Economists Find Much to Like in USDA Pricing Plan

USDA’s plan for modernizing the Federal Milk Marketing Order system aligns well with the principles outlined in NMPF’s own proposals, NMPF economists Peter Vitaliano and Stephen Cain said in a Dairy Defined Podcast released today. Still, analysis is ongoing, and NMPF will be suggesting improvements during a public comment period that lasts through mid-September. 

“It's important that we have a national system that helps level the playing field across the country,” said Cain, NMPF’s senior director for economic research and analysis. “We do not want regulation to create winners and losers or incentivize actions that distort the marketplace or market dynamics in any way.

Transcript

Alan Bjerga: Hello and welcome to Dairy Defined.

USDA's Plan for federal milk marketing order modernization is out, and dairy farmers want to know, "How does this work for me?"

Helping answer these and other questions are NMPF economist, Peter Vitaliano and Stephen Cain, who have been leading analysis in the process throughout.

Let's start with you, Peter. You may have put more time into this effort than any economist on this planet. Tell us a bit about what USDA did and how did it align with the work NMPF's membership put into this effort?

Peter Vitaliano: National Milk Producers spent a couple of years and countless meetings working with a large team of its member cooperative or member economists and dairy marketing specialists to develop the program that it brought to this past hearing.

Resulted in five formal proposals to the hearing, all premised on the basis of the fact that the pricing formulas and the federal order program are designed to accurately reflect the value of manufactured dairy product prices back to a value of milk for payments to dairy farmers through the system.

USDA accepted that basic principle in all five of our proposals, but they mostly came up with some of their own variations, let's say, on our specific proposed changes. By and large, those changes, and we're in the process of examining them very closely to see how closely they achieve the objectives we set out for them. But my impression is that USDA's adjustments do a reasonably good job of bringing us a good part of the distance to where National Milk came out in its own proposals. Nothing that we proposed was flat out rejected. That occurred with a number of other proposals from other organizations. And by and large, dairy farmers will receive a higher value for their milk under these revised formulas in the recommendation.

Alan Bjerga: Anything in the plan surprise you?

Peter Vitaliano: Yes, probably the most one was the Class I mover. National Milk recommended returning to the higher-of mover processor groups. Very strongly recommended sticking with the current average of Class III and Class IV mover with an adjustment that would basically over time keep it coming up with roughly the same price that the higher-of mover would have. That would have addressed the biggest problem with the current mover that producers have lost a significant amount of money.

I expected that the department would have to look at this as a zero sum game. It's going to be one or the other. I did not expect that they would come up with a decision that basically established two different Class I movers, one for most milk with shorter shelf life, which was the higher-of as National Milk had requested, but also the average of with an adjustable increment on top of that for the much smaller volume of extended shelf life products, products with a shelf life of over 60 days, which was the class of milk that the processor said they really needed to keep the average of mover. So in a sense, it was a Solomon-like decision that I think very creatively addressed the issue.

Alan Bjerga: Let's bring in Stephen Cain. Stephen, something that's been getting a lot of attention is accompanying USDA's proposal is an economic analysis. That said, had this plan been in effect over the past five years, farmers would have received an extra 32 cents per hundred weight for their milk.

But there's a lot of variation in that calculation, and the numbers aren't always positive, in places like California, the upper Midwest. A farmer could look at that and say, "What's in it for me? It looks like I'm losing money." What would you tell those farmers?

Stephen Cain: Yeah, I mean, well, the short answer is, a federal order system that reflects reality, which I think is very important. You need regulation to reflect the realities of the marketing conditions in which it's governing. And the orders haven't been updated in a very long time. They've gotten out of sync with the market realities, and it's causing disorderly marketing.

To Peter's comments, the updates that USDA has outlined in the proposed ruling are good, and largely I think they bring us back into reality. And overall we're fairly pleased with what USDA has proposed.

It's also worth noting, though, that we didn't get everything we wanted, and specifically on the make allowances. The make allowances that we proposed were a little bit lower than what USDA is coming out with their proposed ruling, but they're also substantially lower than what IDFA and some other processor groups proposed. So also to Peter's comments, that put USDA in a tough position and making a putting the baby decision on where those numbers should actually be.

At the end of the day, I think they came out with an okay decision there on the make allowances, but they are quite a bit higher than what we proposed, and especially in groups, areas where Class I utilization may not be as high, like California, like some places out Midwest, that may lead to a little bit of a lower pay price at times.

Per USDA's ROI analysis, that was past-looking, looking at the past five years. That's not always indicative of the next five years, but we'll see where the takes in the future.

Alan Bjerga: Well, and you make an interesting point, Stephen, in that this is a dynamic situation. It's not like somebody's going to come in the day this is proposed and say, "Okay, your milk check's 20 cents less a hundred weight now."

What you're putting in place is this dynamic system that allows the entire industry ... It basically provides a more rational footing for the entire industry, which then allows different elements to adjust.

Peter Vitaliano: Well, the areas that USDA indicated would receive slightly negative price changes are areas, as Steven pointed out, where most of the milk is used for manufacturing as opposed to fluid use. And in those areas, cooperatives play a very important role in that manufacturing, and the cooperatives have been as badly affected as regular non-cooperative processors by the make allowances that are clearly everybody agreed were inadequate.

The question is, the higher make allowances may show on a historic analysis of a small reduction in overall prices, because there's not enough fluid milk to offset that in those areas. But dairy farmers in even those regions that are manufacturing heavy will benefit from the fact that their cooperatives will be in a stronger position, will not have to come back and claw back as some of them have had to do. Some of the previous payments they've made to dairy farmers to cover their losses and dairy farmers all over the country will continue to benefit as they've had for decades and decades from having strong cooperatives representing them in the marketplace.

Alan Bjerga: And a key phrase there that you just said, Peter, is, "farmers all over the country."

Even when you see all of these regional variations, Stephen, what in the end is the benefit of having a truly national plan?

Stephen Cain: It's important that we have a national system that helps level the playing field across the country. We do not want regulation to create winners and losers or incentivize actions that distort the marketplace or market dynamics in any way.

So milk being a perishable product, just the nature of milk, we have to have regulations to support and protect dairy farmers, but that regulation should never create winners and losers. So we need that national program to provide that level playing field as much as possible across the entire industry.

Alan Bjerga: One thing you've been noting, Peter, is that almost as important as the plan itself, USDA's proposal provides a blueprint for how to more efficiently update FMMOs in the future, which you'd hope would make these long, expensive, once a generation efforts less necessary. Could you explain that a little more in depth?

Peter Vitaliano: Yes. I think that's a very important feature of this decision, not necessarily one that was specifically made, but it's effectively that's the case.

For example, the national oil proposal on make allowances, the problem with adjusting make allowances in the past has been the continued controversy on the voluntary and only occasional cost surveys, which are needed to make those adjustments. All parties to this hearing agreed to seek legislation in the Farm Bill, which I'm positive will be included when there finally is a farm bill, to give USDA the authority and the funding to conduct biennial mandatory, auditable cost surveys that will for the first time finally provide an objective source of information for making future make allowance adjustments. That'll make that process so much easier.

Another proposal was to increase the component composition factors in the Class III and Class IV skim milk price formulas to reflect the fact that producer milk contains a lot more components than it did when the current formulas were put into place. USDA did make an upward adjustment for those as National Milk had proposed. They scaled it back a little bit, but basically, you could for future continued changes in composition, which we fully expect, USDA basically set out effectively a blueprint for what level of increase we could request in the future when those composition factors continue to increase, making it a very straightforward proposition to request future hearings to keep those updated once USDAs established that principle.

The federal order Class I differentials all over the country. USDA based its request on an updated version of a very complex economic model that was used to establish the current differentials. We made some adjustments for things that the model couldn't account for. USDA was very skeptical about those, proposed some of its own, but basically, again, they set a blueprint for as the cost of supplying fluid milk for Class I use continues to increase. It's going to be a straightforward matter to basically run an updated version of that model and take those results and make the kind of adjustments that USDA indicated they would be comfortable with.

And again, a blueprint for making further increases, because the structure of the US dairy industry, whose changes were basically long overdue to be addressed in the current hearing, those are going to continue in many cases, particularly the cost-related changes.

Alan Bjerga: Where do we go from here?

Stephen Cain: The USDA put on the registrar the proposed change here a few days ago, so we'll have to file comments by mid-September. Everybody in the industry has to file comments by mid-September. After that, USDA will issue their final decision after reviewing those comments sometime in November. Likely have a referendum sometime in December before those changes get implemented in early next year, probably sometime in Q1.

Peter Vitaliano: National Milk has reconvened its task force put together of experts that put together the original proposals to take a close look at it to guide the comments we're going to make. National Milk's Board of Directors has not yet taken a formal position on the proposal, but again, I think we did pretty well overall. Compared to some of the other organizations with proposals at the hearing, I think we did pretty well.

Alan Bjerga: We've been speaking with Peter Vitaliano. He's Vice President, Economic Policy and Market Research at NMPF, and Stephen Cain, NMPF Senior Director, economic Research and Analysis.

NMPF has an entire page devoted to FMMO modernization. You can see it if you just click the blue bar on the middle of our homepage, NMPF.org, and we have an entire archive of this podcast. All you have to do is go to our website or go to Apple Podcasts, Spotify, Google Podcast, and Amazon Music and search under the podcast name, Dairy Defined.

Thank you for joining us.