By Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
Issue #1 Milk Composition
There are proposals from National Milk Producers Federation (NMPF) and National All Jersey (NAJ) on this issue. The skim values of Class III and Class IV are relevant in the four federal orders that use a butterfat and skim pricing formula (as opposed to a milk component pricing formula in the other seven orders) for calculating milk used to make cheese and butter/powder. The formulas still use butter, cheddar cheese, dry whey and nonfat dry milk to establish values but then assume that the skim portion of the milk has 3.1% protein, 5.9% other solids or 9% solids nonfat and price the skim accordingly. In fact, over the last 20 years the nonfat components in the skim have increased and the current formula does not account for that. In non-component based orders (Arizona, Florida, Southeast and Appalachian) it affects the Class III and Class IV prices which are based simply on butterfat and skim. Processors in the other seven orders pay producers based on actual protein and other solids or solids nonfat when they buy Class III and Class IV milk, so this change will not impact the price paid to producers in those orders for those classes of milk. But the announced Class III and IV prices at standard test will be raised because the component standard will be raised. This change in the announced Class III and Class IV skim milk prices will impact the Class I and Class II prices by raising the assumed or standard component levels as is being proposed by both NMPF and NAJ. The base Class I and II price will be raised and that produces a higher producer price. NMPF seeks to raise the protein value from 3.1 to 3.39 per cwt. of skim, the other solids from 5.9 to 6.02 and the nonfat solids from 9 to 9.41. NAJ seeks the same thing but differs on how often the values should be updated. Both proposals state that if USDA adopts the change, it becomes effective 12 months after adoption.
Value to producers of this change: roughly $0.50 per cwt. on Class I and II in the California order.
Issue #2 Surveyed Commodity Products
There are four proposals in this category. NMPF seeks to eliminate 500 pound barrels of cheddar cheese from the protein formula. The American Farm Bureau (AFB) seeks to add 640 pound barrels to the protein formula. AFB also seeks to add unsalted butter to the butterfat and protein formulas. The California Dairy Campaign (CDC) seeks to add mozzarella to the protein formula. Historically there has been a fairly close relationship between 40 pound cheddar block prices and 500 pound cheddar barrel prices, but over the past number of years, these prices have diverged greatly. NMPF makes the case that the 40 pound cheddar block price is the price that nearly all other cheeses are indexed to. And that the 500 pound barrel market, to the extent it no longer tracks the 40 pound block market, is a unique market and not indicative of the value of cheese. Apparently 640 pound cheddar blocks are indexed to the 40 pound block price so adding them would add volume to the cheese product survey but not change the price much. The CDC proposal to add mozzarella is hard to accomplish. It would add volume to the survey, but there is no accepted standard of what mozzarella cheese is. Most mozzarella is custom made for a specific end user. Also, to the extent it is a commodity cheese, it is likely that it is priced off of the 40 pound cheddar cheese price.
The AFB also wants to add unsalted butter to the survey. I know CDI is very opposed to this. Their position is that unsalted butter is a value add product in the U.S. and should not be considered as part of the commodity butter price survey for Class IV.
The value to the producers from eliminating barrels would vary, but could be in range of 25-50 cents per cwt. on Class III, sometimes significantly more, with a corresponding positive impact on Class I.
Issue #3 Class III and Class IV formula factors
There are 6 separate proposals that seek changes in the formulas.
NMPF proposes to increase the make allowances for butter, nonfat dry milk, cheddar cheese and dry whey. These changes would drop the Class III price by about 55 cents per cwt. They would drop the Class IV price by 53 cents per cwt. These drops would also drop the Class II and Class I prices by the same amount.
The Wisconsin Cheesemakers (WC) propose larger increases in make allowances, but they propose to phase the increases in over four years. The first year increases would be larger than the NMPF increases and therefore reduce producer prices even more: About 75 cents per cwt. reduction for Class III in year one and 60 cents per cwt. reduction for Class IV. By year four that reduction would about double to $1.50 for Class III and $1.20 for Class IV.
The proposal by the International Dairy Foods Association (IDFA) representing all the processors is essentially identical to the WC proposal. Until July 1, 2023, CDI, Land O Lakes and Dairy Farmers of America were members of IDFA. They have now terminated their membership.
Select Milk Producers has a proposal to adjust the implied farm to plant shrink calculation in the Class III formula. The factors USDA used in 2000 when the formulas were created to account for shrinkage between the farm and the plant did not account for the improvements in transportation of milk that has occurred over the past 20 years. These are relatively small tweaks, but if adopted would add about 8 cents per cwt. to the Class III price.
Select Milk Producers has another proposal to increase the nonfat solids factor from .99 to 1.03. The idea here is that the current Class IV yield assumes a yield of .99 pounds of powder being made from each pound of nonfat solids in the skim. Nonfat dry milk does have a moisture content in addition to the solids which means there should be higher yield than .99. On the other hand, some of the nonfat solids in 100 pounds of milk that is made into butter/powder is in the buttermilk residual. When the buttermilk solids are dried, they are not sellable as Nonfat Dry Milk, but as dry buttermilk powder which typically has a lower value. Select’s proposal would add about 34 cents per cwt. to the Class IV price.
Select also has a proposal to increase the butterfat recovery factor in the Class III formula to 93 percent from its current 90 percent. This would change the butterfat yield in cheese from the current 1.572 factor to 1.624. This proposal adds about 5-10 cents per cwt. to the Class III price.
Base Class I Skim Milk Price
NMPF has a proposal to go back to the “higher of” either the Class III or the Class IV value like It used to be. The value of this proposal to producers is hard to estimate going forward. It has been estimated that the cost to producers of this Congressionally imposed change has been over $1 billion over the past four years.
IDFA proposes to stay with the “average of” but to set the adjuster at the higher of 74 cents or the 24 month (August-July) simple average difference between the Class III and Class IV skim milk prices. This could conceptually be a higher Class I base price than simply returning to the “higher of”. The problem with moving off of a “higher of” base price is the problem of misalignment of Class I prices. FMMOs only work if there is an incentive to associate milk with the pool. Access to Class I revenues is that incentive. If the pricing system produces Class I prices that can be lower than other class prices, as we have experienced in the last three years, it takes away that incentive and undermines the integrity of the FMMO system.
The Milk Innovation Group (MIG) is made up of fluid processors and producer handlers, including Producers Dairy in Fresno and Foster Farms. MIG proposes to retain the “average of” Class I base price and update the adjuster monthly using the average difference between a “higher of” calculation and an “average of” calculation for the 24 month period, 13-36 months in the past.
Edge Dairy Farmer Cooperative is from the Midwest. Edge is proposing to eliminate advanced Class I pricing and instead announce Class I prices after the month using the Class III plus an adjuster. The adjuster would be the 36 month average of the monthly differences between the “higher of” the advance Class III or advanced Class IV skim milk price and the Class III skim milk price.
AFB proposes to eliminate advanced Class I and Class II prices. Class II would be Class IV plus a differential. Class I would be the “higher of” Class III or Class IV plus the Class I differential.
Class I and Class II Differentials
NMPF seeks to update the Class I differentials in all 3,108 counties in the contiguous US.
MIG proposes to lower the current base Class I differential of $1.60 to zero.
AFB proposes to change the Class II differential from 70 cents to $1.56.
The hearing starts on August 23 and it is expected to last between 6-8 weeks.