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Federal Milk Marketing Order Hearing Report -- Week 7

There are five “issues” encompassing 21 proposals that make up the substance of the “call” of this hearing into Federal Milk Marketing Order (FMMO) regulations. This week started with the finishing up of issue four, which consists of six competing proposals for how to set the base Class I price. What emerged was a huge effort to essentially reorient the purpose of the Federal Order program to facilitate hedging and risk management. This was particularly driven by Edge Cooperative and their consultant and spokesman who at one point said, “Build a new structure of Federal Orders; that is what we are here to do.”

Huge amounts of hearing time were spent this week and last week on how to bend FMMOs to fit the demands of “risk management.” In its rebuttal to this onslaught of testimony, Cal Covington, on behalf of NMPF, observed that risk management/hedging for the dairy industry has always been voluntary. Risk management and hedging tools were built to accommodate the realities of the regulation, not the other way around. On Tuesday, Edge Cooperative offered what they described as a compromise proposal to split Class I into a category for regular bottled milk that would stay with an advance priced “higher of” base price and a separate (from Edge testimony):

“sub-Class I-H (H for “hedgeable”). All milk processed as Extended Shelf Life or aseptic would be automatically classified to I-H, and others can elect it if they can demonstrate to market administrator’s satisfaction that they are regularly offering their product on forward price basis, and are currently hedging, or wish to start utilizing hedging tools to manage their price exposure. The milk in Class I-H would be priced per proposal 16 – Class III Plus, with no advanced prices. To prevent adverse selection, the switch between sub-classes should be difficult to make, and with a very long lead time. We suggest a lead time of at least 24 months.”

NMPF and USDA-AMS attorneys formally objected to this proposal being submitted into consideration for this hearing. The basis of the objection was that this proposal would involve changing a part of the Federal Order regulation that is not under consideration in this hearing. The Judge allowed Edge to read its testimony and then ruled that the proposal could not be considered by USDA because it was outside the call of the hearing.

The reality is that this hearing is NOT about building a new structure of Federal Orders. It is about updating factors in the FMMO formulas that have not been updated in many years.

On Wednesday afternoon, testimony regarding issue five, the updating of Class I differentials began. It is important to note that there are more than 3,000 counties in the continental United States, all of which have a Class I differential designated for milk received in that county.

The array of witnesses lined up by NMPF to address its proposal 19, from a macro/policy perspective, all the way to local and regional perspectives, is impressive. No less than 17 witnesses are scheduled by NMPF alone on proposal 19. The main justification for raising Class I differentials is that over the past 23 years costs have gone up for getting Class I milk to the market and the Class I differentials need to be raised to reflect those costs.

Annoyingly for producers, while NMPF is putting great effort into raising Class I differentials, the Milk Innovation Group (MIG) representing a group of processors is going the opposite direction with its proposal 20, which is to LOWER all Class I differentials by $1.60. It will be interesting to hear their argument for why Class I should be cheaper than it already is. However, it will likely be quite some time before MIG gets to make its case because USDA let everyone know that the hearing will meet through next Wednesday, October 11. It will then go dark and resume on Monday, November 27 at 1 p.m. No, that is not a misprint. Clearly, the hearing is taking much longer than expected. The issues are important and the FMMO process allows unlimited cross-examination of witnesses to assure that the hearing record that USDA must depend on to make its final decision is thorough and tested. Hopefully this gets done before Christmas.

Today, two California dairy farmers testified. George te Velde from Escalon testified about the impacts of de-pooling on direct shippers to Class I plants. Fresno County dairyman Mark McAfee from the California Dairy Campaign also testified. He spoke about the need for more innovation by the processing sector. You can see his presentation here.

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