A new proposal announced by four Midwestern dairy groups seeks to add stability and limit negative producer price differentials in the federal milk pricing system.
The unveiled proposal, which the organizations are calling Class III Plus, came four days after the National Milk Producers Federation announced its board of directors voted to request an emergency U.S. Department of Agriculture hearing regarding a Federal Milk Marketing Orders proposal to modify the current Class I price mover.
According to an NMPF press release, their proposal would “modify the current Class I mover, which adds $0.74 (per hundredweight) to the monthly average of Classes III and IV, by adjusting this amount every two years based on conditions over the prior 24 months, with the current mover remaining the floor.” The NMPF request seeks to limit the hearing, if granted, to the proposed Class I mover changes.
But the Dairy Business Association, Edge Dairy Farmer Cooperative, Minnesota Milk and Nebraska State Dairy Association don’t agree that the NMPF proposal would solve the problem, particularly in the long term. That’s where their Class III Plus proposal comes in.
“In our discussions, we centered on three core goals in reforming the Class I formula,” Amy Penterman, president of DBA, said during a press conference.
Those goals are to add stability to the pricing system without distorting the markets, reduce the likelihood of negative PPDs and make producer risk management more effective in crises, Penterman said.
“The NMPF proposal does none of these things,” Penterman said. “Instead it merely attempts to claw back lost revenue in the short term and leaves larger problems unsolved.”
John Holevoet, director of government affairs for DBA and Edge, said that the NMPF proposal may bring a hearing sooner than the groups behind Class III Plus had anticipated or desired, but issues with the Class I formula, along with others in the federal milk pricing system, were an item that they had wanted to look into already, whether a hearing or reform happens now or at a later time.
“We’ll leave it to USDA to determine whether the benchmark has been made for having a hearing,” Holevoet said. “We just want to make sure that we are thinking carefully about what would be best for farmers long-term.”
The Class III Plus proposal would tie the price of Class III (cheese production) skim milk price to the Class I (fluid) skim milk price, resulting in the Class I price equaling the Class III price plus the Class I skim milk price adjuster.
The Class I price adjuster would be “equal to the average of the monthly differences between the higher of Class III and Class IV skim milk prices, and the Class III skim milk price during the prior 36 months of August through July,” according to the proposal. The USDA would be required to publish a revised Class I price adjuster each September for the following calendar year.
For 2021-25, the proposal would set a minimum Class I price adjuster of $0.36 per hundredweight.
The Class III Plus proposal would also put an end to the use of advanced prices in FMMO pricing formulas.
“If we look at analysis of the negative PPDs we saw across all quarters in 2020, we can see a decent proportion of all of those are directly tied back to the advanced pricing system,” Holevoet said.
Therefore, in removing the advanced pricing system, the proposal would reduce the likelihood of future negative PPDs, he said.
Overall, the proposal aims to be revenue-neutral and should not be advantageous toward any particular class of milk in the long run, said Lucas Sjostrom, executive director of Minnesota Milk.
“We’re proud of that, which is why we think (the proposal) is good for processors, consumers and dairy farmers,” Sjostrom said.
Kris Bousquet, executive director of the Nebraska State Dairy Association, said, “Our main priorities going into this research and development process was we wanted it to be fair and we wanted to be able to lock in milk and be able to forward contract. And this Class III Plus situation allows for our farmers to do just that.”