In a world of supply and demand, there are only so many ways dairy farmers can hedge their investments.
Calls for reform are growing, led by agricultural economists, farmers and others. Many dairy farmers are hurting, experts said, because the pricing system is outdated, non-transparent, arbitrary and sometimes predatory in nature.
“Over the last number of years, these pricing signals have not been in place to really give farmers the signal in order to cut production the way they should. They’ve been really negatively affected,” Kevin Krentz, president of the Wisconsin Farm Bureau Federation said. “We’re trying to take a deeper look into dairy pricing itself. It’s the old system that is in place, and we’re trying to rebuild that for the future.”
The American milk pricing system is complicated, relying on a highly-structured framework, federal directives and dynamic market factors. Fluctuating standards dictate how much money dairy producers make and how much dairy products cost when they hit the shelves.
The pricing system was mainly the concern of agriculturists for decades, but in recent years — and, in particular, during the COVID-19 pandemic — cracks in the system have emerged. Now, the issue is being brought to the public at large.
Often, the system has been billed as a means to stabilize the dairy market and facilitate consistent returns across the board. However, many farmers are experiencing significant losses dependent on factors out of their control, such as where they operate, what federal orders they’re subject to and how their production is classified.
Numerous dairies in southwestern Wisconsin suffered because they were under a federal milk order in Iowa, Krentz said. The issue of milk pricing is a systemic problem, one that affects operations of every location and size.
In particular, a line item on milk checks called the producer price differential has drawn the ire of farmers across the country. Dairies can typically tailor their operations to meet demand based on what they produce — say, liquid milk versus spreadable cheese — production volume, and secondary factors like protein yield. In the end, pitted against the market, these metrics are a numbers game that can be tracked.
That isn’t the case for the producer price differential. The differential is notoriously opaque, unpredictable, and has been described as ripe for manipulation by greedy processors. If the average farmer has no idea what determines the differential, they’re at a significant disadvantage.
“It’s a nondescript item that very indirectly reflects market activities. One month, it can be 10 cents positive and the other month it could be four or five cents negative. At one point, it was $5 negative,” said Marin Bozic, the associate director of the Midwest Dairy Foods Research Center. “What do you do with that line? ... You’re not getting any indemnities from our risk management system.”
“These are the kind off situations where producers start losing trust that the relationship between them and their processor is fair balance,” he added. “This is the disconnect that is troubling them, that breeds distrust between dairy produces and their processors.”
Often, this situation smacks of predatory market practices. Not illegal by any means, Bozic said, but hardcoded into the milk pricing system itself.
During the pandemic, many dairies experienced significant losses for this reason. Often, what separated farms that performed well versus those that suffered losses are ambiguous distinctions between Class III and Class IV dairy products.
Market upheavals in exports and domestic demand, coupled with federal aid — which disproportionately drove up the price of cheese over other milk products — left many dairy producers reeling without a leg to stand on.
The milk pricing system was unprepared for the pandemic for several reasons. The lack of transparency that favors processors is one. Market consolidation by a few big players is another. Some pointed to provisions in the 2018 Farm Bill that created loopholes.
Still, others blamed the federal approach to government aid, which has been more targeted in recent years, compared to providing broad, uniform aid across the industry as in decades past.
Some note the current milk pricing system was originally created for a very different market in the 1900s, not the dairy industry of today.
“I would like to see a fundamental change in the milk price that takes into account the fundamental market shifts since the early 1900s,” said Christina Zuiderveen, a managing partner in three dairies located in South Dakota and Iowa. “In the 1900s, fluid milk consumption was 70% of a dairyman’s market. And now that number has dropped to 30%. That is because of a drop in fluid consumption, but also because of a rise in exports. It’s an outdated formula.”
This has led to talks of eliminating federal market orders altogether, although Zuiderveen said she isn’t in favor of that step.
Going forward, there are a number of ways to improve the system being discussed by farmers, in public hearings, and before lawmakers. A common area of proposed reform is price transparency.
“We should have a situation where farmers would easily understand the way their milk is priced,” said John Holevoet, director of government affairs for Edge Dairy Farmer Cooperative. “If we keep going down the path that we’re going currently, if our trends maintain, we’re going to see an increased likelihood of negative returns. There’s work that needs to be done.”
Everything’s on the table. Changes could include redesigned federal market orders, or restructuring the milk classification system from four to two classes, which would streamline and simplify the system. Experts noted there needs to be a standardized milk check so that farmers know exactly what their owed, what deductions need to be made and why.
“Every line item on the milk check needs to speak to the dairy farmer, it needs to tie to something that is under direct or indirect control of the dairy farmer,” Bozic said. “Our producers need to believe and trust the system. We need to know the rules of the game won’t change midstream. We need to shed more light on the relationship between producer and buyer, so that prices are transparent.”
Many of these changes need to occur at the federal level through legislation, Holevoet and Krentz noted. Other improvements can only be made through the more localized — and difficult — process of rewriting federal market orders that differ so much from one area of the country to the next.
Initial changes are likely occur in the next iteration of the farm bill, but experts noted there may have to be a public outcry, both from producers and consumers, to really shift the issue.