Washington—The US dairy industry and milk producers are united on a proposal to change the way that milk is priced.
Producers have protected the pricing system for decades while Processors have ignored federal milk marketing orders that set prices for milk based on various dairy products.
Processors have traditionally pooled the receipts to pay producers based on average prices.
Producers also fought off proposals by processors to allow them to start buying fluid milk through contracts with farmers.
But now, the International Dairy Foods Association and National Milk Producers Federation are asking Congress to include compromised provisions in the new farm bill that modifies the formula that determines the floor price for fluid milk. It’s based on fluctuations in milk prices that go into the butter and cheese sectors of the market.
Under the system, the price for fluid milk, Class I, is set as a premium over the price paid for either Class III, used in cheese production or Class IV (butter and milk powder), whichever is higher.
The problem for processors is that with the current formula, they have to hedge the cost of their fluid milk supplies based on Class III and Class IV futures, not knowing for sure which is going to be the price mover. That means uncertainty and increased hedging costs and significant risk for processors.
The Dairy Food Association-Milk Producers deal would still prevent bottlers from forwarding- contract fluid milk. National Milk argues that forward contracting could drive down the prices paid to producers. But the groups have agreed to tweak the formula that's been in place since 2000: The price for fluid milk will be set at 74 cents per hundredweight over an average of the Class III and Class IV prices, not the highest of the two.
It sounds like a minor change, but experts think it'll go a long way toward eliminating price spikes and providing processors with more predictability.
The 74-cent premium is based on the historical average of what producers have been receiving for fluid milk over the cheese and butter prices.
Economist John Newton of the American Farm Bureau Federation analyzed the plan and said that if the proposed system had been in effect since 2000, it would have stabilized prices, eliminating both the highs and lows, with no long-term loss to producers.
“If you look at it over time, it’s a wash for dairy producers,” said Newton.
Jim Mulhern, president, and CEO of National Milk said the agreement marked the first time the producers and processors had come together on reforms to the pricing system. The agreement grew out of discussions that started in 2016 on reforms to farm bill policy. IDFA got behind improving producers’ Margin Protection Program. National Milk agreed to consider changes to the Class I pricing formula.
“It’s not a huge change, but it’s a meaningful change” to milk bottlers, said Dave Carlin, IDFA’s senior vice president for legislative affairs and economic policy.