side of the industry, wants to go back to the “higher of” and submitted a proposal to do that to USDA as part of their petition for an FMMO hearing earlier this year. After NMPF submitted their petition and USDA responded by asking the rest of the industry for proposals for a potential FMMO hearing, then IDFA submitted what is now proposal 14, which is very close to what NMPF proposed two years ago and IDFA rejected. On Wednesday morning, for an hour and 15 minutes, the IDFA attorney grilled the NMPF witness, by selectively going through this history. In the end the NMPF witness admitted that producers had changed their mind about having an “average of”-based Class I formula and pointed out that IDFA had changed their mind as well, with IDFA now proposing nearly exactly what they had rejected when producers were in need two years ago.

The hearing wrapped up for the week on Wednesday with testimony and cross examination of an industry marketing consultant about the mechanics and challenges of trying to hedge Class I milk, as well as a big question about how necessary it is to hedge Class I when the price for fluid milk is known in advance of the month and there is a long history of price change pass through to the retail price for fluid milk. No doubt, more to come on this issue.

The hearing resumes on Monday September 25. It should go for the full five days next week with IDFA making their Class I proposal 14, then Class I proposals from the Milk Innovation Group with proposal 15, Edge Dairy Cooperative with proposals 16 and 17 and the American Farm Bureau with proposal 18. The following week has a question mark on it due to the possibility that Congress does not pass a budget, in which case the federal government including USDA and this hearing would be suspended until Congress and the President get their act together.

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