Geoff Vanden Heuvel
Director of Regulatory and Economic Affairs
On June 15, 2021, USDA announced its intention “to address a number of gaps and disparities in previous rounds of aid” with remaining funds allocated by Congress for Coronavirus Relief. Relative to dairy, three initiatives were mentioned. The first is $400 million for the Dairy Donation Program. The second is $580 million for enhancements to the Dairy Margin Coverage program, which is targeted to a dairy farmer’s first 5 million pounds of production per year. The third and most interesting initiative is “Additional pandemic payments targeted to dairy farmers that have demonstrated losses that have not been covered by previous pandemic assistance.”
During the pandemic, a couple of government actions, done with the best of intentions, created huge disparities in what different dairy farmers got paid for their milk. Back in 2019, Congress instructed USDA to change the Class I formula. The base Class I price went from using the “higher of” either the Class III (cheese/whey) or Class IV (butter/powder) values, to a formula using the “average of” the Class III and IV values, plus an adjuster that was designed to make the change “revenue neutral.” When Class III prices skyrocketed about mid-year in 2020 due to massive government stimulated purchases of cheese for the Farmers to Food Box program, Class I prices lagged behind because they were now based on the “average of” instead of the “higher of.” The resulting lower Class I values generated hundreds of millions of dollars less in Class I revenue than the “higher of” formula would have produced. Cheese plants and the cooperatives who supplied them, for the most part, dropped out of the Federal Order pools, deciding to keep the money instead of sharing it. This contributed to massive negative Producer Price Differentials and very different milk prices for farmers in the same market depending on where their milk was sold. This magnitude of milk price disparity is very destabilizing in the dairy producer community.
While USDA announced their intention to make targeted additional pandemic payments, there were no details given by USDA this week for how these additional targeted pandemic payments would be calculated. But recently, USDA received a written suggestion from Florida dairy farmer Joe Wright that deserves serious consideration. The dairy farmers most hurt by the milk price disparities of the pandemic were dairy farmers who participated in the Federal Orders. Handlers kept almost all the high cheese milk dollars out of the Federal
Order pools while the producers who provided the rest of the milk stayed in the Federal Order pools. Those who stayed in bore the brunt of the low Class I prices. USDA keeps records of which producers associate with the Federal Order pools each month. It is also possible to calculate the difference between what Class I prices would have been under a “higher of” formula as opposed to the “average of” Class I formula that was in place. Industry estimates put that number at close to $750 million.
It seems then that one approach USDA should take is to provide a mechanism for producers to make a claim for additional pandemic payments based on the milk they pooled in the Federal Order during the pandemic period. In this way, the additional pandemic payments would be targeted to those who were most impacted by the lower Class I prices and missed out on the benefit that the massive government stimulated purchases of cheese created. Targeting the payments to those who stayed in the pool would go a long way toward righting an inequity, that while unintentional, was very consequential and destabilizing in the dairy community