Proposed Rule2024-14769
Milk in the Northeast and Other Marketing Areas; Proposed Amendments to Marketing Agreements and Orders
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 15, 2024
Issuing agencies
Agriculture DepartmentAgricultural Marketing Service
Abstract
This decision proposes to amend the pricing provisions in the 11 Federal Milk Marketing Orders (FMMOs).
Full Text
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[Federal Register Volume 89, Number 135 (Monday, July 15, 2024)]
[Proposed Rules]
[Pages 57580-57687]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-14769]
[[Page 57579]]
Vol. 89
Monday,
No. 135
July 15, 2024
Part III
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Parts 1000, 1001, et al.
Milk in the Northeast and Other Marketing Areas; Proposed Amendments to
Marketing Agreements and Orders; Proposed Rule
Federal Register / Vol. 89, No. 135 / Monday, July 15, 2024 /
Proposed Rules
[[Page 57580]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1051,
1124, 1126, and 1131
[Doc. No. AMS-DA-23-0031]
Milk in the Northeast and Other Marketing Areas; Proposed
Amendments to Marketing Agreements and Orders
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This decision proposes to amend the pricing provisions in the
11 Federal Milk Marketing Orders (FMMOs).
DATES: Written exceptions and comments to this proposed rule must be
submitted on or before September 13, 2024.
ADDRESSES: Written exceptions should be filed with the Office of the
Hearing Clerk, U.S. Department of Agriculture, 1400 Independence Ave.
SW, Stop 9203, Room 1031, Washington, DC 20250-9203; Fax: (844) 325-
6940 or via the internet at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. All comments
should reference the docket number and the date and page number of this
issue of the Federal Register. Comments will be made available for
public inspection in the Office of the Hearing Clerk during regular
business hours or can be viewed at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. A
plain-language summary of this proposed rule is available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> in the docket for this rulemaking.
FOR FURTHER INFORMATION CONTACT: Erin Taylor, USDA/AMS/Dairy Programs,
Order Formulation and Enforcement Branch, STOP 0231-Room 2530, 1400
Independence Avenue SW, Washington, DC 20250-0231, Telephone: (202)
720-7183, Email address: <a href="/cdn-cgi/l/email-protection#a5e0d7cccb8bf1c4dcc9cad7e5d0d6c1c48bc2cad3"><span class="__cf_email__" data-cfemail="1e5b6c7770304a7f6772716c5e6b6d7a7f30797168">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION: This recommended decision proposes
amendments to five categories of milk pricing:
1. Milk Composition Factors. Update the factors to 3.3 percent true
protein, 6 percent other solids, and 9.3 percent nonfat solids.
2. Surveyed Commodity Products. Remove 500-pound barrel cheddar
cheese prices from the Dairy Products Mandatory Reporting Program
(DPMRP) survey and rely solely on the 40-pound block cheddar cheese
price to determine the monthly average cheese price used in the
formulas.
3. Class III and Class IV Formula Factors. Update the manufacturing
allowances to: Cheese: $0.2504; Butter: $0.2257; Nonfat Dry Milk
(NFDM): $0.2268; and Dry Whey: $0.2653. This decision also proposes
updating the butterfat recovery factor to 91 percent.
4. Base Class I Skim Milk Price. Update the formula as follows: the
base Class I skim milk price would be the higher-of the advanced Class
III or Class IV skim milk prices for the month. In addition, adopt a
Class I extended shelf life (ESL) adjustment equating to a Class I
price for all ESL products equal to the average-of mover, plus a 24-
month rolling average adjuster with a 12-month lag.
5. Class I and Class II differentials. Keep the $1.60 base
differential and adopt modified location specific Class I differential
values.
In conjunction with this Recommended Decision, the Agricultural
Marketing Service (AMS) conducted a Regulatory Economic Impact Analysis
to determine the potential impact of amending FMMO pricing formulas on
producer revenue and marketwide pool values. AMS used a static analysis
incorporating actual data reported from January 2019 to December 2023
to determine the estimated price impacts of the package of amendments
included in this Recommended Decision. The full text of the Regulatory
Economic Impact Analysis may be accessed at <a href="https://www.regulations.gov">https://www.regulations.gov</a>
or <a href="https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing">https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing</a>.
Prior Documents in This Proceeding
Notice of Hearing: Published July 24, 2023 (88 FR 47396).
Notice of Reconvened Hearing: Published November 6, 2023 (88 FR
76143).
Notice of Reconvened Hearing: Published December 29, 2023 (88 FR
90134).
This administrative action is governed by sections 556 and 557 of
title 5 of the United States Code and, therefore, is excluded from the
requirements of Executive Orders 12866, 13563, and 13175.
The amendments to the rules proposed herein have been reviewed
under Executive Order 12988, Civil Justice Reform. They are not
intended to have a retroactive effect. If adopted, the proposed
amendments would not preempt any state or local laws, regulations, or
policies, unless they present an irreconcilable conflict with this
rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674) (AMAA), provides that administrative proceedings must
be exhausted before parties may file suit in court. Under section
608c(15)(A) of the AMAA, any handler subject to an order may request
modification or exemption from such order by filing a petition with the
USDA stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, USDA would rule on the petition. The
AMAA provides that the district court of the United States in any
district in which the handler is an inhabitant, or has its principal
place of business, has jurisdiction in equity to review USDA's ruling
on the petition, provided a bill in equity is filed not later than 20
days after the date of the entry of the ruling.
Civil Rights Impact Analysis
AMS has reviewed this rulemaking in accordance with USDA
Departmental Regulation 4300-004, Civil Rights Impact Analysis, to
identify any major civil rights impacts the rule might have on FMMO
participants on the basis of race, color, national origin, disability,
sex, gender identity, political beliefs, age, marital, family/parental
status, religion, sexual orientation, reprisal, or because of an
individuals' income is derived from any public assistance program.
Based on the review and analysis of the rule and all available data,
issuance of this proposed rule is not likely to negatively impact low
and moderate-income populations, minority populations, women, Tribes or
persons with disabilities, by virtue of their age, race, color,
national origin, sex, disability, or marital or familial status. No
major civil rights impact is likely to result from this proposed rule.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C.
601 et seq.), the AMS has considered the economic impact of this action
on small entities. Accordingly, AMS has prepared this initial
regulatory flexibility analysis. The purpose of the RFA is to fit
regulatory actions to the scale of businesses subject to such actions
so that small businesses will not be unduly or disproportionately
burdened. Marketing orders and amendments thereto are unique in that
they are normally brought about through
[[Page 57581]]
group action of essentially small entities for their own benefit. A
small dairy farm as defined by the Small Business Administration (SBA)
(13 CFR 121.201) is one that has an annual gross revenue of $3.75
million or less, and a small dairy products manufacturer is one that
has no more than the number of employees listed in the chart below:
------------------------------------------------------------------------
NAICS U.S. industry Size standards in
NAICS code title number of employees
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311511.................... Fluid Milk 1,150
Manufacturing.
311512.................... Creamery Butter 750
Manufacturing.
311513.................... Cheese Manufacturing. 1,250
311514.................... Dry, Condensed, and 1,000
Evaporated Dairy
Product
Manufacturing.
------------------------------------------------------------------------
To determine which dairy farms are ``small businesses,'' the $3.75
million per year income limit was used to establish an annual milk
marketing threshold of 18.3 million pounds. Although this threshold
does not factor in additional monies that may be received by dairy
producers, it should be an accurate standard for most ``small'' dairy
farmers. Based on the U.S. 2023 average yield per cow and 2023 NASS
average All-Milk price, a dairy farm with approximately 780 cows or
fewer would meet the definition of small business. In 2022, the most
recent year with statistics available, there were 24,470 dairy farms
with milk sales, of which approximately 19,576 had milk regulated on an
FMMO for at least one month of the year. Based on the 2022 Census of
Agriculture, Milk Cow Herd Size by Inventory and Sales, an estimated 89
percent of operations with milk sales are likely to be small
businesses.
To determine a handler's size, if the plant is part of a larger
company operating multiple plants that collectively exceed the 750-
employee limit for creamery butter manufacturing; the 1,000-employee
limit for dry, condensed, and evaporated dairy product manufacturing;
the 1,150-employee limit for fluid milk manufacturing; or the 1,250-
employee limit for cheese manufacturing; the plant was considered a
large business even if the local plant does not exceed the 750, 1,000,
1,150, or 1,250-employee limit, respectively.
In 2022, the following number of plants were regulated for at least
one month of the year in each FMMO: 66 plants on the Northeast, 19
plants on the Appalachian, 9 plants on the Florida, 20 plants on the
Southeast, 58 plants on the Upper Midwest, 32 plants on the Central, 43
plants on the Mideast, 24 plants on California, 17 plants on the
Pacific Northwest, 26 plants on the Southwest, and 8 plants on Arizona.
According to the 2022 Census of Agriculture, approximately 86 percent
of fluid milk manufacturing plants, approximately 96 percent of cheese
plants, approximately 82 percent of dry products plants, and
approximately 78 percent of butter plants met the SBA definition of
small businesses.
How FMMO Pricing Provisions Currently Operate
The amendments recommended for adoption in this decision cover five
milk pricing subject areas: Milk Composition Factors, Surveyed
Commodity Products, Class III and Class IV Formula Factors, base Class
I skim milk price (Class I mover), and Class I and II Differentials.
This decision proposes to amend provisions in all five pricing subject
areas. The amendments are intended to update formulas and factors in
response to industry changes over time, many of which have not been
updated since the provisions were adopted on January 1, 2000, to ensure
USDA is carrying out the purposes of the AMAA.
Milk Composition Factors. FMMO milk prices are based on three
primary components--protein, other solids, and nonfat solids. Skim milk
composition factors in the current price formulas codified in the FMMO
regulations were adopted in 2000: 3.1 percent protein, 5.9 percent
other solids, and 9 percent nonfat solids. The proposed amendments
would increase milk composition factors to 3.3 percent protein, 6.0
percent other solids, and 9.3 percent nonfat solids. Actual component
tests of skim milk have increased since 2000, with more significant
increases beginning in 2016. The amendments are intended to more
accurately represent component levels in milk produced.
Surveyed Commodity Products. Milk prices under FMMOs are related to
wholesale prices for butter, cheese, nonfat dry milk, and dry whey. The
formulas use USDA-surveyed average wholesale prices to calculate milk
component prices (butterfat, protein, nonfat solids, and other solids)
that are converted to Class III and IV milk prices. The protein value
in cheese is a component of the Class III price. Currently, the prices
of commodity cheddar cheese packaged in 40-lb blocks (``blocks'') and
500-lb barrels (``barrels'') are collected weekly by AMS through the
DPMRP survey. A monthly average of those prices is used to represent
commodity cheese in the Class III price formula. The butterfat value in
commodity salted butter is the driver of the butterfat price used in
all classified prices. The proposed amendments would eliminate 500-lb
barrels from the DPMRP survey and rely solely on the monthly average
survey price for 40-lb cheddar blocks. The amendment is intended to
provide for more orderly marketing through a survey of only one
product.
Class III and IV Formulas Factors. Make allowances are a factor in
the FMMO pricing formulas representing the cost of converting raw milk
into the four manufactured dairy products surveyed by USDA (butter,
cheese, nonfat dry milk, and dry whey). Make allowances were last
updated in 2008 following a rulemaking proceeding in 2007. The proposed
amendments would update the make allowances in the FMMO Class III and
IV formulas to the following: $0.2504 for cheese; $0.2257 for butter;
$0.2268 for NFDM; and $0.2653 for dry whey. The proposed amendments
would also update the butterfat recovery factor in the Class III
formula to 91 percent. The amendments are intended to update the
formula factors to be more representative of current costs and
butterfat recovery observed in dairy product manufacturing.
Class I mover. The Class I mover is the base price for the skim
milk portion of raw milk used in the production of Class I products.
The Agriculture Improvement Act of 2018 (2018 Farm Bill) amended the
Class I skim milk price mover from the ``higher of'' Class III or Class
IV skim prices to a simple average of the two classes plus $0.74,
referred to as the ``average of'' mover. The proposed amendments would
return the base Class I skim milk price calculation to the higher-of
Class III or Class IV skim prices. The proposed amendments would also
adopt a rolling monthly Class I ESL adjustment equating to a Class I
price for all ESL products equal to the average-of the Class III and
Class IV advance prices,
[[Page 57582]]
plus a 24-month rolling average adjuster, with a 12-month lag. The
monthly Class I ESL adjustment would be calculated as the average of
the differences between the higher-of and the average-of calculations
for the prior 13 to 36 months. The amendments are intended to provide
for more orderly marketing by returning to the higher-of mover; while
the Class I ESL adjustment would provide better price equity for ESL
products whose marketing characteristics are distinct from other Class
I products.
Class I and II Differentials. FMMO Class I prices are calculated as
the average of the advanced Class III and Class IV prices, plus $0.74,
plus a location-specific differential referred to as a Class I
differential. As the value of milk varies by location, Class I
differentials have been determined for every county in the continental
U.S. Current Class I differential levels were implemented January 1,
2000, with updates to the differentials in the three southeastern
orders taking effect May 1, 2008. The proposed amendments would retain
the $1.60 base differential and adopt modified location-specific Class
I differential values. The amendments are intended to recognize the
evolution of the dairy industry since 2000 and the increased cost of
servicing the Class I market given current transportation costs and
plant and producer locations.
This decision finds these amendments are necessary. The evidentiary
record reflected testimony from a broad range of stakeholder views that
updates are necessary in all five pricing subject areas to reflect
current market conditions.
Impact on Small Businesses
An economic analysis has been performed on impacts the proposed
amendments will have on industry participants, including producers and
handlers. It can be found on the AMS website at <a href="https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing">https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing</a>. The proposed amendments would be applied identically
to all proprietary and cooperative handlers regulated by FMMOs,
regardless of their size. The proposed amendments would implement
prices that more accurately reflect current market conditions,
providing for more orderly marketing for both small and large producers
and handlers.
AMS considered alternatives to each of the recommended amendments.
Over 49 days of hearing, dozens of witnesses from 9 industry
stakeholder groups presented testimony and evidence on 21 proposals in
the 5 pricing subject areas. AMS considered all evidence and testimony,
including alternative proposals presented, in making its
recommendations.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these proposed amendments would have no impact on
reporting, recordkeeping, or other compliance requirements because they
would remain identical to the current requirements. No new forms are
proposed, and no additional reporting requirements would be necessary.
This proposed rule does not require additional information
collection that requires clearance by the Office of Management and
Budget (OMB) beyond currently approved information collection. The
primary sources of data used to complete the forms are routinely used
in most business transactions. Forms require only a minimal amount of
information which can be supplied without data processing equipment or
a trained statistical staff. Thus, since the information is already
provided, no new information collection requirements are needed, and
the current information collection and reporting burden is relatively
small. Requiring the same reports for all handlers does not
significantly disadvantage any handler that is smaller than the
industry average.
AMS is committed to complying with the E-Government Act, to promote
the use of the internet and other information technologies to provide
increased opportunities for citizen access to Government information
and services, and for other purposes.
No other burdens are expected to fall on the dairy industry as a
result of this rulemaking. This rulemaking does not duplicate, overlap,
or conflict with any existing Federal rules.
Preliminary Statement
A public hearing was held upon proposed amendments to the marketing
agreement and the orders regulating the handling of milk in all 11
Federal milk marketing areas. The hearing was held pursuant to the
provisions of the AMAA, as amended (7 U.S.C. 601-674), and the
applicable rules of practice and procedure governing the formulation of
marketing agreements and marketing orders (7 CFR part 900).
The proposed amendments set forth below are based on the record of
a public hearing held in Carmel, IN, from August 23-October 11, 2023,
November 27-December 8, 2023, January 16-19, 2024, and January 29-31,
2024, pursuant to a notice of hearing published July 24, 2023 (88 FR
47396), a notice of reconvened hearing published November 6, 2023 (88
FR 76143), and a second notice of reconvened hearing, published
December 29, 2023 (88 FR 90134).
The hearing was held to receive evidence on 21 proposals submitted
by dairy farmers, handlers, and other interested parties. A total of
165 witnesses testified over the course of the 49-day hearing.
Witnesses provided an overview of the complexity of the U.S. dairy
industry and submitted 511 exhibits containing supporting data,
analyses, and historical information.
The material issues, related to FMMO pricing formulas, presented on
the record of hearing are as follows:
1. Milk Composition Factors
2. Surveyed Commodity Products
3. Class III and Class IV Formula Factors
4. Base Class I Skim Milk Price
5. Class I and Class II differentials
Summary of Testimony
Milk Composition
Two proposals seeking to amend the milk composition standards are
being considered in this rulemaking. Proposal 1, submitted by the
National Milk Producers Federation (NMPF) seeks to increase the skim
component factors, with a 12-month implementation lag. The proposed
standards are as follows: increase the nonfat solids assumption from
9.0 to 9.41 per hundredweight (cwt) of Class IV skim milk; increase the
protein assumption from 3.1 to 3.39 per cwt of Class III skim milk; and
increase the other solids assumption from 5.9 to 6.02 per cwt of Class
III skim milk. Proposal 1 also contains an updating methodology that
would automatically update the standards no more than once every three
years once the nonfat solids component for the prior three years
changes by at least .07 percentage points.
Proposal 2, submitted on behalf of National All-Jersey (NAJ), is
identical to Proposal 1, except for the automatic update methodology.
The proposal would update the standards annually using the previous
year's weighted averages, with a 12-month implementation lag.
A witness from NMPF, a trade association representing dairy farmer-
owned cooperative marketing associations throughout the United States,
testified in support of updating the skim milk price milk component
factors, as contained in Proposal 1. The witness explained how the U.S.
dairy industry has undergone dynamic structural change since 2000,
while FMMO product price formulas have
[[Page 57583]]
generally remained static. The witness stated dairy farmers have
responded to component pricing by significantly increasing the
butterfat, protein, and other solid levels in their milking herds.
According to the USDA's National Agricultural Statistics Service
(NASS), said the witness, average butterfat tests have increased 10.9
percent from 2000 to 2022, and USDA's Economic Research Service (ERS)
reported average skim milk solids content of U.S. milk production
increased 0.31 percent during the same period. The witness said 2022
FMMO average protein, other solids, and nonfat solids (NFS) in pooled
milk were 3.39 percent, 6.02 percent, and 9.41 percent, respectively.
The NMPF witness asserted the static component levels contained in
the formulas result in underpayments to producers in all FMMO's for the
value of their Class I skim milk. Therefore, NMPF proposes to increase
the milk composition factors in skim milk to 2022 levels. The NMPF
witness analyzed 2013-2022 FMMO product prices and concluded adoption
of Proposal 1 would have increased the Class III skim price by $0.80
per cwt and the Class IV skim milk price by $0.41 per cwt. An increase
from the 2022-based skim milk component factors by the proposed 0.07
percentage point threshold level, the witness added, would have
increased the Class III and Class IV prices by $0.14 and $0.07 per cwt,
respectively.
Another NMPF witness testified the announced FMMO Class III and
Class IV skim milk values do not reflect the current component levels
of producer milk, resulting in announced prices being lower than actual
market values. The witness said this leads to a misalignment of fluid
and manufacturing milk, possibly leading to disorderly marketing
conditions. This occurs because the Class I Mover skim milk price is
calculated based on skim milk component levels based on 2000 levels,
narrowing the difference between Class I prices and manufacturing milk
prices (Classes III and IV) and resulting in more instances of price
inversions and depooling.
Several NMPF dairy farmer witnesses testified in support of
Proposal 1. The witnesses stated improved genetics and feed quality
have caused component levels in the milk they market to increase. The
witnesses stated component levels in the pricing formulas should be
updated to reflect the additional protein produced.
An NMPF witness testified regarding their work as a business
consultant with dairy farmers. The witness said dairy farming costs
have been consistently increasing due to higher feed prices, overall
inflation, interest rate increases, and rising costs associated with
labor and environmental regulations. The witness estimated the average
margin per cwt of milk produced over the past decade was less than $1,
or approximately 4 to 7 percent of the average milk price. It was the
witness's opinion that financially sustainable margins are necessary to
avoid further consolidation in the industry.
An NMPF dairy farmer witness testified that monthly pay price
volatility has increased since 2000. According to the witness, in 2000
their pay price varied $0.52, from a high of $12.95 to a low of $12.43.
In the 12 months prior to August 2023, the witness said the variance
was $7.46, ranging from $22.50 to $15.04, while costs continued to
rise, including the price of corn and soybean meal more than doubling.
The witness said that during the same 12-month period their milk output
rose over 10,000 pounds. The witness attributed improvements in cow
comfort, genetics, and feed quality to the increases in milk output and
component levels but opined low component standards were depressing
producer price differentials (PPDs) and discouraging milk from
supplying the Class I market.
NMPF, in their post-hearing brief, offered additional support for
Proposal 1. The brief credited significant advances related to animal
genetics, farm management, and cow nutrition as contributing to rising
skim milk component levels. NMPF reiterated hearing testimony regarding
the static component levels in the formulas leading to a narrowing of
the difference between Class I and manufacturing milk prices resulting
in more price inversions, larger volumes of depooled milk, and
resulting in disorderly marketing. NMPF stated higher skim milk
component levels have value in the competitive manufacturing dairy
market, which is the basis for determining Class I values. NMPF stated
that increasing the skim milk components in the formulas to reflect
current levels would recognize the current average value of producer
milk used for manufacturing dairy products and result in a Class I
price that properly reflects base milk values. Additionally, NMPF
argued delayed implementation of updated component level factors is
necessary because of dairy farmers' use of risk management programs.
Such a delay would allow for the completion of most transactions placed
prior to announcement of the change.
A Dairy Farmers of America, Inc. (DFA) witness, appearing on behalf
of NMPF, testified the failure to delay an update in skim component
standards would cause financial harm to dairy farmers, milk plants, end
users, and others who entered into risk-management transactions. DFA is
a dairy farmer cooperative and owns and operates 14 manufacturing
plants which produce liquid whey, Italian cheese, skim milk powder,
whole milk powder, American-style cheese, condensed milk, cream, nonfat
dry milk, milk protein concentrate (MPC), sweetened condensed milk, and
dry whey. The witness testified that failure to delay implementation
would affect the basis, or the profit margin for milk being hedged. The
witness testified that 35 to 45 percent of the U.S. milk supply was
hedged by dairy farmers and there is a growing demand for risk
management services among larger-sized dairies.
A witness representing the American Farm Bureau Federation (AFBF),
a farmer advocacy organization with approximately 6 million members
throughout the U.S., testified in support of Proposal 1. The witness
estimated that raising the skim component standards would increase the
Class I price by an average of $0.70 per cwt, based on 2022 data.
Consequently, raising the skim component standards would help bring the
Class I, III, and IV prices in alignment, reduce the frequency of
negative PPDs, and reduce the incentives for depooling, which the
witness said undermines orderly marketing. The witness stated that
raising the value of the skim milk in the manufacturing classes for the
skim and butterfat markets would reduce the incentive of manufacturing
plants in the multiple component pricing (MCP) orders to pool milk,
which would lower the producer's price and discourage milk from
entering a milk deficit region. The witness testified that updating
component standards would address some price misalignment issues and is
preferred to prevent handlers from depooling.
AFBF offered support in their post-hearing brief stating Proposal 1
would more accurately define the market value of skim milk pooled on
FMMOs. The brief asserted the resulting increase in Class I prices
would reduce the incidences of price misalignment with Class III and IV
prices, reduce the size and frequency of negative PPDs, and reduce
depooling incentives. AFBF supported periodic adjustments to component
levels, as contained in Proposal 1, to account for the continuing
increases in the component levels, but specified these levels should
[[Page 57584]]
only be changed in the positive direction. In AFBF's opinion, more
frequent updates, as contained in Proposal 2, would be disruptive.
A witness representing NAJ, an organization representing the
interests of Jersey cattle breeders, testified in support of Proposal
2, which proposes the same milk composition levels as Proposal 1, with
automatic annual updates. The witness said many factors have
contributed to increased component levels, including improved genomics,
increased use of gender-selected semen, and volume-based programs such
as base/excess programs. The witness testified an annual update would
provide improved accuracy because of the recently accelerated pace of
component increases and would have better alignment with pricing
between butterfat/skim and multiple component pricing FMMOs.
Additionally, the witness stated a 1-year lag on implementing these
updates would allow for greater risk management which is becoming
increasingly more important to producers and processors.
NAJ's post-hearing brief reiterated their support for Proposal 2,
arguing record evidence shows protein and other solids levels in
producer milk have progressively and significantly increased since FMMO
reform in the late 1990s. NAJ stated the trend of higher solids
components in skim milk was expected to continue due to economic
signals to producers from component values and improved production
techniques. NAJ argued amendments of standard skim milk composition
factors is necessary to help avoid periods of price inversions,
depooling, undervaluing Class I milk, milk supply inefficiency, and
disincentives to supply milk for Class I use. NAJ stated a change to
the skim milk component levels should be announced at least 11 months
in advance of implementation due to risk management practices used by
producers and processors. NAJ argued annual updates better serve risk
management practices because it would lead to smaller incremental
changes and less adverse impact on risk management contracts with more
than 12-months open interest at the time component changes are
announced.
A witness representing Edge Dairy Farmer Cooperative (Edge), a
Wisconsin-based dairy milk test verification cooperative, testified in
support of Proposals 1 and 2. The witness recommended increasing the
implementation lag to 15.5 months to support longer contract hedging.
The witness was of the opinion the standard butterfat test also should
be updated from 3.5 percent to 4.06 percent, the 2022 average butterfat
for all markets combined as published by the USDA's AMS. According to
the witness, this would more accurately reflect current butterfat
levels and better align the butterfat to protein ratio used in the
formula, ensuring more effective risk management tools, as farmers'
ability to manage their gross pay price risk would improve.
Edge, in their post-hearing brief, reiterated hearing testimony
that failure to adjust the butterfat level when updating skim component
levels would cause disorderly milk marketing, as it undermines
effective risk-management tools for dairy farmers. Edge argued that
without the corresponding change, producers hedging milk revenue using
risk management products based on Class III milk or Class IV milk
prices, will tend to be under protected against the decline in
butterfat prices. Edge added that changing the butterfat level would
not affect handler obligations to the producer settlement fund, PPDs,
or uniform producer prices.
A witness representing the International Dairy Foods Association
(IDFA) testified in opposition to Proposals 1 and 2, stating that
updating the component standards would increase the Class I skim price
by $0.60 per cwt, a value that cannot be recovered in the marketplace.
IDFA is a trade organization representing dairy manufacturers of milk,
cheese, ice cream, yogurt, cultured products, and dairy ingredients.
The IDFA witness testified consumers choose finished Class I products
based on desired fat level, freshness, and price, not higher nonfat
solids levels. The witness estimated that updating component levels in
the formulas would result in manufacturing handlers in butterfat/skim
FMMOs paying an additional $0.40 to $0.80 per cwt, even though the
component levels of milk delivered to those plants was less than those
proposed. The witness cited National Dairy Herd Information Association
(DHI) data showing 2020 to 2022 average skim protein levels in
butterfat/skim FMMOs below the levels contained in Proposals 1 and 2.
The witness attributed the lower observed component levels to the fact
that producer payments in these orders are made on the basis of the fat
and skim content of their milk, leaving no financial incentive to
produce higher component milk.
A witness from Saputo Cheese USA (Saputo), appearing on behalf of
IDFA, also testified in opposition of Proposals 1 and 2. Saputo is a
dairy processor and manufacturer operating 29 plants throughout the
U.S. The witness said Saputo operates three plants located in the skim/
fat orders, and in 2022 the average NFS level of milk received at those
plants was 9.1070 percent, which is less than what is proposed in
Proposals 1 and 2. The witness explained Saputo purchases skim solids
to add to its skim milk in order to ensure the Class II products it
manufactures contain the skim solids necessary to meet standard of
identity requirements for those products. Updating the component levels
in the formula would only result in Saputo paying for skim solids not
received, but it would not lower the amount of skim solids Saputo must
purchase, explained the witness.
A post-hearing brief submitted by IDFA reiterated its opposition to
Proposals 1 and 2, arguing that increased component levels have no
financial benefit or economic value to Class I handlers who would be
the primary entities impacted by adoption of these proposals. IDFA
stated the current FMMO system of pricing Class I milk on a skim/fat
basis versus Classes II, III, and IV milk on a component basis does not
create disorderly marketing.
The Milk Innovation Group (MIG) is a group of fluid milk processors
and producers that market value added dairy based products. MIG's
members include Anderson Erickson Dairy (AE), Aurora Organic Dairy
(Aurora), Crystal Creamery, Danone North America (Danone), fairlife, HP
Hood LLC (HP Hood), Organic Valley/CROPP Cooperative (Organic Valley),
Shamrock Foods Company (Shamrock), Shehadey Family Foods LLC
(Shehadey), and Turner Dairy Farms (Turner Dairy). Crystal Creamery is
a California fluid milk processor producing Class I, II, and IV
conventional and organic milk products. Danone is a food and beverage
company operating seven plants in the U.S. Fairlife is a fluid milk
processor of ultra-filtered lactose free milk, and other high protein
products. Organic Valley is a dairy farmer-owned organic cooperative
producing more than 30 percent of the organic milk sold in the U.S.
Seven witnesses representing MIG, including witnesses from HP Hood,
Shehadey, Saputo, Shamrock, AE, Turner Dairy, and Aurora, testified in
opposition to Proposals 1 and 2. HP Hood is a fluid milk processor
operating five ESL plants and four high-temperature, short-time (HTST)
plants in the Northeast and California. Shehadey operates four
manufacturing plants in California, Nevada, and Oregon, producing Class
I and Class II products. Shamrock is a fluid milk
[[Page 57585]]
processor of HTST and ESL products with processing facilities in
Arizona and Virginia, and a 20,000-head dairy farm located in Arizona.
AE is an Iowa fluid milk processor producing both Class I and II
products. Aurora is a vertically integrated organic milk supplier with
four organic dairy farms located in Colorado and Texas. Turner Dairy is
a small fluid milk processor with full or partial ownership of two
fluid milk plants, as well as a standalone Class II plant, all located
in western Pennsylvania.
Six witnesses testified their plants regularly receive milk with
components below the proposed levels. One witness offered that
component levels received ranged from 3.09 to 3.63 percent protein,
5.83 to 6.10 percent other solids, and 8.92 to 9.65 percent NFS. MIG
members testified that increasing the component levels in the formulas
would increase their raw milk costs, requiring them to pay for milk
components not received. One witness stated that adoption of Proposals
1 and 2 would increase costs between $0.60 and $0.75 per cwt. All MIG
witnesses claimed that fluid milk processors, even if they did receive
higher component milk, are unable to convert those higher components
into additional market revenue as Class I products are sold on a
volume, not component basis.
Another MIG witness testified on a survey conducted of MIG members
plus two additional large grocery retailers who own their own fluid
milk processing plants. According to the witness, using component data
from 32 out of the 36 plants surveyed, these plants frequently received
milk with components below the proposed levels. As data was
confidential, no specific data was provided. The witness also noted the
data showed component levels changed due to seasonality and
geographics, demonstrating inconsistent levels received by plants. The
witness testified the adoption of Proposals 1 or 2 would raise Class I
prices and make it more challenging for these plants to recover costs.
Should USDA decide to change the standard component levels in the
pricing formulas, the witness testified component minimums should be
used instead of averages because FMMOs are meant to provide minimum
prices.
A post-hearing brief filed on behalf of MIG argued it would be
disorderly for Class I fluid milk processors, the only mandatory
participant of FMMOs, to be forced to pay for component levels
regardless of what is actually received. MIG opined consumers do not
value additional skim component levels in fluid milk products,
therefore Class I processors are unable to recoup additional revenue
out of the market. MIG was of the opinion no record evidence was
provided at the hearing that the current skim component formula factors
are causing disorderly marketing and added that although they oppose
Proposals 1 and 2, if any part of these proposals are adopted there
should be a 12-month implementation delay.
A witness representing the CME Group (CME) testified to explain
various dairy risk management tools offered through the exchange,
including futures and options contracts. The witness explained the CME
is a derivatives marketplace offering a range of futures exchanges to
meet private risk management needs. The witness explained a futures
contract is a legally binding agreement to buy or sell a standardized
asset on a specific date or during a specific month. An option on a
futures contract is the right, but not the obligation, to buy or sell
the underlying futures contract at a predetermined price on or before a
given date in the future. The witness stated 97.43 percent of contracts
in the futures and options market are for 12-month periods, and in a
previous change to futures contracts there was an 18-month lag on
implementation to be beyond open interest. The witness testified that
Dairy Revenue Protection (DRP) is one of many programs that rely on CME
markets and advocated USDA to consider futures and options markets when
establishing implementation plans.
In its post-hearing brief, CME reiterated its neutrality on all
proposals under consideration. They stated any change modifying the
current Class III and Class IV formulas would be considered a material
change affecting current contracts. CME stressed the importance of
sufficient and transparent notice of any changes.
A post-hearing brief was submitted on behalf of Select Milk
Producers (Select), a dairy-farmer owned cooperative which owns and
operates eight processing plants in Texas, New Mexico, and Michigan,
manufacturing ESL fluid milk products and a variety of cheese, butter,
and NFDM products. Select offered support for Proposal 1 and took
exception to the assertion there is no value in higher protein levels
in Class I products, as it is belied by the success of specialty fluid
milk products such as fairlife, and the higher milk solids required for
California fluid milk. Although Select supported adoption of Proposal
1, they do not support a delay in implementation, nor the annual update
as contained in Proposal 2.
Lamers Dairy Inc. (Lamers), a Wisconsin based HTST fluid milk
processor, submitted a post-hearing brief in opposition to Proposals 1
and 2. Lamers stated component levels can vary both regionally and from
farm to farm. Lamers opined that USDA is statutorily required to
conduct a study of component levels before any change could be made and
argued adoption of Proposals 1 and 2 should not be considered.
New Dairy OPCO LLC (New Dairy), a fluid milk processor operating
four fully regulated distributing plants (three of which are located in
the southeastern U.S.), submitted a post-hearing brief in opposition to
Proposals 1 and 2. New Dairy offered support for arguments made by IDFA
and MIG that fluid milk processors would be unable to recoup the
additional cost of components should Proposals 1 or 2 be adopted. They
purport that charging fluid milk processors for components not actually
received would be disorderly. New Dairy said raising component levels
in the formulas would harm its southeastern plants as they pay on a
skim/fat basis which provides no incentive to producer to increase
components to match the national average.
In its post-hearing brief, NMPF opposed the annual updating feature
contained in Proposal 2. NMPF stated that by limiting changes to the
standard component levels to a periodic basis and relying on 3-year
weighted average, Proposal 1 is more likely to produce accurate
component values and avoid disruption from more frequent changes.
Surveyed Commodity Products
This rulemaking proceeding considers four proposals, and a modified
proposal submitted during the hearing, that would add or remove a
variety of products in the DPMRP survey, which are then reported in the
National Dairy Product Sales Report (NDPSR) and used to establish FMMO
classified prices. The proposals are as follows:
Proposal 3, submitted by NMPF, seeks to eliminate the Cheddar
cheese barrel price from the cheese price formula.
Proposal 4, submitted by AFBF, seeks to add Cheddar cheese 640-
pound block price series to the cheese price formula.
Proposal 5, submitted by AFBF, seeks to add unsalted butter to the
butterfat and cheese price formulas.
Proposal 6, submitted by the California Dairy Campaign (CDC), seeks
to add a price series for mozzarella to the cheese price formula.
Edge offered a proposal modification during the hearing to adopt
different weighting methodology which would
[[Page 57586]]
reweigh 40-pound blocks and 500-pound barrels in the DPMRP survey by
all U.S. cheddar block and barrel production volumes.
NMPF witnesses from Foremost Farms USA (Foremost), Ellsworth
Cooperative Creamery (Ellsworth), Land O'Lakes (LOL), and DFA testified
in support of Proposal 3. Foremost is a cooperative with 850 members
located in Wisconsin, Michigan, Iowa, Minnesota, Indiana, Ohio, and
Illinois, and operating eight manufacturing plants producing cheese and
butter.
Ellsworth is a Wisconsin-based cheese manufacturer producing a
significant volume of barrel cheese and a variety of specialized
cheeses and cheese curds from 250 dairy-farmer members. LOL is a dairy
farmer-owned cooperative with more than 1,000 dairy farmer members,
primarily producing butter and cheese.
The witnesses explained the current cheese price formula includes
both block and barrel cheese in the computation. They asserted the
cheese price formula provides for orderly marketing if the difference,
known as the ``spread,'' in the respective market prices of blocks and
barrels remains close to the assumed $0.03 per pound cost difference,
which occurred from 2000 to 2016. However, since 2017 the spread
between the block and barrel prices has been volatile. One witness
stated the weighted average spread published in the weekly NDPSR during
January 2017 through July 2023 was $0.120 per pound, with a much wider
and more volatile range per pound. The LOL witness opined that the
DPMRP survey could continue to include and publish prices of 500-pound
barrel cheese without necessitating its inclusion in the Class III
protein price calculation.
An NMPF witness testified the CME block cheddar price is used as a
pricing index for most cheese produced in the U.S., including cheddar,
40-pound block, 640-pound block, mozzarella, other American-type
cheese, and other cheese including cream cheese, and Hispanic cheese.
They estimated 90 percent of natural cheese produced in the U.S. is
sold using the CME 40-pound block cheddar price as a pricing index. The
witness estimated the CME barrel cheese price is used to price only
about 9 percent of total domestically produced natural cheeses,
including barrels themselves. They said DPMRP survey volumes of barrel
cheese between 2013 and 2022 ranged from 44 to 52 percent, resulting in
an overrepresentation of 500-pound barrels compared to the actual
volume of cheese that is priced off of barrels. The witness testified
that since 2017, the significantly wider and increasingly volatile
block-barrel spread has caused instability in the cheese market.
Consequently, the witness said, dairy farmer revenue has been reduced
as the over representation of 500-pound barrels lowered the Class III
price. The Foremost witness estimated the undervaluation represented $2
billion since 2017, opining the value would have been greater if not
for the large volume of Class III milk not pooled in 2020 and 2021.
The NMPF witness testified eliminating 500-pound barrel prices from
the Class III price would create more orderly marketing in FMMOs by
reducing the financial uncertainty for dairy producers and
manufacturers and ensuring the cheese price in the protein component
formula represents the single commodity cheddar cheese product. The
witness described how barrel cheese manufacturers are harmed when they
must account to the pool at an FMMO cheese price higher than the
revenue generated from barrel cheese product. The witness said
eliminating the 500-pound barrels would have increased the Class III
price by $0.41 per cwt, using average product prices for 2017 to 2022.
An NMPF witness testified that removing 500-pound barrels had been
addressed in prior rulemakings, but denied by USDA in the rulemaking.
However, current market conditions have significantly changed,
necessitating a re-evaluation. The witness attributed the increased
volatility in the block-barrel price spread since 2017 to a variety of
factors, including increased 500-pound barrel production capacity that
may be due to increasing values of its white whey by-product.
NMPF witnesses testified eliminating 500-pound barrel cheese from
the protein component price (PCP) formula would still provide adequate
volume of cheddar cheese for price discovery purposes as 40-pound block
cheese surveyed represents approximately 16 percent of total U.S.
natural cheddar cheese production. The witness also said this
methodology change would bring the cheese price into conformity with
the price for butter, NFDM, and dry whey, which utilize only one
surveyed product for price discovery purposes.
The witness testifying on behalf of Ellsworth stated 40-pound
blocks and 500-pound barrels are not interchangeable products. The
witness said while 40-pound block cheddar has many markets and uses,
500-pound barrel cheddar is used for processed cheese, a market driven
by few processors and purchasers. As a result, the witness said,
surveying barrel cheese prices skews the FMMO cheese price towards a
smaller market which is not representative of the rest of the cheese
market. The witness estimated the volatility in the block-barrel spread
since 2017 cost Ellsworth producers $0.84 per cwt. The witness said
barrel cheese manufacturers would adjust to the elimination of barrel
prices from the survey and eventually transition to prices based on the
40-pound block cheese price.
Witnesses representing IDFA, Leprino Foods Company (Leprino), and
Associated Milk Producers, Inc. (AMPI) testified in opposition to
Proposal 3. Leprino operates nine plants in the U.S., manufacturing
mozzarella cheese, whey products, and NFDM. AMPI owns and operates
eight manufacturing plants processing cheese, butter and powdered dairy
products from member farms in Wisconsin, Minnesota, Iowa, Nebraska,
South Dakota, and North Dakota.
The witnesses said sales of both block and barrel cheddar cheese
are robust and each play a significant role in setting the market value
of cheddar cheese. They argued eliminating 500-pound barrels would
reduce by more than half the cheese market price contained in the
survey and would result in a distorted picture of the total commodity
cheddar market. The witness said opposition to removing barrels was not
related to the presumed effect on the Class III price as the NDPSR
weighted average cheese price (reflecting block and barrel cheese) was
higher than the 40-pound block price in 9 of 14 years from 2009 to
2022. One witness opined additional cheddar block plant capacity is
coming on-line in the next couple of years, increasing 40-pound block
volumes, and would reduce the block-barrel spread to historical levels
under normal supply-demand behavior.
The IDFA witness speculated cheddar barrel manufacturers may opt
not to pool milk if the barrel price is no longer surveyed because they
would be unable to garner sufficient market revenue in order to account
to the pool and the Class III price.
Two Leprino witnesses testified eliminating 500-pound barrels from
the Class III price formula removes the product most closely reflecting
the supply and demand balance. They were of the opinion that removing
500-pound barrels would both shrink the survey volume and likely result
in greater production of cheddar blocks as a way to clear the market.
The witnesses testified this would add volatility to the block market,
cause unnecessary stress to the U.S. marketplace, and make U.S.
[[Page 57587]]
cheese a less attractive option for global buyers.
The Leprino witnesses said dropping 500-pound barrels from the
survey would create a presumption within the Class III formula that all
cheese, including barrels, would then be priced off blocks. The
witnesses asserted barrels and blocks have different supply and demand
functions, and eliminating barrels from the Class III formulas would
force barrels to be priced off blocks, adding dysfunction to the barrel
market. The witnesses were of the opinion barrels are the market-
clearing cheese, and instead 40-pound blocks should be eliminated from
the price formula to be more consistent with the minimum pricing
provisions.
In its post-hearing brief, NMPF reiterated testimony regarding
price differences between 40-pound blocks and 500-pound barrels
becoming more volatile since 2017. Historically, NMPF wrote, using both
block and barrel prices in the Class III pricing formula increased the
volume of cheddar cheese reported in the NDPSR. However, the increased
price spread has caused instability in the cheese market and reduced
revenue for dairy farmers as the barrel price is a disproportionately
large share when compared to its volume in the cheese market. NMPF
estimated 90 percent of the natural cheese produced in the U.S. is
priced using the CME 40-pound block price, while the remaining is
priced off of the CME barrel cheese price. As a result, NMPF wrote, the
Class III milk price has been undervalued and lowered producer revenue.
Leprino submitted a post-hearing brief reiterating the important
balancing function barrels provide and opined removing them would push
40-pound blocks into the balancing role and would increase price
volatility for cheddar blocks.
Select submitted a post-hearing brief in support of Proposal 3,
arguing 500-pound barrels no longer represent the commodity cheddar
market and 40-pound blocks are an appropriate commodity to establish
the protein price. According to Select's brief, current formulas
dramatically over weights the price of barrels relative to the markets
actual use barrels and the cheese priced off of them.
The AFBF submitted a post-hearing brief in support of Proposal 3
reiterating hearing testimony that barrels represent roughly 50 percent
of the NDPSR volume but is used to set prices for only 10 percent of
the cheese in the U.S. market. The AFBF stressed use of barrels in the
cheddar cheese price formula creates a price not representative of the
value of 90 percent of cheddar cheese produced.
IDFA, in their post-hearing brief, opposed Proposal 3 as they
argued its adoption would make 500-pound barrel production
uneconomical, resulting in barrel makers going out of business or
switching to block production which would destabilize the block market.
IDFA wrote that 40-pound blocks and 500-pound barrels serve materially
different functions in the market and the failure to include both in
the survey would distort the commodity cheddar cheese market.
NAJ submitted a post-hearing brief in opposition to Proposal 3. NAJ
cited hearing evidence showing the market price of block and barrel
cheese has diverged significantly since 2017, with barrel cheese priced
about $0.11 per pound less than block cheese from 2017-2022. NAJ stated
blocks and barrels have different uses, different buyer markets, and
limited substitutability. With an expected increase in block production
in the coming years, NAJ wrote, there may be many months in which
barrels are more per pound and should remain part of the cheese price
formula.
A witness representing the AFBF testified in support of adding 640-
pound cheddar blocks to the Class III formula, as contained in Proposal
4. The witness said adding 640-pound blocks would expand the volume of
cheese surveyed and better reflect U.S. block and barrel production
volumes. The witness was of the opinion there has been a pronounced
production shift from 40-pound blocks to 640-pound blocks and adding
640-pound blocks would provide more survey volume to avoid future
rulemaking to address the dwindling 40-pound block survey volume. The
witness testified that 40-pound and 640-pound blocks are largely
interchangeable in price, use, and storage, and therefore it is
appropriate those prices be reflected in the Class III price.
A witness representing IDFA testified in opposition to Proposal 4.
The witness said the DPMRP cheese survey encompassed more than 1.34
billion pounds of sales in 2022, divided almost evenly between 40-pound
blocks and 500-pound barrels. The witness testified the data set is
sufficient to determine prices in the market and, since 640-pound
blocks typically trade off the 40-pound block price, its addition would
provide little additional price discovery information. The witness
opined that only a small percentage of the 640-pound block market would
meet survey specifications because of the nature of how the product is
manufactured and sold.
The two Leprino witnesses argued it would be inappropriate to add
640-pound blocks as the market is largely make-to-order and the lack of
equipment to handle 640-pound blocks limits sales to a narrow group of
buyers. The witnesses noted the 640-pound block market is balanced
through the cutting down of 640-pound blocks into 40-pound blocks, so
the 40-pound block cheddar market is already reflected in its pricing.
A witness representing Glanbia PLC (Glanbia), testified in
opposition to Proposal 4. Glanbia owns four dairy plants in Idaho and
partially owns two joint venture plants in New Mexico and Michigan,
processing 34 million pounds of milk daily into barrel cheese, block
cheese, whey protein concentrates, proprietary protein blends, and
lactose. The witness testified Glanbia plants manufacture 40-pound and
640-pound-blocks, both priced off the CME 40-pound block price and
opined that adding 640-pound blocks would not add new information to
the survey.
A witness representing the Wisconsin Cheese Makers Association
(WCMA), whose 81 members include cheese manufacturers making 40-pound
blocks, 640-pound blocks, and 500-pound barrels, testified in
opposition to Proposal 4. The witness testified the industry uses the
40-pound block price to price 640-pound blocks, and since 40-pounds
blocks are already used in the protein formula, adding 640-pound blocks
would add no new price information.
A DFA witness representing NMPF, testifying in opposition to
Proposal 4, said the 40-pound block volume provides an adequate dataset
and the sole inclusion of 40-pound blocks is sufficient for cheese
price discovery, making adoption of Proposal 4 unnecessary. The witness
stated the daily CME cash block cheese market is widely recognized by
market participants as heavily influencing the price of cheese. The
witness concluded that because annual CME block cheese traded volumes
are not as large as NDPSR block survey volumes, the volume of 40-pound
blocks reported in the NDPSR is more than adequate to determine the
FMMO cheese price. The witness testified that incorporating 640-pound
blocks into the NDPSR data set could promote the same disorderly market
conditions currently observed with the inclusion of 500-pound barrels.
The AFBF reiterated their support of Proposal 4 in their post-
hearing brief. The AFBF indicated 640-pound blocks are priced
identically, or nearly
[[Page 57588]]
identically, to 40-pound blocks, and are a standardized commodity
cheddar cheese product. Including the 640-pound blocks in the NDPSR
survey, they argued, would help make the survey more robust.
Select, in their post-hearing brief, expressed support for Proposal
4 agreeing with proponents that its inclusion would increase DPMRP
survey volume. Select mentioned that with new cheese processing
capacity starting in upcoming years in Minnesota, New Mexico, Michigan,
and Texas, 640-pound blocks would become a larger proportion of the
commodity cheddar market and it would be prudent to incorporate their
prices and volume in the survey.
IDFA reiterated opposition to Proposal 4 in its post-hearing brief.
IDFA highlighted evidence describing how 640-pound blocks are typically
made to customer order as there is only a small number of cheese buyers
who are able to purchase and process them. Since manufacturers of 640-
pound blocks often balance the 640-pound block market by cutting them
down to 40-pound blocks, IDFA said no new price information would be
gained from including 640-pound blocks in the survey.
WCMA also expressed opposition to Proposal 4 in their post-hearing
brief and wrote that because 640-pound blocks do not have a unique
price discovery mechanism, they would add no new price information to
the formulas.
A witness representing the AFBF testified in support of Proposal 5,
seeking to add unsalted butter to the DPMRP butter survey. The witness
said because of the growing volume of unsalted butter production and
use in the U.S., the DPMRP salted-only butter price collection
increasingly underrepresents the value of U.S. butter. According to the
witness, the amount of butter captured by the NDPSR as a percentage of
total butter production has been declining, from 16 percent in 1999 to
9.4 percent in 2022. The witness expected this trend to continue
without the addition of unsalted butter.
Citing USDA voluntarily graded salted and unsalted butter volumes,
the AFBF witness said one reason for declining butter survey volumes is
the increase in U.S. unsalted butter production. The AFBF witness
testified the exclusion of unsalted butter is unnecessarily restrictive
for the purposes of the DPMRP survey. The witness cited U.S. butter
export data showing 2,000 metric tons exported in 2000, to over 65,000
metric tons in 2022, estimating almost all the exports were unsalted.
The witness said incorporating unsalted butter prices into the FMMO
butterfat formula would make the survey more representative of the
evolving butter market, allow for better market transparency, and
provide for more orderly marketing of butter and milk. The witness
claimed salted and unsalted butter are production substitutes, as the
same production line can be used for both without substantial
interruption. The witness clarified Proposal 5 is not intended to
change the current 80 percent butterfat reporting standard for butter,
and therefore exported unsalted butter at 82 percent butterfat would
continue to be excluded.
A witness representing CDC expressed support for Proposal 5,
without additional testimony. The CDC represents dairy farmers
throughout California and is a state chapter of the National Farmers
Union.
A witness representing IDFA testified in opposition to Proposal 5.
The witness testified there is no uniform specification for unsalted
butter, so it is impossible to derive a uniform price for purposes of
an FMMO pricing formula. The witness explained unsalted butter does not
store as well compared to salted butter, rendering unsalted butter less
capable of providing useful uniform price information. The witness also
testified unsalted butter tends to be priced off the CME Grade AA
salted butter price, and therefore does not bring any new pricing
information. As substantial quantities of unsalted butter are exported
through premium-assisted sales, which would not be included in the
DPMRP survey, emphasizing unsalted butter should not be relied on for
determining the market price of butter. Moreover, the witness
considered the current volume of salted butter reported in the DPMRP to
be a robust quantity of butter sales.
A witness representing the Dairy Institute of California (DIC)
testified in opposition to Proposal 5. The DIC is a trade association,
representing fluid milk and dairy product processing plants in
California. The witness asserted most unsalted butter is 82 percent
butterfat and exported and should be considered substantively different
from domestically consumed butter which contains 80 percent butterfat.
The witness referenced a lack of clarity on how subsidies on exported
butter would be handled in the product price reporting as another
reason for their opposition.
A California Dairies, Inc. (CDI) witness, representing NMPF,
testified in opposition to Proposal 5. CDI is a California dairy
farmer-owned cooperative with 258 members producing and marketing 41
percent of California's total milk production and operating six butter
and milk powder manufacturing facilities in the state. The witness
disagreed with the assertion that salted butter at 80 percent butterfat
no longer represents an adequate survey volume. The witness testified
CDI manufactures both types of butter, and unlike salted butter,
unsalted butter is manufactured exclusively for customer order. The
witness argued sales of the two types of butter are not
interchangeable. The witness stressed the addition of salt allows
salted butter to be stored for long periods, making it a market
clearing product, whereas the nature of unsalted butter requires it to
be sold and consumed in a significantly shorter period of time. The
witness was of the opinion introducing unsalted butter into the survey
may result in volatility in the relationship between salted and
unsalted butter similar to the current volatile relationship between
40-pound block and 500-pound cheddar barrels. The witness said it was
preferable to have one product generate the singular commodity
reference price for purposes of calculating the minimum FMMO prices.
In post-hearing briefs, the AFBF offered additional support for
Proposal 5, stating the growing volume of unsalted butter production
and use in the U.S. markets results in a salted-only butter price
collection in the NDPSR survey which increasingly underrepresents the
value of U.S. butter. The AFBF argued the declining trend in butter
survey volume as a percent of actual production would continue, as
butter survey volume has fallen from 16 percent of total production in
the 1999 to 9.4 percent in 2022.
Select expressed opposition to Proposal 5 in its post-hearing
brief. Select argued that despite the growth of unsalted butter
products, it should not be included in the survey because it lacks a
uniform specification, is typically produced for special orders, has no
active commodity market, is often made with 82 percent butterfat versus
80 percent, and is viewed as a higher-value product.
IDFA's post-hearing brief reiterated their opposition to Proposal 5
stating the Grade AA salted butter survey volume is robust and the
product is traded on the CME. IDFA wrote that a majority of unsalted
butter is exported through government or private assisted sales, such
as Dairy Export Incentive Program or Cooperatives Working Together,
which would disqualify such sales from being reported. IDFA also stated
unsalted butter does not store as
[[Page 57589]]
well as salted butter, making it more likely to be made to order to a
particular buyer's specifications.
A witness representing the CDC testified in support of adding
mozzarella prices to the FMMO cheese price, as contained in Proposal 6.
The witness was of the opinion adding mozzarella would make the FMMO
Class III price more reflective of all U.S. cheese production. The
witness asserted that because the volume of mozzarella production
significantly exceeds cheddar production it should be reflected in the
FMMO cheese price to improve price transparency and increase dairy
farmer revenue. The CDC witness also stated mozzarella production is
the largest category of cheese produced today and deserves a standard
specification determined by the volume of mozzarella produced today.
The CDC witness proposed adding mozzarella to the FMMO protein
price based on the Van Slyke cheese yield formula, a formula for
predicting cheddar cheese yields from milk on the basis of its fat and
casein content. The witness submitted numerous USDA Specifications of
Mozzarella Cheese for the Department to consider when determining an
acceptable moisture and fat content of mozzarella cheese to be
surveyed. The specification detailed requirements for six variations of
mozzarella types in four forms (loaf, sliced, shredded, or diced). The
witness testified that 5 to 6-pound loaves of mozzarella would be
representative of a wholesale commodity mozzarella product and
reasonable for inclusion in the survey.
A California dairy farmer testified in support of Proposal 6. The
witness said including mozzarella in the survey would create a Class
III price that more accurately reflects the value of the current cheese
market. The witness attributed the ongoing decline in the number of
California dairy farms to negative margins and price volatility and
stressed the urgency in capturing the additional value of mozzarella. A
Wisconsin dairy farmer also supported inclusion of mozzarella for
similar reasons.
A witness representing IDFA testified in opposition to Proposal 6.
The witness described the difficulty in selecting appropriate
mozzarella product specifications, yield assumptions, and manufacturing
costs to include in the formulas whose factors currently reflect only
cheddar production. The witness also testified the commercial
mozzarella cheese market contains wide product variability, including
varying fat and moisture parameters demanded by mozzarella customers.
The witness testified that unlike bulk cheddar products, mozzarella is
not a market-clearing product, is often sold to meet the customer
specifications, is not traded on the CME, and is not storable for
extended periods.
Witnesses from Leprino and Glanbia testified in opposition to
Proposal 6, asserting the proposal lacked critical details making it
difficult to interpret and evaluate. The witnesses explained the
equipment, production, and yield difference between mozzarella and
commodity cheddar. The witnesses said Proposal 6 does not define the
type of mozzarella to be surveyed or how USDA should address the
diversity of mozzarella cheese types and packages. The witnesses stated
significant volumes of mozzarella are manufactured into value-added
forms, whether as shred, string, or smaller retail or foodservice
loaves by the primary manufacturer. The witnesses also noted most
mozzarella is not market-clearing and is stored in refrigerated form
with limited shelf life reducing its role as a market clearing product.
The witnesses added that the volume of mozzarella production sold by
the primary manufacturer in bulk format is comparatively small, in
contrast to cheddar, in which most shredding, processing into consumer
packaging, and conversion to other forms is performed by different
companies rather than the original manufacturer. The witnesses opined
cheddar remains the most appropriate Class III cheese product.
Leprino reiterated their opposition to Proposal 6 in their post-
hearing brief. Leprino argued mozzarella cheese is a grouping or
collection of similar products with diverse specifications, and that
the assumption mozzarella production volume represents a single defined
bulk product is incorrect. Leprino further stated mozzarella has
different manufacturing processes, costs, and product yields.
Therefore, if mozzarella was added to the Class III pricing formula,
the formula would become substantially more complicated with little
incremental benefit.
A Foremost witness, testifying on behalf of NMPF, testified in
opposition to Proposal 6, urging USDA to only utilize one commodity
price series to represent each of the four dairy prices: cheese,
butter, NFDM, and dry whey, to ensure orderly marketing. The witness
noted the many mozzarella composition types, and purported deriving a
40-pound block cheddar equivalent price would be difficult. The witness
added mozzarella manufacturing costs are different and no data exists
to determine how those costs should be reflected in the cheese make
allowance. The witness said including mozzarella pricing into the
protein price calculation would not enhance price discovery as
mozzarella prices already move with the 40-pound cheddar market. Other
NMPF witnesses testified to the appropriateness of limiting the cheese
price to one survey product, cheddar. Witnesses representing the AFBF
and WCMA opposed the inclusion of mozzarella due to the lack of
standard format that could be surveyed.
Select's post-hearing brief opposed Proposal 6 because no workable
framework for incorporating mozzarella into the price formula was
provided on the record.
IDFA's post-hearing brief reiterated their opposition of Proposal 6
as mozzarella lacks uniformity in compositional specifications and
yields and is not traded on the CME. IDFA wrote the U.S. Food and Drug
Administration (FDA) Standards of Identity provide four different
variants of mozzarella cheese, with a wide variety of fat and moisture
levels. IDFA also stated that while proponents advocated use of the Van
Slyke formula to determine yields, the record lacked evidence as to how
the formula should be revised to incorporate mozzarella cheese.
WCMA opposed Proposal 6 in their post-hearing brief. WCMA members
argued that there is no FDA Standard of Identity for mozzarella and are
concerned over the vast variety of forms and functionality of each
mozzarella manufacturer.
A witness testifying on behalf of the CME offered information
regarding its dairy futures and options markets which utilize FMMO
prices. The witness did not appear in support or in opposition to any
proposal under consideration. The witness testified that the CME dairy
product portfolio, which began in 1996, includes Class III and Class IV
milk futures and options, cash-settled cheese, 40-pound block cheese,
cash-settled butter, NFDM, and dry whey. The witness said the
relationship between Class III and Class IV milk futures can serve as a
mechanism to manage both input and output costs and provide the dairy
trading community with an opportunity to provide liquidity to the
market while managing risk. The witness testified any changes to FMMO
formulas, or underlying DPMRP survey methodology could result in a
material change to the valuation of the contracts. A post-hearing brief
filed by CME reiterated its hearing testimony and stressed that the
Department consider the impact to futures and options
[[Page 57590]]
markets when determining the implementation timeframe for any FMMO
price formula changes.
A witness representing Edge offered the modified proposal that
would reweight 40-pound blocks and 500-pound barrels by U.S. production
volumes, not DPMRP survey volumes. The witness said this alternative
weighting methodology would reduce the weight of barrel cheese as most
cheddar cheese is manufactured into blocks. The witness explained that
since a significant volume of block cheddar cheese does not qualify for
inclusion in the NDPSR, barrels have a weight disproportionate to their
true market share of the cheddar market. The witness was of the opinion
the protein price should primarily reflect the block cheddar cheese
market as it is estimated 70 to 75 percent of all cheddar cheese is
produced into 40-pound or 640-pound blocks.
The Edge witness predicted that the block-barrel spread could
invert in 2025 due to the growth of block cheese production. The
witness expects cheese manufacturers who can make either blocks or
barrels will react to profitable opportunities, thus reducing the
spread between block and barrel prices by altering their production
schedules. The witness argued that, given the anticipated trends over
the next 3 to 5 years, it would be more prudent to reduce the weight of
barrels today and revisit the topic of removing barrels in 5 years.
Edge reiterated their support for the weighting methodology in its
post-hearing brief, as an alternative to eliminating barrel cheese or
adding 640-pound blocks to the survey. Edge explained that, in
practice, the Department would survey all barrel cheese production
volume on an annual basis, including forward contracted cheese volumes,
to determine the percentage of barrel cheese produced in relation to
the NASS total U.S. cheddar cheese production estimates. Edge proposed
the percentage be rounded to the nearest 5 percent, and the inverse
would be assumed to represent block production. This calculated weight
would be announced by September 15 and be applicable for the following
calendar year. Survey prices would then be weighted by these
percentages to determine weighted average cheese prices.
IDFA, in their post-hearing brief, opposed Edge's modified
proposal, arguing that it ignores market clearing, minimum pricing
principles. IDFA opposed the idea of Class III prices being
predominantly determined through a 40-pound block cheddar price.
A post-hearing brief submitted by NMPF opposed Proposals 4, 5, 6,
and Edge's modified proposal on the grounds the proposals perpetuate
the problem Proposal 3 seeks to fix, which is to have only one product
surveyed to determine a wholesale commodity price.
Class III and Class IV Formula Factors
a. Make Allowances
Proponents submitted three proposals to amend the make allowances
in the Class III and IV formulas. Proposal 7, submitted by NMPF, seeks
to update make allowances to the following: cheese, $0.2400; dry whey,
$0.2300; NFDM, $0.2100; butter, $0.0210. WCMA and IDFA submitted
Proposal 8 and identical Proposal 9, respectively, to update make
allowances as described in the below table. The proposals contain a
four-year implementation schedule with 50 percent of the increase
implemented in year 1 and the remaining 50 percent implemented evenly
across the remaining 3 years.
IDFA/WCMA Proposed Make Allowances
----------------------------------------------------------------------------------------------------------------
Product Year 1 Year 2 Year 3 Year 4
----------------------------------------------------------------------------------------------------------------
Cheese.......................................... $0.2422 $0.2561 $0.2701 $0.2840
Dry Whey........................................ 0.2582 0.2778 0.2976 0.3172
NFDM............................................ 0.2198 0.2370 0.2544 0.2716
Butter.......................................... 0.2251 0.2428 0.2607 0.2785
----------------------------------------------------------------------------------------------------------------
A former University of Wisconsin economics professor testified
regarding separate manufacturing cost surveys they conducted on behalf
of USDA and IDFA in 2021 and 2023, respectively. Each survey collected
data submitted voluntarily from plants producing commodity cheddar
cheese, dry whey, butter, and NFDM. The witness previously conducted
similar surveys used by the Department in determining make allowance
levels. The witness did not testify in support or opposition to any
manufacturing allowance proposals under consideration.
The witness explained that only plants manufacturing commodity
products meeting DPMRP product specifications were eligible to
participate. As plant participation was voluntary, the sample of plants
and respective volumes varied by product and between surveys, with
increasing cost variation between plants over time. The witness noted
more observed cost variation across plants can occur due to newer
automation technology employed in some plants, varying utility costs
over time, and economies of scale achieved by some plants who negotiate
input costs. The witness explained that dairy-based raw product costs,
such as raw milk or purchased cream, are excluded, while costs of non-
dairy ingredients needed to transform the raw milk into a manufactured
product, such as salt and enzymes, are collected and included in the
survey results. The witness said costs, such as labor and utility,
through the product-packaging stage are incorporated, but post-
packaging costs, such as long-term storage or distribution and sales
costs, are not. The witness explained an economic depreciation factor,
not consistent with taxable depreciation, is incorporated to cover
consumed capital, and the asset's return on investment is included to
capture opportunity costs.
The witness explained two different methodologies used for
allocating costs in multi-product plants that could not be associated
with a specific product (unallocated costs). The witness said the 2021
survey utilized a degree-of-transformation factor to allocate costs
based on degree of transformation raw milk must undergo in order to be
manufactured into the wholesale product. Transformation factors were
assigned subjectively, based on knowledge of manufacturing processes.
As a result, the witness said, unallocated costs were weighted towards
heavily transformed products, such as NFDM, while products undergoing
less transformation, for example, butter, were assigned a lower portion
of the unallocated costs. Due to questions from the industry regarding
this methodology, the witness said the 2023 survey reverted to
allocating costs on a solids basis, a methodology more familiar to
industry stakeholders. The
[[Page 57591]]
witness said the 2021 survey showed more variation of costs when
compared to current make allowance levels, ranging from an 18 percent
decrease in butter costs to a 75 percent increase in NFDM costs. The
2023 survey results revealed a more consistent cost change when
compared to current FMMO levels, ranging from a 65 percent increase in
NFDM costs to a 72 percent increase in butter costs.
The witness attributed much of the survey result differences to the
plant samples. For NFDM, the 2021 survey had 27 participating plants,
whereas the 2023 survey had 15, with larger average volume per plant,
according to the witness. For cheese, the 2023 survey included 18
cheddar cheese plants compared to 10 in the 2021 survey, and the
witness elaborated that the cheese plants surveyed were much larger on
average and represented a significant proportion of the NDPSR volume
when compared to the 2021 survey.
The witness testified the data on butter highlighted the importance
of sample composition. Both surveys sampled a similar numbers of butter
plants, 13 in 2023 and 12 in 2021, and represented roughly the same
total volume. However, the witness stated the 2023 survey had more
variation in production volumes whereas in the 2021 survey, butter
plants were more similarly sized. Finally, the witness testified the
dry whey surveys had similar numbers of participating plants, 9 in 2023
and 8 in 2021, but the surveyed volume in the 2023 survey was nearly 50
percent more than that contained in the 2021 survey.
NMPF offered Proposal 7 as one option for amending FMMO make
allowance levels. Eleven NMPF witnesses, representing the manufacturing
interests of cooperatives, testified in support of Proposal 7. The
witnesses testified the current FMMO make allowances do not resemble
manufacturing costs currently experienced in their plants. The
witnesses provided detailed testimony on the impact of inadequate make
allowances, which consisted of similar themes. First, they were of the
opinion inadequate make allowances cause the FMMOs to overvalue raw
milk. Consequently, the witnesses said many cooperatives have reblended
cooperative revenues to members as a way of recouping manufacturing
costs not covered by current FMMO make allowances. Second, the
witnesses said insufficient make allowances disincentivize plant
investment, whether it be in current or potential new plants.
The NMPF witnesses testified the industry lacks consensus on
reliable data to determine make allowances due to inconsistencies in
cost allocation and reporting across operations. The witnesses were of
the opinion the available manufacturing cost surveys are not
comprehensive or reliable enough to justify large make allowance
increases. The witnesses all stressed increasing make allowances to
levels above actual costs could cause untenable financial harm to
producers, putting many out of business and jeopardizing the milk
supply. One NMPF witness described how an informal manufacturing cost
survey of some NMPF members was used in the development of Proposal 7.
A CDI witness testified regarding the impact insufficient make
allowances have had on their member farms and six butter and milk
powder manufacturing facilities. The CDI witness testified the NFDM and
butter make allowances in Proposal 7 are transformations of the 2021
survey results, using the combined costs and yields of the two
products. An LOL witness testified inadequate make allowances have led
to disorderly market conditions, including lack of investment in
manufacturing plants to process and balance milk supplies and
inequitable producer pay prices between producers of different
cooperatives and between cooperative and nonmember producers.
An Agri-Mark witness said current make allowances overvalue
producer milk and make it difficult for cooperatives with manufacturing
facilities to remain profitable and pay the FMMO blend price.
Consequently, the witness said, cooperatives must re-blend proceeds in
order to recoup manufacturing costs, resulting in producer pay prices
often less than FMMO blend prices. Agri-Mark is a dairy farmer-owned
cooperative located in the Northeastern U.S. with over 550 members, 3
cheese manufacturing plants and 1 butter-powder plant in the region.
A Foremost witness attributed higher operating costs seen in their
plants to inflation since 2008, adding that in the last 2 years, they
have experienced particularly acute price increases in all categories.
A witness representing FarmFirst Dairy Cooperative (FarmFirst), a
cooperative operating in the Upper Midwest with 2,600 dairy farmer
members, testified negotiated over-order premiums have diminished by 24
percent since 2020 due to their processor's compressed margins, partly
a result of inadequate make allowance levels. In addition to reducing
premiums, the FarmFirst witness attested the current make allowances
overvalue producer milk and have contributed to an oversupply of milk
in the Upper Midwest, resulting in milk dumping, negative PPDs,
depooling, and milk selling at below Class III prices.
A Northwest Dairy Association (NDA) witness testified in support of
Proposal 7. NDA is a dairy farmer-owned cooperative located in the
Pacific Northwest with approximately 295 members, whose subsidiary
(Darigold) operates 5 fluid milk bottling plants and 7 manufacturing
plants making butter, cheese, dry whey, and dry milk products. The
witness testified Darigold's manufacturing costs increased 80 percent
between 2008 and 2022. The witness said inadequate or delayed
investment in manufacturing plant capacity increases transportation
costs, which are borne by producers, since milk must be shipped farther
distances to find an available manufacturing market. A witness
representing Maryland and Virginia Milk Producers Cooperative, Inc.
(MDVA), a dairy farmer-owned cooperative located in the Mid-Atlantic
that operates three pool distributing plants and two pool supply plants
manufacturing bulk butter and NFDM, testified costs had increased
compared to 2008 levels, with NFDM conversion costs increasing 64
percent over the period. According to the MDVA witness, Proposal 7
would reduce, but not eliminate, the manufacturing losses incurred in
balancing their milk supply. A witness representing Lone Star Milk
Producers (Lone Star), a dairy-farmer owned cooperative marketing milk
on the Appalachian, Southeast, Central, and Southwest FMMOs, testified
that manufacturing costs at their butter and NFDM plant have risen
since commencing operation in 2017. A witness representing Ellsworth
testified to the increasing costs of production at their cheese and dry
whey operation. Lastly, a DFA witness testified in support of Proposal
7 and provided dairy farm cost of production data, arguing this data
should be considered when determining make allowances.
A dairy economist from the University of Missouri, appearing on
behalf of NMPF, testified on the estimated economic impact of Proposal
7. Using an econometric model, the witness estimated the proposed make
allowances would lead to a $0.30 decline in the All-Milk Price and a
200-million-pound milk production decline in the first year of
implementation, with a further milk production decline of 400 million
pounds in the second year. In the long run, the witness forecasted the
decline in the All-Milk Price would
[[Page 57592]]
moderate to $0.04 as markets adjusted to lowered milk production.
A dairy farm accountant, testifying on behalf of NMPF, presented
various statistics related to their dairy farmer clientele. The witness
testified average total income from their clients' operations was $5.50
per cwt in 2022, with a break-even milk price of $19.78 per cwt. The
witness said the average net income from 2006 to 2023 was $1.23 per
cwt, on an average milk production of 995,115 cwt, yielding an average
net income of approximately $1.2 million. The witness later stated that
a 3,300-milking cow herd would require an investment of approximately
$40 million.
An economist from Cornell University, testifying on behalf of NMPF,
testified on the topics of dairy farm profitability, cost of production
measures, and farm data from the Cornell Dairy Farm Business Summary,
Michigan State University, and the University of Wisconsin. The witness
warned that setting make allowances ``too high'' would lead to
unwarranted investments in processing facilities while setting make
allowances ``too low'' would lead to insufficient plant investments and
cooperative deductions on member milk checks.
Numerous dairy farmers testified in support of Proposal 7,
recognizing the need for increased make allowances despite what they
acknowledge would be a decrease in FMMO producer prices. These
witnesses testified to recent decreased farm margins due to a declining
All-Milk Price, falling net pay prices, higher feed costs, and
increased production costs, leading to near negative operating incomes.
The witnesses said that while make allowance increases would hasten
this trend, Proposal 7 accounts for these factors, balancing producer
and processor needs. Multiple witnesses expressed doubt in the
available manufacturing cost survey data due to its voluntary and
unaudited nature, as well as observations of cheese manufacturing
profitability and continued investment.
Dairy farmer witnesses testified that inadequate make allowances
have disadvantaged dairy farmer-members of cooperatives who own
manufacturing plants compared to dairy farmer-members of cooperatives
who own no plants. Several dairy farmer witnesses said that the
prevalence of market adjustment deductions from their member milk check
signifies negative returns on the cooperatives manufacturing assets due
to inadequate make allowances. Another dairy farmer testified
processing costs for Agri-Mark's four manufacturing plants producing
cheese, butter, NFDM, and whey have increased by an average of 20
percent since 2008, and insufficient make allowances have resulted in
deductions to member milk checks to cover processing costs. According
to the Agri-Mark witness, this has led to disorderly market conditions,
which impair plant investment and disadvantage cooperative members. A
CDI dairy farmer witness testified to the financial difficulties of
operating CDI's balancing plants given current make allowance levels.
A witness representing the Milk Producers Council (MPC), an
organization representing California dairy farms, testified Proposal
7's proposed make allowances balance producer and processor needs. The
witness said the cost survey information entered into evidence is of
limited value due to its voluntary, unaudited nature and the lack of
transparency in cost allocation for multi-product plants. The witness
argued differences between the All-Milk Price and the Mailbox Price
indicates a need for increased make allowances and a guideline to the
resulting impact on producer pay prices, currently estimated at $0.75
per cwt.
In its post-hearing brief, NMPF reiterated its arguments for
adopting the make allowance levels contained in Proposal 7, writing it
is the only option accounting for an increased cost in manufacturing
while protecting producer pay prices. NMPF stated there has never been
a make allowance adjustment greater than $0.35 per cwt, and the changes
contained in Proposal 7 would decrease farmer milk prices by
approximately $0.50 per cwt.
NMPF presented in its brief the aggregated costs cooperatives with
manufacturing capacity shared on the record, to emphasize the increases
across cost categories since make allowances were last updated. While
the need to update make allowances to reflect higher costs is
necessary, NMPF stated the data on the record is not sufficiently
comprehensive, verifiable, or unambiguous to determine make allowances
above those offered in Proposal 7. In its post-hearing brief, Agri-Mark
reiterated support for Proposal 7 as the most balanced approach to
updating make allowances, despite acknowledging the proposed levels are
not sufficient to cover all manufacturing costs.
Opponents to Proposal 7, primarily representatives for IDFA or
WCMA, echoed similar concerns from cooperative manufacturers regarding
inadequate make allowances, claiming the inability to recover
manufacturing costs on wholesale commodity products has led to a lack
of investment in manufacturing capacity. These witnesses testified on
the importance of make allowances fully covering manufacturing costs,
rather than a portion of costs as proposed in Proposal 7. Witnesses
testified that continued capital investment in plant yield and
efficiency gains have not fully countered the effects of insufficient
make allowances as costs have continued to increase. Without make
allowances accurately reflecting costs, the witness said, manufacturers
receive inaccurate financial signals, which impact investments, capital
distribution, and FMMO pooling decisions. Additionally, they said the
competitive advantage gained by manufacturing plants not regulated by
an FMMO lead to more investments into operations unaffiliated with the
FMMO system. Only an increase in make allowances reasonably covering
commodity product manufacturing costs, according to these witnesses,
can counteract these effects.
In its post-hearing brief, IDFA reiterated opposition for Proposal
7, writing that the proposed make allowance levels are inadequate and
not grounded in observed data. IDFA stressed that make allowances are
defined as covering the entire cost of converting raw milk to a given
dairy product, not a portion. In its brief, IDFA pointed to NMPF's
recognition that Proposal 7's make allowances do not fully cover actual
costs but instead represent a balance dairy farmers can withstand. IDFA
objected to the consideration of farm production costs when determining
make allowance levels. IDFA reiterated FMMOs are not a price support or
income support program, and the prices must reflect the market price of
end-dairy products. IDFA explained manufacturers cannot raise the
prices of commodity dairy products to offset higher manufacturing costs
because the wholesale prices are captured in the NDPSR and would raise
the reference price by the same amount. AMPI reiterated in its post-
hearing brief opposition for Proposal 7 as failing to reflect 2022
manufacturing costs. AMPI argued that USDA should not delay increasing
make allowances on the possibility that legislation will give USDA the
authority to conduct a mandatory audited survey.
A witness from DIC testified in support of Proposals 8 and 9. The
witness testified that setting minimum prices too high incentivizes
excess milk production, while a low minimum price through higher make
allowances allows for over-order premiums to set a competitive market
price. The witness
[[Page 57593]]
argued Class III and IV prices should allow manufacturing plants to
clear the market and operate profitably.
The DIC witness entered data concerning its 2022 California dairy
manufacturing cost forecast (2022 CA Forecast). The witness testified
the 2022 CA Forecast used a combination of 2003-2016 California
Department of Food and Agriculture (CDFA) data, state and national
indices, and market developments to measure how changes in labor,
utility, and other costs historically moved the actual CDFA cost data.
The model then used that information to forecast California-specific
2017-2022 manufacturing costs, according to the witness. The witness
said while the model forecasts costs, the range of actual costs around
those forecasts could be relatively wide given the relatively few
observations (14 years) used to estimate the model. For example, the
expert witness elaborated that CDFA only collected dry whey costs until
2006, when they surveyed fewer than three dry whey plants, which is why
the CA analysis did not forecast dry whey costs. The DIC witness opined
the best approach to determine manufacturing allowance levels is using
observed cost data but offered the 2022 CA Forecast as another
methodology for use with the other cost surveys and testimony
presented.
An IDFA witness testified in support of Proposals 8 and 9, stating
make allowances should be updated to reflect increased costs in
manufacturing dairy products. The witness said that while end-product-
prices change monthly to reflect the current market, make allowances
are fixed at 2006 cost levels, forcing dairy manufacturers to lose
money or stop production. The witness stressed the need for relief from
the current inadequate make allowances that do not reflect rising
industry costs, adding losses are not sustainable for plants or dairy
farmers who depend on these manufacturing outlets for their milk. The
witness explained IDFA's proposed make allowances are simple averages
of the 2023 survey and 2022 CA Forecast plus a $0.0015 marketing cost.
The IDFA and WCMA witnesses asserted accurate make allowances need
to be adopted quickly as current make allowances are based on 2005/2006
cost data. The IDFA witness clarified their staggered implementation
proposal, which would implement proposed year 1 levels shortly after
the final decision is published. Both IDFA and WCMA witnesses said the
staggered implementation is designed to recognize the impact
significant make allowance increases would have on producer prices.
However, if there is any delay in implementing changes, both witnesses
stressed the staggered implementation approach should be abandoned and
the proposed year 4 levels should be implemented.
The WCMA witness stated the use of audited California manufacturing
cost data in the 2022 CA Forecast should alleviate any data validity
concerns and the 2023 survey methodology follows precedent used to
determine the current make allowance levels. The witness noted the risk
of using a simple average of the 2022 CA Forecast and the 2023 survey
to determine proposed make allowances is the potential of the result
being skewed towards California costs, since California plants are
represented in both surveys.
A dairy farmer witness, who is a member of AMPI, testified on
behalf of IDFA and expressed support of Proposals 8 and 9. The witness
testified that AMPI, who participated in the 2023 survey, experienced
cheese manufacturing costs close to the study average despite plant
sizes that were smaller than the survey average plant size. The witness
said their manufacturing costs of bulk cheese products are 47 percent
higher and general plant expenses are up 62 percent in 2022, compared
to 2008.
Several dairy manufacturer witnesses representing Hilmar Cheese
Company (Hilmar), Glanbia, Saputo, and Leprino testified in support of
Proposals 8 and 9. Hilmar is a cheese and whey manufacturer with
processing locations in California and Texas. These witnesses testified
dairy processing costs have increased, particularly of late because of
inflation, noting Hilmar's natural gas costs were 45.1 percent above
the 20-year average. The Saputo witness echoed testimony on increasing
costs, citing the St. Louis Federal Reserve data series for labor,
energy, packaging, and maintenance costs. The witness said these costs,
comprising 20 percent of the total cost to manufacture a finished
cheese product, rose 60 percent, on average since 2006. According to
the witness, Saputo's manufacturing costs align with the 2021 and 2023
survey results. The Hilmar witness testified their manufacturing cost
increases correlate with the results of the 2022 CA Forecast. The
Leprino witness stated the 2021 survey and 2023 survey had robust
participation, and the 2022 CA Forecast, which used CDFA audited
mandatory data, leveraged a widely accepted statistical modeling
approach. All four witnesses stressed the urgency of updating make
allowances. The manufacturer witnesses generally agreed that inaccurate
make allowances distort pricing signals for farmers, processors, and
ultimately consumers.
Witnesses representing Nasonville Dairy and Cedar Grove Cheese, two
proprietary specialty and commodity cheese manufacturer members of
WCMA, testified to rising manufacturing costs by outlining costs in a
similar manner to the 2021 and 2023 surveys. According to the
witnesses, their costs have risen $0.3226 and $0.77 per pound,
respectively, far beyond the fully implemented Proposal 8 levels. The
witnesses testified that insufficient make allowances negatively impact
cheese processing investments and increase the production of higher-
cost specialty products unable to play the same balancing or
foodservice roles as commodity products. They added current make
allowance levels impair the ability of proprietary manufacturers to
participate in the FMMO pool and deprives producers the benefits of
having their milk pooled.
In their post-hearing briefs, WCMA and IDFA reiterated their
support for Proposals 8 and 9. IDFA wrote that USDA has consistently
set make allowances to reflect the most recent and reliable actual cost
data, using multiple surveys, as in Proposals 8 and 9. Further, IDFA
stressed in its brief the 2023 survey is the most robust of all of the
author's previous surveys used to set make allowances. IDFA refuted the
notion the 2022 CA Forecast is inappropriate to use for determining
make allowances, explaining the underlying data is robust audited
California manufacturing data and the econometric techniques are widely
accepted. IDFA contended that the 2022 CA Forecast and 2023 survey
averages are lower than the cooperative manufacturing costs shared on
the record. Even if inflation has subsided since 2022, IDFA added in
its brief, there would have to be deflation to arrive below pre-2022
levels.
IDFA clarified in its brief the proposed schedule for phasing in
make allowance changes, which is designed to accommodate farmers. When
addressing implementation timing, IDFA refuted the CME's points about
incorporating risk management in the timing of implementation, arguing
that CME's interests do not necessarily align with those of the broader
dairy industry because of the fee revenue they generate.
In its brief, IDFA emphasized the destabilizing effect of current
make allowances on processors and farmers. IDFA shared charts from the
hearing, showing how the Mailbox Price is in close proximity to FMMO
blend price,
[[Page 57594]]
which it says indicates FMMO prices are too high. IDFA refuted NMPF's
argument that Proposals 8 and 9 will result in a $1.42 per cwt decrease
in the All-Milk Price because FMMO prices are minimum prices and don't
reflect premiums received. Further, IDFA wrote in its brief that dairy
farmers whose cooperatives own processing facilities are receiving
depressed prices when make allowances are too low.
IDFA said the best method to update make allowances is through a
mandatory and audited USDA survey; however, USDA does not currently
have the authority and IDFA estimates it would take approximately five
years before new make allowances could be adopted once the authority
was granted. IDFA reiterated arguments that make allowances under-
representing actual costs harm both dairy farmers and manufacturers.
In its post-hearing brief, AMPI reiterated support for the make
allowance levels in Proposals 8 and 9, contending they accurately
reflect the changes in costs. AMPI added it supports immediate
implementation, rather than the phased 4-year approach. AMPI wrote the
2023 survey had the largest product volumes of any previous surveys and
highlighted other manufacturing cooperative testimony describing
increased manufacturing costs. AMPI opined continued high manufacturing
costs and farm bill delays have made make allowance updates more
urgent.
Leprino's post-hearing brief reiterated its support of Proposals 8
and 9, emphasizing the importance of implementing make allowance
changes immediately. Leprino stressed 2023 cost levels have continued
to climb and offered its own updated cost increases, compared to 2022:
11 percent for labor, 17 percent for property insurance, and 9 percent
for liability insurance.
A witness representing the AFBF testified in opposition to
Proposals 8 and 9, opining the 2021 and 2023 survey data may be biased
due to its unaudited nature and the known potential to be used for
rulemaking, stating the incentive to overestimate reported costs for
commodity goods disqualifies this voluntary data. The witness testified
only the 2016 CDFA survey results can be verified as accurate enough to
be used for determining make allowances. According to the witness, the
relatively complicated 2022 CA Forecast model using a small number of
observations (14 years) to forecast 2022 costs (6 years out from the
actual data) could be overfitted to the 2000-2016 data and unreliable
to predict future costs.
Numerous dairy farmer witnesses testified in opposition to
Proposals 8 and 9, focusing on the negative effect significant make
allowance increases would have on producer pay prices. A DFA farmer
witness from New Mexico testified the make allowance increases
contained in Proposals 8 and 9 would result in negative operating
income over the next 10 years, making continued operation of their farm
unsustainable. The witness said any make allowance increases would
severely and disproportionally impact producers in the southwest due to
the share of milk going into manufacturing products. A LOL dairy farmer
testified significant increases in make allowances would be difficult
for farms in California to absorb, where water scarcity has led to high
forage costs. According to the witness, large make allowance increases
would put adequate milk supply at risk, all the while guaranteeing
profit for commodity manufacturers and leading to over production of
manufactured dairy products.
Two dairy farmer witnesses, a member of the CDC and a small
Maryland dairy farmer, testified against increases in make allowances
due to the impact on producer pay prices and lack of accounting for
dairy farm production costs. According to the witnesses, while
processors can pass on costs to customers up the supply chain, producer
margins are too thin to sustain substantial price decreases from
increased make allowances. The witnesses testified that further
declines to producer margins will cause more producer exits and
disruption to the milk supply. A dairy farmer representing Edge
testified any change in make allowances should require a 15.5-month
delay, be restrained by the impact on producer pay prices, and cover
only the most efficient plants.
In its post-hearing brief, NMPF reiterated its arguments in
opposition to Proposals 8 and 9. NMPF argued that these proposed
changes would decrease dairy farmer milk prices by approximately $1.45
per cwt, further narrowing producer margins and causing disorderly
marketing.
NMPF cited ongoing plant investment as an indication current make
allowances are not too low as portrayed by proprietary manufacturers.
NMPF emphasized proprietary manufacturers are not required to be
regulated and, thus, can choose not to participate in the FMMO and
avoid paying minimum prices they contend are too high because of
inadequate make allowance levels. NMPF opined about the lack of
evidence to merit raising make allowances to levels contained in
Proposals 8 and 9.
In its brief, NMPF refuted the studies used as a basis for
Proposals 8 and 9. NMPF cited hearing testimony regarding the
insufficiency of some plant sample sizes in the 2023 survey. Further,
NMPF argued the 2023 survey does not capture how manufacturing costs
are skewed by plants that serve a balancing role. NMPF stated if make
allowances are set too high, balancing plants would be incentivized to
run at maximum capacity, rather than running at less than full capacity
to provide critical balancing services to the market. NMPF voiced
concerns with the 2022 CA Forecast, noting the proposed make allowances
in Proposals 8 and 9 are duplicative since the 2023 survey included
California data. Further, NMPF opined that the 2022 CA Forecast is of
little utility as it did not account for basic changes to the
California dairy manufacturing sector since 2016, such as plant
openings and closings and productivity improvements.
In its post-hearing brief, Select also opposed Proposals 8 and 9,
on the basis of the 2022 CA Forecast being inappropriate to use in
determining make allowances. Select echoed NMPF's argument that use of
the forecast would be duplicative of California data. Further, Select
argued indexing does not account for improvements to plant efficiencies
and the Department has not previously used indexing to determine make
allowances.
In its brief, the AFBF opposed any increase to make allowances,
instead advocating they only be increased once a mandatory, audited
cost survey was administered by the Department. The AFBF opined that
both the 2021 and 2023 surveys were biased because there was a clear
intention the surveys would be used in a rulemaking proceeding. The
AFBF opposed the use of indexing to set make allowances, as was done in
the 2022 CA Forecast, because it fails to recognize productivity
improvements over time. The AFBF echoed other brief arguments that
continued processor investment is evidence that make allowances are not
too low.
The Midwest Dairy Coalition (MDC), an alliance of six dairy farmer-
owned cooperatives operating in the Midwest, filed a post-hearing brief
stating make allowance updates are long overdue, but took the position
the Department should be granted legislative authority to conduct a
mandatory and audited cost survey. MDC did not offer support or
opposition to any make allowance related proposals. In its post-hearing
brief, Edge also did not support or oppose any make allowance related
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proposals but cautioned against setting make allowances too high. Until
there is a mandatory and audited USDA-administered survey, Edge stated,
the Department should err on the side of caution to not subsidize
commodity manufacturing.
In its post-hearing brief, Select offered an alternative
methodology for determining the make allowance levels using what Select
argued was the most reliable record data. Select suggested taking the
average of the 2021 survey and 2023 survey, subtracting the current
make allowance level, and taking half that difference to add to current
make allowance levels. As a result, Select proposed the following:
cheddar cheese, $0.2281; butter, $0.2004; NFDM, $02260; and dry whey,
$0.2498.
In its post-hearing brief, CME noted any make allowance changes
would be considered material changes, and USDA should consider an
implementation timeframe that mitigates risks to those involved in
futures and options trading.
b. Yield Factors
Submitted by Select, Proposal 10 seeks to amend the cheese price
formula by increasing the butterfat recovery rate in the cheese yield,
from 90 to 93 percent. A Select witness testified in support of
Proposal 10 and clarified a butterfat recovery rate of 93 percent would
also necessitate an increase in the butterfat yield factor in the
protein price formula from 1.572 to 1.624. According to the witness,
these changes would result in a modest increase in the Class III price,
estimated at $0.04 per cwt. The witness stressed USDA should not be
guided by price impacts but rather by achieving formulas to better
reflect manufacturing realities and the actual value of raw milk.
Select reiterated support for this proposal in its post-hearing brief.
An independent expert witness, retained by Select, testified
advancements in vat technology, coagulants, and curd handling have
enabled manufacturers to achieve recovery rates higher than the
currently assumed 90 percent. The witness described how modern,
horizontal vats attain butterfat recoveries far exceeding both open and
enclosed horizontal vats, and how most commodity cheddar manufacturers
use advancements in coagulants and curd handling to attain greater than
93 percent butterfat recovery. Additionally, the witness said, whey
cream can be reintroduced into the cheesemaking vat to increase cheese
yield and revenue, ultimately increasing butterfat recovery.
The AFBF wrote in its brief that it also supports Proposal 10 to
increase the butterfat recovery factor. The AFBF pointed to evidence on
the record of increasing plant efficiencies, justifying updating the
butterfat recovery factor to the level in Proposal 10.
Six witnesses, representing Glanbia, Leprino, IDFA, CDI, DIC, and
MPC, testified in opposition to Proposal 10. The Glanbia witness
described a broad range of industry fat recovery based on plant age and
processing techniques, and acknowledged many modern plants, including
Glanbia plants, can achieve 93 percent cheddar fat recovery. The
witness testified Proposal 10 is being offered to enhance prices while
ignoring other parts of the formula that overvalue milk. The witness
contended lost solids within the manufacturing plant and the discounted
price of whey cream, should they be considered, outweigh the effects of
Proposal 10 on milk prices. The Leprino witness testified any changes
to the yield factor should only occur after a comprehensive review of
all yield assumptions. The witness agreed 93 percent butterfat
retention is achievable in some plants but does not believe it is
possible across the entire industry.
The IDFA witness contended Proposal 10 takes a piecemeal approach
to changes in the yield formula and selectively focuses on dairy farmer
revenue enhancements only. The witness opined whey cream is overvalued
in the current formula, as butterfat not going into cheese is currently
valued as Grade AA butter despite regulation that whey cream cannot be
used in Grade AA butter. The witness claimed whey cream is discounted
20 percent or more compared to fresh cream. In addition, the witness
said in-plant milkfat losses are not recognized in the current formula,
something that should be considered when evaluating yield factor
changes. The witness testified any decreases in the Class III prices
that result from accurately accounting for both processing losses and
whey cream values would more than offset the increases in Class III
prices proposed by Select.
A witness from the Center for Dairy Research (CDR), appearing on
behalf of IDFA, testified to observing improvements in butterfat
retentions over the past 40 years, mostly due to improved vat design
and technology. The CDR, with a dairy plant on the University of
Wisconsin-Madison campus, supports the U.S. dairy industry with
expertise in cheese, dairy ingredients, cultured products, dairy
beverages, quality/safety, and dairy processing. The witness noted a
range of butterfat losses at the cutting stage including 9 to 10
percent fat loss in open vats, 7 percent fat loss in Double O vats, 6
percent fat loss in horizontal vats, and 5 percent fat loss in modern
vats. The witness testified that while large modern plants are
installing newer, more efficient vats, old, less efficient vats are not
leaving production, and are being repurposed and installed in medium
and small plants throughout the country. The witness noted there is
still a large variety of vats being using in the industry, and stressed
the latest vat design does not ensure optimal butterfat retention, as
the experience of the cheesemaker and product handling practices could
also lower butterfat recovery.
Based on current observations and work within the industry, the CDR
witness provided best estimates for fat recoveries in cheddar
cheesemaking as 91 to 93 percent retention in well-run factories with
modern vats, 90 to 92 percent retention in well-run factories with
vertical Double O vats, and 88 to 91 percent retention in factories
with open vats. The witness said, based on their experience, 91 percent
could be considered the industry average butterfat recovery for cheddar
cheese plants.
A CDI witness, appearing on behalf of NMPF, testified to the lack
of yield data available to support the proposed recovery rate contained
in Proposal 10. The witness supported a tempered update to the cheese
make allowance that does not include an update to the yield factor. A
witness representing DIC testified the current 90 percent butterfat
recovery rate is reasonable because, despite some newer, more efficient
plants achieving higher fat recovery, older plants may not be able to
achieve the higher rates. The DIC witness stated fat recovery data is
lacking across the industry and further asserted the current 90 percent
butterfat recovery should be retained. The witness representing MPC
testified the current formula should remain in place until the industry
tackles the mechanics of the Class III formula, and the big issue is
how butterfat not being retained in the cheesemaking process is valued.
A witness representing AMPI provided testimony supporting the
improvement seen in butterfat recovery due to new vat technology. The
witness said AMPI installed cheesemaking equipment that facilitates the
recovery of fat; however, they did not provide specific data.
Submitted by Select, Proposal 11 seeks to eliminate farm-to-plant
shrinkage from the yield factors in the FMMO Class III and IV price
formulas. A witness appearing on behalf of Select testified USDA's
decision to include
[[Page 57596]]
shrinkage in the formula was premised on the concept that such losses
were not in the handler's control and are unavoidable and common. The
Select witness was of the opinion producers, cooperatives, and handlers
do have the ability to address and stem losses in the transportation of
milk from the farm to the plant. The witness said historically, as the
number of farms on a milk route increased, the probability for
discrepancies between farm weights and plant weights also increased, as
each stop offered potential for spillage, loss within piping, and
errors in measurement. The witness shared statistics on the increasing
size of U.S. dairy farms, stating that in 2016, three-quarters of all
U.S. milk production came from farms that could fill a full tanker,
whereas in 2000, less than half of U.S. production came from farms
filling a full tanker. The witness estimated 80 percent of the current
milk volume in the U.S. comes from farms able to fill full tankers on
every-other-day pickup schedules. Consequently, said the witness, the
occurrence of shrinkage is decreasing. As an example, explained the
witness, Select's members are large enough to ship full tanker loads of
milk, meaning Select does not experience the same risks of milk loss
which occur on multi-stop routes.
Other than milk losses occurring with hoses, the Select witness was
unaware of any inherent, unavoidable, farm-to-plant losses that could
occur within the pick-up process. The witness said even farms without
the ability to fill a tanker can adopt farm scales, flow measurement,
and other technologies to minimize imprecision and inaccuracy. The
witness testified the cost of implementing these improvements would be
offset by the anticipated price impacts of adopting Proposal 11, which
the witness estimated to be $0.07 per cwt.
A second Select witness presented an analysis of Select plant data
from August 2022 to July 2023, representing 171,240 milk shipments and
a total of 9.8 billion pounds. The witness stated approximately half of
their customers do not report plant weights back to Select. For those
plants who do report, the witness said reported plant weights exceeded
farm weights about half of the time. The witness stated non-shrink
factors, such as scale calibration or weather, typically cause the
large discrepancy between farm and plant weights. The witness concluded
that for the subset of loads where differences occurred between farm
and plant weights, the net variance across all loads was less than 0.1
percent.
A witness testifying on behalf of Continental Dairy Facilities
(CDF) and Continental Dairy Facilities Southwest (CDF SW), two wholly
owned subsidiary plants of Select in Michigan and Texas, manufacturing
NFDM, butter, and buttermilk powder, presented farm-to-plant loss data
to support Proposal 11. The witness analyzed farm-to-plant losses in
milk deliveries to the two CDF facilities from August 2022 through July
2023, comprised of both single and multi-farm pickups. The witness
stated in total, plant weights averaged 0.15 percent lower than farm
weights for CDF and 0.10 percent lower for CDF SW. The discrepancies
ranged from a negative 0.32 percent (plant weights were 0.32 percent
lower than farm weights) to 0.67 percent (plants weights were 0.67
percent lower than farm weights). Since many of the non-Select
shipments to CDF are multi-farm pickups, the witness said management
for farm-to-plant shrink is not unique to Select or larger farms,
generally. The witness described improperly calibrated scales, input or
transposition errors by milk haulers, changes in equipment or personnel
when weighing loads, or snow settled on scales or tanks when weighing,
as reasons for weight discrepancies. The witness testified these
variances are not inherent and that they can be addressed. Select
reiterated its arguments supporting Proposal 11 in its post-hearing
brief.
The AFBF expressed support for Proposal 11 in its post-hearing
brief. The AFBF contended that data on farm-to-plant shrinkage
contained in evidence is similar to what was used to determine the
original farm-to-plant shrinkage factor. The AFBF argued that this
issue does not merit a formal data collection, but a one-time
adjustment to reflect that farm-to-plant shrinkage is much less
significant than it used to be.
Five witnesses representing IDFA, Leprino, CDI, DIC, and MPC
testified in opposition to Proposal 11. The witnesses asserted Select's
minimal farm-to-plant shrinkage is not the reality for much of the
dairy industry, noting the lack of industry-wide data on farm-to-plant
shrinkage and the differing nature of measuring components at the farm,
rather than at the plant, are reasons Proposal 11 should not be
adopted. The witnesses further testified FMMO yield factors should not
be based on one company's experience, especially one, they argued, that
was an industry leader in this area.
The Leprino witness testified that while Select has been able to
limit their own farm-to-plant loss through increasing herd sizes and
improvements in milk weighing and sampling, this is not a
representation of the nationwide dairy industry. Additionally, the
witness argued the scientific characteristic of milk fat clinging to
the walls of stainless steel has not changed; as such, volume and fat
loss still occur, even at the most innovative plants. The IDFA witness
claimed less than 10 percent of all farms produce enough milk to fill
entire tanker loads, so it is reasonable to conclude the losses
experienced when the formulas were adopted are still happening today.
According to the witness, failure to account for the diversity of farm
size may further incentivize manufacturers to prefer larger farms over
smaller farms.
Submitted by Select, Proposal 12 recommends amending the nonfat
solids price formula by increasing the NFDM yield factor from 0.99 to
1.03. A Select witness testifying in support of Proposal 12 said it
would correct the NFS yield factor by including the value of milk
solids utilized in buttermilk powder, as producers are not currently
paid accurately from a price calculated on NFDM prices alone. According
to the witness, a proper yield factor for NFDM should account for all
milk solids, including the milk solids remaining in cream after
separation and used in butter or buttermilk. The witness stressed the
initial NFS formula, correctly adopted in 2000, included buttermilk
powder.
A witness representing CDF and CDF SW testified on price alignment
and processing differences between NFDM and buttermilk powder. The
witness stated sales and regional prices observed at the two plants for
buttermilk powder and low-heat NFDM are closely aligned, as well as
consistent with prices reported by AMS' Dairy Market News (DMN) from
January 2023 through June 2023. The witness further testified that the
process of drying buttermilk utilizes the same equipment as that of
drying skim milk but requires a thorough cleaning of equipment when
changing product lines, higher temperature, and additional drying time
due to buttermilk's higher butterfat content. The witness said this
leads to increased utility costs of approximately $0.02. The witness
testified the NFS yield factor should consider all powder products,
including buttermilk powder whose yield is lower than NFDM. Select
reiterated its arguments in support of Proposal 12 in its post-hearing
brief.
In its post-hearing brief, the AFBF expressed support for Proposal
12 as it believes it reflects the long-term market shift toward valuing
buttermilk near the NFDM price. The AFBF stated that a formal extensive
data collection is not
[[Page 57597]]
necessary for this proposal to be adopted because there is a clear
record of buttermilk values.
Two witnesses, representing Leprino and IDFA, testified in
opposition to Proposal 12. The witnesses testified Proposal 12 is based
upon a theoretical yield approach which assumes a perfect system with
no in-plant component losses in the conversion of NFS to NFDM. The
witness said in-plant losses exist even in the most modern and
efficient manufacturing facilities and should be recognized in the
price formulas. The witnesses gave an example of the portion of NFS
remaining in cream after separation, which cannot be processed into
NFDM. The Leprino witness argued the FMMO system is predicated on the
notion processors should pay for milk based on the revenue they can
derive from selling products manufactured from that milk. The witness
said milk routinely lost in processing does not end up in finished
products, which should continue to be accounted for in the formulas.
The IDFA witness testified product yields should incorporate
manufacturing losses, and overestimating the quantity of NFDM
manufactured from NFS by accounting for buttermilk powder would
overvalue the market-clearing of NFDM and contribute to disorderly
marketing.
A witness from CDI testified on behalf of NMPF in opposition to
Proposal 12. The witness testified CDI supports evaluating all factors
in the Class III and IV formulas, and yield factors should only be
updated once industry-wide data on product yields are available. The
witness stated the NFS price formula is based on NFDM and the yield
factor correctly reflects the yield of NFDM only, without an adjustment
for buttermilk powder. The witness said Proposal 12 would adjust the
NFDM yield factor to represent a composite yield for multiple products
which differ in terms of component composition, uses, cost of
manufacture, and market prices. While acknowledging buttermilk powder's
processing costs are likely higher than NFDM's, the CDI witness
testified there was not enough data to quantify the difference in
processing costs; further, data presented from DMN and by Select
witnesses are not sufficient to determine the alignment of prices
between buttermilk powder and NFDM. The witness clarified that buyers
of butterfat and NFS must account for all solids utilized at the
minimum component prices, regardless of whether the solids are used in
the surveyed products of butter and NFDM or in other Class IV products
such as buttermilk powder.
A witness from the DIC testified in opposition to Proposal 12.
According to the witness, while NFDM yields are likely higher than the
current yield factor of 0.99, not all NFS in producer milk end up in
NFDM, with some NFS from cream remaining in buttermilk. The DIC witness
claimed the lower yield factor is to compensate for generally lower
buttermilk powder prices compared to NFDM but acknowledged DMN data
suggested a buttermilk powder price discount relative to NFDM narrowing
in recent years. A witness from MPC testified in opposition to Proposal
12, stating they were opposed largely due to a lack of adequate data.
In their post-hearing briefs, IDFA and NMPF opposed Proposals 10,
11, and 12. IDFA argued the three proposals are not representative of
industry-wide experience, but rather on what is possible given modern
technology and equipment. NMPF echoed IDFA's opposition in its brief,
citing insufficient data to justify the proposed changes. IDFA
specifically objected to Proposal 11, stating it would place an unfair
burden on small farms that cannot fill a tanker and, thus, continue to
experience shrinkage. Proposal 11 was also opposed by WCMA in its post-
hearing brief. Lastly, IDFA contended Proposal 12 should be rejected
because it overvalues buttermilk powder.
Base Class I Skim Milk Price
Six proposals to amend the base Class I skim milk price were
considered in this proceeding. Proposal 13, submitted by NMPF, seeks to
return the base Class I skim milk price to the higher-of the Class III
or Class IV advanced skim milk price, referred to as the ``higher-of''
mover. Proposal 14, submitted by IDFA, would use an average of the
advanced Class III and Class IV skim milk prices, plus an adjuster that
resets every January. The adjuster would be the higher of either: (1)
$0.74; or (2) the 24-month average difference between the higher-of and
the average-of the advanced Class III and Class IV skim milk pricing
factors. The 24-month calculation would run from August of the three
years prior to July of the previous year. Proposal 15, submitted by
MIG, would amend the current average-of mover from a $0.74 adjuster to
a monthly rolling average adjuster calculated as the difference between
the higher-of and the average-of, for 24 months, with a 12-month lag.
Proposal 16, referred to as ``Class III plus,'' submitted by Edge,
would start with the announced Class III price and incorporate a 36-
month rolling adjuster averaging the monthly differences between the
higher-of the advanced Class III or advanced Class IV skim milk prices,
and the Class III skim milk price. The proposal would eliminate
advanced prices. Proposal 17, also submitted by Edge, would return to
the higher-of mover but would use announced rather than advanced
prices. Proposal 18, submitted by the AFBF, would return to the higher-
of mover and would eliminate the advanced pricing of Class I skim milk,
Class I butterfat and Class II skim milk.
An NMPF witness testified in support of Proposal 13. The witness
reviewed the 2000 Federal Order Reform (Order Reform) rulemaking and
summarized the higher-of methodology as accurately reflecting the value
of the different milk use categories and ensuring shifts in demand for
any one manufactured product does not lower Class I prices. The witness
said the Department determined during Order Reform that the higher-of
mover addresses disorderly marketing by reducing volatility in milk
prices, reducing class price inversions and depooling, and assisting
Class I handlers in competing for a milk supply.
The NMPF witness testified the 2019 change to the average-of was
designed to facilitate price risk management strategies for fluid milk
processors, which, the witness stated, is not an objective of FMMOs.
The witness said the intent of the change was to be roughly revenue
neutral, while allowing handlers to better manage volatility in monthly
Class I skim milk prices using Class III and Class IV milk futures and
options contracts. The witness claimed the 2019 change has not
functioned as intended or anticipated by NMPF, has exacerbated
disorderly marketing conditions, has not been revenue neutral, and will
continue to have deleterious effects on the dairy industry. The witness
described the asymmetrical risk to producers which was not anticipated
when the mover change occurred. The witness explained the higher-of
exceeds the average-of calculation whenever the Class III and IV
advanced skim milk pricing factors differ by more than $1.48 per cwt,
regardless of which factor is higher. The witness noted the reverse is
true when the advanced skim pricing factors differ by less than $1.48
per cwt.
A witness from Southeast Milk, Inc. (SMI), a NMPF cooperative
member with 114 dairy farmer members, testified that when the two
advanced skim milk pricing factors are equal, the maximum amount by
which the average-of can exceed the higher-of Class I mover is $0.74
per cwt, but there is no limit by which the average-of can
[[Page 57598]]
fall below the higher-of Class I mover. The NMPF witness testified that
in 2020 and 2022, there were instances when the average-of mover fell
below what the higher-of mover would have been, in which the difference
was at times significant. The witnesses testified the maximum
divergence recorded between the current average-of mover and the
higher-of mover was a $5.19 lower average-of mover in December 2020,
when Classes II, III, and IV skim prices differed by approximately $11
per cwt. In comparison, the witness said, the maximum gain during that
time was capped at $0.74. The SMI witness said because the upside is
capped, but the downside is not, it is difficult to ever return to
revenue neutrality under the average-of mover.
The SMI witness testified the average-of mover has lowered dairy
farmer revenue compared to what they would have received under the
higher-of mover, with estimated cumulative market losses totaling
$998.3 million from May 2019 through August 2023. The witness said that
for the same period, the average-of mover decreased revenue to the
southeastern FMMO producers by more than $192 million. The NMPF witness
reviewed data during periods of relative price stability, revealing the
average-of mover generated modest gains over the higher-of mover.
However, in periods of price volatility, there were substantial revenue
losses in months when the average-of mover was less than the calculated
higher-of mover, which resulted in significant cumulative losses to
producers over time.
The NMPF witness claimed the change to the average-of mover
increased disorderly marketing by reducing Class I prices relative to
the other classes and creating greater incentives for handlers to
depool milk. The witness said that in 2020, the enhanced demand for
cheese relative to the demand for butter and NFDM widened the spread
between Classes III and IV well beyond $1.48, substantially lowering
Class I prices compared to what they would have been under the higher-
of mover. The SMI witness testified that between May 2019 and June
2023, the Class III skim value exceeded the Class IV skim value by over
$1.48 per cwt in 16 months, and the Class IV skim value exceed Class
III skim value by $1.48 or more per cwt in 11 months. In 2023,
according to the SMI witness, the average-of continued to be lower than
the higher-of in some months, which had a more significant impact to
dairy farmers because it occurred during a time of extremely low dairy
farm margins. The witness said they expect to see more volatility and
larger spreads between Class III and Class IV prices in the future
because of anticipated higher butterfat prices which will lower the
Class III skim value.
The NMPF witness testified that adoption of the average-of mover
created class price inversions and resulted in significant volumes of
depooled Class III milk during the second half of 2020. Class price
inversions occurred again in 2022 and 2023, said the witness, resulting
in price volatility and substantial depooling of Class IV milk. The
witness opined a wide variety of market conditions have proven capable
of generating market volatility, driving a wedge between Class III and
IV skim milk prices, and resulting in an average-of mover of more than
$1 per cwt below what the higher-of mover calculation would have been.
The NMPF witness said the average-of mover has not resulted in
increased risk management activity at a value to handlers anywhere near
the losses experienced by dairy farmers. Numerous witnesses testified
their fluid milk customers have shown very little interest in hedging
milk since the average-of mover was implemented.
NMPF witnesses testified other Class I mover proposals under
consideration in this proceeding use the higher-of mover calculation as
the benchmark for determining adequate Class I skim milk price revenue.
They testified those proposals provide producers revenue in an after-
the-fact-manner that fails to maintain the maximum monthly separation
between advanced Class I prices and the manufacturing class prices, a
goal expressed by the Department when it recommended the higher-of
mover during Order Reform.
The SMI witness testified that because of the change to the
average-of mover, the southeastern FMMOs experienced disproportionately
large reductions in blend prices due to the higher Class I utilization
in the region, making it harder to attract supplemental milk the region
requires to meet fluid demand. The witness noted that using an average-
of mover to establish a Class I skim price makes it more difficult for
Class I handlers to procure milk from plants with higher-value
manufactured products because the price difference is not large enough
to draw milk away from manufacturing. The witness opined a Class I skim
mover should provide for orderly marketing by ensuring an adequate
supply of raw milk for fluid plants, producer price equity including
prompt and uniform payments to farmers and cooperatives, and stability
for dairy farms. The witness argued the current average-of mover makes
it more difficult for FMMOs to achieve those purposes.
An NMPF consultant witness testified the higher-of mover is
necessary to transmit market signals in real time. The witness said a
higher Class I milk price relative to other class prices sends market
signals to move milk from surplus to deficit regions to ensure adequate
fluid milk supplies. Additionally, the witness continued, disorderly
marketing caused by prolonged depooling occurs when the Class I price
is lower than Class II, III, or IV prices. The witness asserted
prolonged periods of depooling create market disorder. Since the change
in 2019, claimed the witness, the Class I mover has facilitated
persistent long-term periods of depooling because there is no guarantee
Class I prices will exceed the other class prices over time. In
contrast, the witness asserted that under the higher-of mover, if Class
III and IV advance skim prices increased, the Class I price would
remain higher and depooling would moderate.
The NMPF witness presented data to demonstrate the objective of
adopting the average-of mover, to allow for greater risk management,
has not been accomplished, and prolonged periods of depooling have made
it difficult for producers to hedge their farm margins. The witness
stated that when milk is not pooled, producer hedging losses cannot be
offset by gains on milk checks because revenue from the higher valued
manufacturing milk is not shared with the marketwide pool. The witness
asserted risk-management performance is relatively similar under the
higher-of and average-of movers, entering data they believed showed how
Class III futures contracts would similarly mitigate risk. The witness
contended other proposals do not adequately replicate the higher-of
price in future periods; nor do they share equally among dairy
producers and others, necessitating periodic recalibration. Rather than
recognize the average-of limitations, the witness said, other proposals
seek to align the average-of and higher-of performance. The witness
testified an average-of mover with an adjuster causes past market
conditions to influence current prices, sending pricing misinformation
to the market and causing disorderly marketing. The witness concluded
that without immediate market signals from the advanced Class III and
IV milk prices, any of the average-of or Class III plus movers would
struggle to replicate the higher-of mover performance.
An NMPF witness representing Prairie Farms testified producer
revenue
[[Page 57599]]
has been significantly reduced, without recovery, since the change to
the average-of mover. Prairie Farms is an Illinois based farmer-owned
milk cooperative with over 600 dairy farmer members operating fluid
milk processing and manufacturing facilities that produce a variety of
fluid and manufactured dairy products. Increased depooling in the last
few years because of the average-of mover has resulted in increased
price volatility, the witness said. The witness testified that with the
average-of mover either Class III or Class IV milk is not pooled,
depending on which class is higher, because the manufacturer is able to
keep the additional market revenue instead of sharing it among pooled
producers.
The Prairie Farms witness testified dairy producers want a pricing
system that gives real-time market signals, which is accomplished with
the higher-of mover. The witness testified Prairie Farms supported the
change to the average-of mover believing it would facilitate their
customers' ability to hedge Class I milk. However, Class I processors
have generally not increased their use of hedging, said the witness,
while dairy producers have taken on additional risk by giving up a
higher Class I price. The witness stated one reason they believe their
customers do not utilize hedging is because of fear of incurring a
price disadvantage compared to their competitor. The witness added that
of the Prairie Farms dairy farmer members engaged in risk management,
there has been a decrease in the use of forward contracting since the
implementation of the average-of mover because of negative PPDs, as
they create a negative basis dairy producers are unable to account for
in their risk management decisions. The witness presented data showing
negative PPDs have become larger and more frequent under the average-of
mover, which has increased the volume of depooled milk and
significantly reduced revenue to farmers.
Another NMPF witness representing Upstate Niagara Cooperative
(Upstate Niagara) testified the average-of mover has not operated as
intended, has negatively impacted producer revenue, and has exacerbated
disorderly conditions. Upstate Niagara is a dairy farmer-owned
cooperative marketing the milk of approximately 250 members and
operating eight fluid processing and manufacturing plants in New York
and Pennsylvania. According to the witness, under the average-of mover,
producers pooled on FMMOs with higher Class I utilization were most
severely impacted due to the depressed Class I milk prices and no
ability to benefit from the higher priced manufacturing milk. Similar
to other witnesses, the Upstate Niagara witness described the
asymmetric price risk of the average-of mover.
From interactions with fluid milk customers, the Upstate Niagara
witness said there is widespread acceptance of prices based on FMMO
monthly price announcements by their conventional customers. The
witness said conventional customers have been less interested in
pursuing a fixed price if there was any chance it could result in a
competitive disadvantage in any given month. The witness recognized
there may be some processors or end users in specialized Class I
product channels that may utilize hedging but contended it is a
relatively small portion of total Class I sales.
A University of Missouri professor testifying on behalf of NMPF
presented results of an analysis conducted to evaluate the impact of
adopting Proposal 13. The witness testified, under the higher-of mover,
Class I prices would increase every year between $0.32 and $0.50 per
cwt; the Class II price would be between $0.08 and $0.12 per cwt less
annually; the Class III price would be between $0.06 and $0.13 per cwt
less annually; the Class IV price would be between $0.08 and $0.12 per
cwt less annually; and the all-milk price would be between $0.01 or
$0.02 per cwt higher annually, except for a more significant increase
of $0.06 per cwt in the first year. The witness said the model
forecasted the effect on the all-milk price to moderate over time as
production expands.
Twenty dairy farmers testified in support of Proposal 13. Many
dairy farmers testified blend prices have been lower and their milk
prices have been reduced since the average-of mover was implemented.
They said only when Class III and Class IV prices are within a narrow
range of each other is the average-of mover equal to or outperforming
the higher-of mover. The witnesses said their experience supports
NMPF's assertion that farmers' milk prices have been reduced by $950
million, and the reduction is not just a COVID-era anomaly. Dairy
farmer witnesses said the losses demonstrate the goal of revenue
neutrality with the change to the average-of has not been achieved. One
witness asserted that in 29 of the 52 months since the average-of was
adopted, Class I prices averaged $1.30 per cwt less than what the price
would have been under the higher-of mover. In comparison, said the
witness, in the remaining 23 of the 52 months the average-of returned a
price only $0.42 higher per cwt. The witnesses testified to near-
universal support by dairy farmers for a return to either the higher-of
or, under the average-of, a mechanism to be equal to the higher-of over
a period of time, such as 24 months.
Several dairy farmers urged a return to the higher-of mover,
claiming a need for financial relief as dramatic shifts in milk markets
since implementation of the average-of mover have caused significant
financial losses to dairy farmers. Dairy farmers reiterated the
average-of mover change affects 100 percent of pooled producer milk
while it is unlikely fluid milk processors are covering 100 percent of
their products with risk management tools. A dairy farmer testified
they were assured the change to the average-of would be net neutral or
net positive, but it has not been. Many dairy farmer witnesses
described losses to dairy farmers under the average-of compared to what
the Class I mover would have been under the higher-of and testified to
receiving lower blend prices. The dairy farmers were concerned about
receiving a delayed value of milk from a Class I mover with a rolling
average methodology because they believe they cannot afford to wait
months or years for the added revenue. They testified restoring the
higher-of mover through adoption of Proposal 13 would help to reduce
the volatility in monthly milk prices, bringing more stability and
predictability to farmer income.
Dairy farmers of all sizes testified to relying on risk-management
tools, such as Dairy Margin Coverage (DMC), Dairy Revenue Protection
(DRP), and CME futures and options markets because it is difficult to
manage their farms through periods of significant price volatility.
Dairy farmers' testimonies described a range of contract periods,
anywhere from 3-18 months, depending on the individual farmers' risk-
management strategy and risk tolerance. In its post-hearing brief, NMPF
reiterated hearing testimony arguing the average-of mover does not meet
the standards set forth in Order Reform, and the change has not been
revenue neutral as originally assumed. NMPF restated that under the
average-of mover, price inversions, volatility, and depooling have
increased, and Class I prices have been less effective at incenting
milk to fluid processors relative to manufacturing. NMPF reiterated the
asymmetrical risk borne by dairy farmers with the average-of mover and
the frequency of which the difference between Class III and IV prices
exceeded $1.48 per cwt, effectuating that risk.
NMPF reiterated the average-of mover failed to send appropriate
market
[[Page 57600]]
signals to participants because the fixed adjuster could not maintain
the maximum monthly separation between the advanced Class I and the
manufacturing class prices. NMPF wrote this increased the likelihood
manufacturing classes would have a higher value than milk used in Class
I and resulted in increased volumes of depooled milk. Under the higher-
of mover on the other hand, NMPF argued, when a particular
manufacturing class price is rising, the Class I price also rises and
tends to maintain Class I as the highest priced class. To dampen the
effect volatility in the manufacturing classes has on Class I, the
highest priced manufacturing class should provide the foundation for
ensuring the Class I price remains above the manufacturing classes
almost every month, reducing the incentive to depool, which is
disorderly.
The demand for Class I hedging is not clear, NMPF asserted in its
brief, and no evidence was presented to suggest more than a small
minority of the overall fluid market utilizes hedging, especially
beyond ESL handlers. NMPF argued in its brief that while facilitating
risk management for fluid processors may have merit, it is not an
objective of FMMOs. In regulating processors, the AMAA only considers
price uniformity to processors, NMPF asserted. Finally, NMPF restated
in its brief the widespread support of producers for a return to the
higher-of mover.
The Dairy Cooperative Marketing Association, Inc. (DCMA), a Capper-
Volstead Marketing Agency in Common with nine cooperative members in
the southeastern U.S., submitted a post-hearing brief in support of
Proposal 13. In its brief, DCMA argued the change to the average-of
mover has not been revenue neutral to dairy farmers, nor provided
benefits to the industry as originally intended. According to DCMA, the
hearing record demonstrates that little Class I hedging occurs,
especially on HTST milk, and includes no evidence that the use of
hedging is more prevalent now than prior to the change. DCMA stated
most testimony demonstrated HTST milk is sold based on FMMO announced
prices each month plus a fixed margin. Because revenue on packaged milk
sales flows back to the processor in step with the monthly changes in
the FMMO announced prices, there is no price risk to the Class I
processor under this system, according to DCMA. In its brief, DCMA
described the pronounced losses in the southeastern region as a result
of the change to the average-of mover.
The MDC submitted a post-hearing brief in support of Proposal 13,
expressing the importance of making the changes as part of the FMMO
reform process underway. MDC conveyed in its brief the importance of
ensuring all reforms are considered in concert since all changes have
ripple effects throughout the entire system and across all classes of
milk.
In its post-hearing brief in support of Proposal 13, Select
reiterated the proposal would support the priorities expressed by the
Department in Order Reform, the rationales of which remain true today.
Select cited billions of dollars lost to producers, an increase in
depooling, and a lack of Class I handlers hedging their milk costs as
reasons the average-of has failed.
In both witness testimony and briefs, IDFA and MIG strongly opposed
a return to a higher-of mover. A majority of their opposition was
contained in supporting testimony and evidence for Proposals 14 and 15,
as detailed below.
A witness representing IDFA testified in support of Proposal 14.
The witness said the goal of Proposal 14 is to keep producer Class I
revenue consistent with what would be experienced under the previous
higher-of mover, while allowing for effective and affordable Class I
risk-management strategies.
The IDFA witness claimed that in the long-run, the proposed Class I
mover would never fall below what the Class I skim milk price would
have been under the higher-of mover. According to the witness, Proposal
14 would have paid more than the higher-of mover in 13 of the past 21
years. The witness asserted dairy farmers are ``made whole'' as
compared to the higher-of mover over time through the annual adjuster
calculation. The witness presented data from 2003 through 2019 showing
Proposal 14 would have yielded a Class I price $0.08 greater than the
higher-of mover. For 2004 through 2023, the witness said Proposal 14
would have yielded a Class I price $0.05 higher, due to the $0.74
floor.
The IDFA witness entered data and analysis to show the volume of
milk not pooled would be slightly less under Proposal 14 than Proposal
13, and the Class I price would be lower than Class III or Class IV
prices in nearly the same number of months under both proposals. The
IDFA witness presented an analysis showing Proposal 14 would have
reduced price volatility with the only exception of very high cheese
prices in 2020. According to the witness, volatility equates to greater
price risk, which increases hedging costs, and ultimately higher
consumer prices.
The IDFA witness countered claims the higher-of mover sends
important price signals to dairy farmers through the Class I price,
instead claiming the blend price sends more important price signals
because it is the price farmers receive. The witness alleged there is
little difference between signals sent by the blend price under
Proposals 13 and 14, arguing that from 2012 to 2022, Proposal 13 would
average 31.9 percent of the Class I value in the blend price while
Proposal 14 would average 31.8 percent. As the impact on the blend
prices is very similar, over time there is little difference in price
signals between the proposals, the witness said.
Regarding the delay incorporated by the rolling adjuster and
farmers possibly not receiving the make-up payments, the IDFA witness
noted farmers go out of business for many reasons, and some may go into
the business or expand and benefit from higher payments. The witness
said this issue is no different than handlers going out of business
before the make allowances are raised.
The IDFA witness testified hedging is a critical tool for the
subset of innovation and value-added milk manufacturers to remain
competitive with alternative beverages. In the few growing segments of
the milk market, especially ESL and higher value-added products,
retailers are demanding processors provide long-term fixed price
contracts, rather than contracts with fluctuating monthly prices, the
witness said. Since processors cannot enter into a fixed purchase price
for raw milk with their milk suppliers, hedging allows processors to
take on the risk of entering into a fixed sales price for its finished
products and cover the risk of raw milk prices rising during the
contract period, the witness testified.
The IDFA witness noted several ESL processors formed and quickly
implemented risk management plans in anticipation of the change to the
average-of mover. The witness noted ESL processors are interested in
hedging because of the longer product shelf-life. According to the
witness, a risk management plan allows a processor to level out what
could otherwise be very different costs of milk products that could
have been produced at significantly different times but are being sold
to the customer at the same point in time. The witness noted more
hedging of HTST products is done by end users, such as foodservice
customers, not processors. The witness testified that while risk
management is not a stated objective of the AMAA, a stable price,
promotion, and growth of the sale of milk are, and the ability to use
risk management tools results in stable prices and increased sales.
[[Page 57601]]
The witness testified IDFA would support a rolling average longer
or shorter than 24 months, but the 12-month implementation lag is
essential to allow for hedging. The witness testified Proposal 14
calculates the adjuster from August through July because long term
Class I sales contracts between processors and retailers are often
negotiated and entered into during the final months of the calendar
year. To allow for effective hedging for those contracts, Class I
processors would need to know at the time of the contract negotiations
what the adjuster would be for the next calendar year. The witness
supported Proposal 15 as an acceptable alternative to Proposal 14.
A dairy processor witness representing Schreiber Foods (Schreiber)
testified in support of Proposal 14 or 15. Schreiber is a fluid milk
processor primarily manufacturing Class II and Class III products, with
approximately 5 percent of their products sold as ESL Class I products.
The witness testified that over the past 20 years risk management has
become a necessary tool for companies with exposure to dairy market
volatility. The witness said that only since the change to the average-
of mover in 2019 have milk processors had a viable way to manage risk.
The witness testified that, in response to requests from foodservice
and retail customers to manage Class I costs, Schreiber has offered
Class I forward contracts since 2019. Prior to 2019, the witness said
creating an effective hedge for Class I milk was challenging as it was
unknown whether Class III or Class IV would be the mover. The witness
stressed the change to the average-of allows purchasers to use a
combination of Class III and Class IV hedge positions, which gives
everyone in the supply chain the ability to control their market risk
in a way that was not previously possible under the higher-of.
According to the witness, Schreiber hedges price risk for its ESL
production through a combination of Class III and IV futures and swaps,
and Class I swaps, which typically go out 12 to 18 months. Under
Proposal 14, the witness explained, market participants will know the
fixed adjuster in advance of the calendar year in order to conduct
their hedging analyses for the coming year. If the Class I mover were
to revert to the higher-of, the witness testified they would have to
either find a different way to hedge or cease offering forward
contracts on their ESL products.
A witness representing Nestl[eacute] USA (Nestl[eacute]) testified
in support of Proposal 14. Nestl[eacute] is a fluid milk processor
operating one plant regulated by the FMMO system. Nestl[eacute]
procures milk from cooperatives using contract agreements, the witness
testified, and offers its customers an annual fixed price contract for
their primary Class I product, an ESL product. The witness stressed the
importance of hedging to manage risk and compete in the market against
nondairy beverages. The witness stated Nestl[eacute] did not use
hedging for Class I under the higher-of mover because not knowing which
class price would be higher caused uncertainty. The witness testified
Nestl[eacute] currently hedges all its Class I milk purchases using
Classes III and IV futures contracts, and while they have an 18-month
outlook they typically hedge Class I milk 6 months out. If USDA returns
to the higher-of mover, the witness testified, Nestl[eacute] would not
be able to continue hedging its Class I milk. The witness testified
price volatility has specific impacts on ESL products, as it is
challenging for retailers to set different prices due to monthly milk
price fluctuations for two identical products sold at the same time but
produced in different months.
A witness representing Lamers testified in support of Proposals 14
and 15 stating those proposals would help smooth out the volatility in
the pricing of Class III and Class IV.
In its post-hearing brief, IDFA reiterated the importance of
hedging to processors for managing price risk and volatility and
claimed effective hedging could only be achieved with an average-of
mover. IDFA noted that when price uncertainty does not allow fluid milk
processors to manage risk 6 to 12 months out, they risk losing shelf
space to plant-based and other alternative beverage products that can
offer fixed prices. IDFA argued that the choice for a fluid milk
processor, especially with respect to ESL products, higher value-added
products, and foodservice, is increasingly between offering stable
pricing and long-term contracts demanded by customers or losing shelf
space to competing beverages. Pricing stability and long-term
contracting are facilitated by hedging, according to IDFA. IDFA
stressed the growing need for Class I hedging because of increased
volatility between the manufacturing classes.
In response to criticism of Proposal 14, IDFA wrote the average-of
mover does not create price inversions or lead to milk not being
pooled, arguing depooling occurs because of the price relationships
between classes, and is caused by negative PPDs and pooling
requirements. IDFA also wrote that the average-of mover does not
increase price volatility, unlike a higher-of mover which routinely and
unpredictably switches between Class III and Class IV. Finally, IDFA
asserted the value of Class I products is not necessarily related to
the value of Class III or IV products, thus, the higher-of does not
better reflect the value of milk than the average-of mover.
NAJ submitted a post-hearing brief in support of Proposal 14,
arguing it better protects long-term producer milk revenue, provides
less Class I price volatility, and preserves equitable risk-management
opportunities for Class I handlers who are required to participate in
the FMMO system. NAJ noted the perception a return to the higher-of
mover would produce higher producer Class I revenues is based on highly
divergent Class III and IV price movers and an expectation this will
continue in the future. However, NAJ argued in its brief this price
divergence analysis does not account for composition factor amendments
nor potential Class I differential amendments. With revised composition
factors, NAJ asserted, a restored manufacturing to Class I price spread
would mitigate price inversion and depooling.
A MIG witness testified in support of Proposal 15 seeking to amend
the average-of mover from a $0.74 adjuster to a rolling 24-month
adjuster with a 12-month lag. The witness claimed the movers contained
in Proposals 14 and 15 provide similar base Class I skim milk prices
and have similar effects on producer prices. The witness explained in
certain years Proposal 15 would return more money to farmers than the
higher-of, and even if farmers do not experience the benefits of a high
manufacturing price immediately, they will over time through the lagged
adjuster. The witness presented data comparing the monthly average base
Class I skim milk price calculated under the current mover, the higher-
of mover, and Proposal 15 from 2003 to 2022 to show Proposal 15 would
be revenue neutral in the long run.
The MIG witness testified Proposal 15 preserves risk-management
opportunities for both producers and Class I processors, which is part
of orderly marketing. The ability to hedge Class I milk became
effective in 2019, followed by the pandemic and regulatory uncertainty
as to whether the average-of would remain, and time, resources, and
lack of knowledge slowed the adoption of Class I risk-management
strategies, the witness testified.
Five MIG member witnesses representing fairlife, HP Hood, Turner
Dairy, Shehadey, and Crystal Creamery testified on the importance of
hedging Class I milk. The fairlife and HP Hood
[[Page 57602]]
witnesses said they primarily process ESL products, which they hedge
using CME Class III and IV component and commodity futures. The HP Hood
witness stated they do not hedge HTST milk because it is primarily sold
through direct store delivery where the standard business practice is
monthly pricing. However, ESL products are distributed primarily
through grocery warehouses and buyers expect 60 to 90 days' notice for
any price changes, the witness said. The HP Hood witness stated the
ability to hedge has not changed their ESL pricing strategy but has
allowed for fewer price increases. In earlier testimony a witness
representing Shamrock, also a MIG member, said they manufacture both
HTST and ESL products and hedge milk used in their ESL products.
A processor witness representing Shehadey testified contracts with
retailers such as grocery stores use a fixed formula that changes
monthly, quarterly, or semi-annually, and are based on FMMO prices. The
witness testified Shehadey has only HTST Class I milk products and they
do not use any form of risk-management tools to hedge their risk. The
Turner Dairy and Crystal Creamery witnesses said their companies
primarily process HTST Class I milk products which they currently do
not hedge. Both witnesses expressed value in hedging HTST milk sold to
foodservice, as foodservice customers prefer to know prices months to
years in advance. The fairlife and HP Hood witnesses testified hedging
under the higher-of mover was difficult due to price volatility and
uncertainty, but the average-of mover allows them to offset the risk.
The witnesses also testified it takes time to develop a robust hedging
program. The HP Hood witness stated Class I hedging is primarily used
by more sophisticated operators, but as Class I hedging becomes more
accepted, the market should become more liquid, and more processors
will likely use this risk-management tool. The fairlife witness said
fairlife typically hedges its ESL Class I products, mainly 0 to 6
months out, but contracts could extend up to 12 months.
A MIG witness explained that the adoption of Proposal 15 would
allow for less price volatility throughout the market and support
industry growth by stabilizing the cost of milk for retailers and
consumers. Hedging, the witness said, is important to offering
customers and consumers a more stable price, which could stem the
declines in fluid milk as fluid milk competes with many beverages in
the market. The fairlife witness testified that price certainty
translates to price stability for both the retailer and the consumer.
The HP Hood witness testified the goal of hedging is not to make a
higher return, but instead to act as price risk insurance by removing
some input price volatility and increasing margin certainty for end-
product sales. The Turner Dairy witness testified the average-of mover
results in more price stability which is beneficial to the Class I
market. The witness said under the higher-of formula, the Class I price
went up with every spike in butter, cheese, or powder markets, even
though short-term changes in those product prices have no direct effect
on the actual Class I market. The witness argued the price spikes
necessitated raising prices to cover cost, without a market-based
explanation to provide to customers.
The MIG and fairlife witnesses testified in support of the 12-month
lagged adjuster contained in Proposal 15, stating it is critical to
allow Class I processors to mitigate risk and hedge successfully.
Knowing the adjuster 12 months in advance allows companies who hedge to
reduce or eliminate basis risk, the witness said, while the 24-month
rolling adjuster updates and provides dynamic market signals. The
witnesses said Proposal 15 would stabilize prices by moving gradually
and make fluid milk products a more reliable and steady purchase for
customers. Proposal 15 has no floor or ceiling, as the witness
testified MIG members believe floors and ceilings can create price
distortions. The witnesses testified a lookback of less than 24 months
would create more volatility, while a longer lookback does not transfer
market signals well over time. The fairlife witness testified the 12-
month lag is necessary to be able to buy futures 12 months out. The 24-
month rolling average adjuster allows the system to recognize the
difference between Class III and Class IV prices and what the higher-of
mover would have been, the witness said, allowing the industry to know
definitively what the premium structure is going to look like
associated with the adjuster 12 months into the future.
In its post-hearing brief in support of Proposal 15, MIG argued
USDA should first assess whether the current average-of formula has
resulted in disorderly marketing. MIG wrote the current average-of
mover ensures the market has sufficient milk for both fluid and
manufacturing uses and there is not disorderly competition for fluid
market access. MIG argued a return to the higher-of under Proposal 13
would not provide higher returns to farmers, estimating a minimal
impact of a $0.01 to $0.02 per cwt increase in the long term. However,
MIG argued in its brief, the return to the higher-of mover would have
significant negative impacts on the Class I market and the entire dairy
industry. There is no asymmetrical risk inherent in Proposal 15, MIG
argued in its brief, unlike the present average-of mover formula.
According to MIG, the use of risk management developed primarily
after the average-of formula was adopted and is likely to grow in the
future. MIG stated Class I processors do currently use risk-management
tools to hedge ESL products, as this sector has historically utilized
more fixed pricing, meaning hedging can be more easily adopted. MIG
stated many HTST customers, such as grocery stores, have become
accustomed to the monthly fluctuations of pass-through pricing, but
HTST customers, such as school lunch programs or USDA feeding programs,
would benefit from the increased price certainty that comes with an
average-of calculated mover. The industry has not yet had time to
widely adopt risk management, MIG reiterated in its brief, and
regulatory uncertainty due to this proceeding has caused processors to
hesitate further use of risk-management tools.
MIG noted in its brief that even though the AMAA does not
specifically provide for hedging, a Class I formula that supports
hedging helps serve the enumerated purpose of the AMAA of avoiding
unreasonable price fluctuations and reducing milk price volatility.
When Class I processors can better manage risk, they can offer more
stable prices to customers and consumers, MIG argued in its brief.
In its brief, MIG reiterated hearing testimony that use of an
average-of mover best ensures an orderly market, and sufficient supply
of milk for fluid use, including the most accurate pricing signals for
dairy farmers in a longer, and more appropriate, time. MIG took
exception to arguments that the Class I price be used to address price
inversions and depooling. Using a California pool example, MIG argued
that record evidence shows the Department would have to increase the
Class I price an impractical amount to incentivize both manufacturing
classes to remain pooled. MIG reiterated many factors cause depooling
and negative PPDs, and neither the Class I price nor use of an average-
of mover drive those results. Rather, according to MIG, the main
drivers of depooling in the months reviewed in testimony were the Class
III/IV spread and advanced pricing.
In its brief, MIG argued a return to the higher-of mover will not
help Class I handlers in competing for milk supply
[[Page 57603]]
as a higher pool obligation detracts from the incentive to service
Class I plants. MIG reiterated hearing testimony that the current
marketplace is sufficiently served using an average-of formula.
Lamers submitted a post-hearing brief in support of retaining an
average-of mover. Lamers argued that because of the small percentage of
Class IV use in the market, Class IV prices should not be a main driver
for setting the Class I price, as an average-of mover is more
representative of the entire manufacturing market. Lamers preferred the
lower of the Class III and IV prices should be used when setting the
mover as they believe the higher-of artificially raises Class I prices
to consumers.
NMPF presented numerous witnesses who testified in opposition to
the continuation of the average-of mover, embedded in the summary of
their testimony and post-hearing brief presented above. An SMI witness
opposed a modified average-of mover, testifying it would result in
revenue losses to dairy farmers because the Class I price is paid back
to dairy farmers over time and would not compensate dairy farmers that
have exited the business.
Select expressed opposition to Proposals 14, 15, and 16 in its
post-hearing brief. Select wrote that the higher-of more accurately
reflects the value of milk in manufacturing classes, better manages
shifts in demand for any one manufactured product, helps reduce milk
price volatility, better addresses class price inversions and
depooling, and makes it more difficult to draw milk away from Class I
uses for manufacturing. Select noted most Class I handlers have not
engaged in milk hedging under the average-of mover, and the average-of
mover creates and exacerbates opportunistic depooling when Class III
and IV prices diverge significantly. Select opined the average-of mover
results in market disorder which they believe would continue until the
higher-of mover is restored.
In its post-hearing brief, the AFBF opposed Proposals 14 and 15,
arguing they do not address the key issue of class price misalignment.
The AFBF believes handlers of all sizes can find alternative methods of
managing risk under a higher-of mover.
A witness representing Edge testified in support of Proposals 16
and 17. The witness advocated for the adoption of Proposal 16, referred
to as a Class III plus proposal, because the Class III price is
typically higher than the Class IV milk price. In times of rapidly
declining dairy prices brought on by a decrease in demand, the witness
said, government recovery efforts typically prioritize more perishable
products, usually Class III. The witness said this would result in
higher Class III prices in relation to Class IV, and consequently a
base Class I skim price under Proposal 16 approximately equal to the
higher-of mover. According to the witness, in situations where the
Class IV skim milk price is higher than the Class III skim milk price,
any lost revenue would be redistributed to producers over the next
three years through the adjuster and would better support dairy farmers
during years of lower profitability. The witness testified risk
management under Proposal 16 is easy to implement and less expensive
due to high liquidity of Class III milk futures, creating more
predictable prices and making fluid milk products competitive with
plant-based beverages. The witness testified Edge would support a
monthly rolling adjuster in place of an annual adjuster.
The Edge witness testified that as Class I utilization rates
continue to fall, advanced pricing would continue to cause disorderly
marketing conditions such as opportunistic depooling. The witness said
advanced prices are antiquated and anti-competitive and their
elimination would encourage fluid plants to use risk management. The
Edge witness entered data showing the contribution of various factors
to negative PPDs. The witness testified that while the change to the
average-of mover tended to make PPDs more negative, advanced prices and
the spread between Class III and IV influenced pooling decisions, not
the adoption of the average-of mover. The witness testified that if the
Class I price was announced at the same time as the Class III and Class
IV prices, it would prevent a for-profit Class I trading relationship
between Class III and Class IV, and the CME group would be more likely
to create a Class I futures contract. The witness expressed a strong
preference for Proposal 16, which they argue balances producer,
processor, and consumer needs and supports risk management which they
said was critical for the success of the nation's dairy farmers,
particularly fluid sector innovators.
The Edge witness also testified in support of Proposal 17,
returning to the higher-of mover without advanced pricing. The witness
said the proposal would allow the Class I futures price to be equal to
the greater of the Class III futures price and the Class IV futures
price. Risk management players would have minimal risk in providing
liquidity to Class I hedgers by spreading their position between Class
I and the higher-of Class III or IV futures. The witness testified
dairy producers may prefer the higher-of mover without advanced
pricing, such as Proposal 17, as it provides real-time maximum income
for Class I milk, whereas Proposal 16 is more of a compromise.
The Edge witness stated that since 2010, total fluid milk sales
have been steadily declining, adding more instability and difficulties
hedging under the higher-of mover. The witness entered data showing how
much more risk and costs were involved to hedge under the higher-of
mover than the average-of mover. The witness concluded a person hedging
with futures contracts under the higher-of mover would have significant
difficulties, but hedging under the average-of mover meets
effectiveness standards required for hedge accounting.
Nine dairy farmer witnesses, located in Wisconsin, Minnesota, Iowa,
and South Dakota, testified in support of Proposals 16 and 17. The
dairy farmers opined Proposals 16 and 17 would decrease the frequency
of negative PPDs and depooling, and enhance their ability to manage
price risk through hedging and other risk-management programs. One
witness said using only the Class III skim price to set the Class I
skim price is the best option because Class III milk futures carry more
liquidity than Class IV and better represent Class I prices. The
witnesses testified Proposal 16 would help keep prices steady,
benefitting both plants and customers.
In its post-hearing brief, Edge objected to what it believes are
goals of some proponents to maximize FMMO Class I handler obligations
in order for the additional revenue to be used to offset the negative
producer impact of increasing make allowances. Edge argued the
Department should consider the following factors in its decision: there
have not been any significant shortages in the supply of beverage milk
to retail stores; Congress' reason for changing to the average-of mover
to facilitate risk management by fluid milk processors which fluid milk
processors testified is still relevant; advanced pricing is outdated
and no longer necessary to facilitate supply chain coordination but
instead facilitates opportunistic depooling; a mover resulting in the
highest fluid milk price when the Class IV price substantially exceeds
Class III is not in the best interest of consumers; and a mover
resulting in the highest fluid milk price when the Class IV price
substantially exceeds Class III is not in the best interest of all
dairy farmers. Edge argued dairy farmers located where Class I
utilization is low may be worse off under a higher-of mover than an
[[Page 57604]]
average-of or Class III-based pricing as proposed by Edge.
Edge reiterated Proposal 16 would facilitate risk management by
fluid milk manufacturers and large commercial buyers, eliminate
outdated advanced pricing and reduce the incidence and magnitude of
opportunistic depooling, and best serve both producer and consumer
interests.
A witness representing the AFBF testified in support of Proposal
18. The witness said the AFBF believes orderly pooling is the key to
orderly marketing, and this is best accomplished by the proper
alignment of the four class prices. The witness claimed advanced Class
I pricing leads to increased Class III component values, a common
factor contributing to negative PPDs. The witness said advanced prices
reflect market conditions that are 25 to 40 days older than final
prices, which are announced after the close of the month. When a market
rally occurs between the announcement of advanced and final prices, the
witness said it leads to low or negative PPDs and creates incentives
for handlers to depool milk. The witness stated depooling results in
elevated component prices not being shared with the pool, further
depressing the PPD and undermining the FMMO principle of uniform
producer prices. The witness testified advanced pricing may also cause
price inversions when manufacturing prices are rising rapidly, making
it difficult for Class I handlers to attract adequate milk supplies.
The witness entered data showing the effects of advanced pricing on
class price alignment from May 2019 to May 2023 under the current
average-of, and under Proposals 13, 17, and 18. The witness said this
data showed many months under the current average-of mover and Proposal
13 in which the manufacturing class prices exceeded the Class I price,
testifying this created disorderly marketing conditions. On the other
hand, according to the witness, the data showed elimination of advanced
pricing under Proposals 17 and 18 resulted in more consistent alignment
of class prices.
The AFBF witness testified the frequency of published commodity
data allows handlers to estimate price changes regardless of when
prices are announced, and as more products are available on the CME or
other exchanges, processors and manufacturers will have information
needed to hedge and manage risk. The witness opined that the
elimination of advanced pricing would allow for the introduction of
Class III and IV spread options, providing an additional way to hedge
Class I milk when both are used in combination. Three dairy farmers
testified in support of Proposal 18, stating the proposal would reduce
the incentive to depool brought on by low and negative PPDs.
The AFBF witness also testified that while they support the
elimination of advanced pricing, they oppose Proposal 16 because it
would delink Class I prices from Class IV prices, which they anticipate
being higher than Class III in the future due to better export markets.
The witness said tying the Class I price to only the Class III price
could operate more like a ``lower-of'' formula. The witness stated the
AFBF supports Proposal 17 because it is identical to Proposal 18 if
combined with Proposal 13.
In its post-hearing brief, the AFBF reiterated its support for a
return to the higher-of mover, which it argued would support class
price alignment and substantially decrease negative PPDs and depooling.
The AFBF reiterated its hearing testimony that volatility has and
continues to increase, contributing to price inversions and rapidly
changing markets, resulting in competitive inequalities among dairy
farmers. The AFBF said the CME has indicated a willingness to provide
contracts catering to industry demand, and the fact that the industry
is used to advanced pricing should not be a driving reason for its
retention. The AFBF argued disorderly marketing conditions are present
when producers do not receive uniform prices because of frequent
depooling, and its proposals lead to the realignment of class prices,
which encourage consistent pooling and uniform pricing.
An SMI witness, appearing on behalf of NMPF, testified in
opposition to elimination of advanced pricing as contained in Proposals
16, 17, and 18. The witness said 90 percent of packaged fluid milk is
highly perishable HTST milk which is processed, packaged, distributed,
and sold in a relatively short period. The witness said these marketing
characteristics require the price of the product to be known at the
time of purchase, which advanced pricing of Class I milk provides.
According to the witness, most HTST packaged fluid milk is priced
monthly by fluid processors to their customers based on monthly FMMO
Class I prices. This is materially different from cheese and butter
products, the witness said, the prices of which are typically based on
CME daily cash prices. According to the witness, advanced pricing
enables retailers to set store milk prices at the beginning of a month,
allowing the fluid processor to know the price the plant would receive
for the packaged fluid milk prior to the raw milk being processed,
packaged, and sold.
The SMI witness also testified that if advanced pricing was
eliminated, retailers would not know their fluid milk costs until the
end of the month when FMMO Class I prices are announced. This would
mean most fluid milk purchased by retailers would be sold during the
month without knowing its minimum regulated price which, the witness
said, from a retailer's perspective is not orderly marketing. The
witness claimed that if there were significant month-to-month increases
in the Class I price, retailers could seek price relief from the
processor, and ultimately, cooperative suppliers, opening the potential
for fluid milk processors in the same marketing area to have
inequitable raw milk costs and non-uniform payments to producers. In
its post-hearing brief, NMPF reiterated its opposition to the
elimination of advanced pricing.
A witness representing IDFA opposed Proposals 16, 17 and 18. The
witness objected to the elimination of advanced pricing as it would
result in Class I handlers pricing milk products to their customer
before knowing the minimum regulated milk price and impact a handler's
ability to hedge. In its post-hearing brief, IDFA supported the feature
of Proposal 16 that would create a predictable Class I price that could
be hedged based off a hedged Class III price plus a known adjuster.
However, IDFA maintained its opposition to the elimination of advanced
pricing, arguing it is essential for non-hedging Class I handlers to
know their milk cost before the start of the month. It is also an
important part of planning for fluid milk retail customers to market
milk, IDFA stated. IDFA noted in its brief that traditional fluid milk
retail customers are not yet using hedging sufficiently to permit a
regulatory change eliminating advanced pricing. IDFA reiterated their
total opposition to Proposals 17 and 18 in that they would return to a
higher-of mover and, according to the brief, eliminate any practical
ability to hedge.
A MIG witness testified in opposition to eliminating advanced
pricing. The witness said the industry is not yet using hedging
sufficiently to permit this regulatory change, as advanced pricing
remains critical for the dominant share of the fluid market as
retailers expect to know the price in advance. The witness also opposed
Proposal 16, which would price Class I milk solely off the Class III
price. The witness said the proposal would delink the fluid milk supply
and demand from Class IV which MIG believes is critical for balancing.
The witness opposed Proposals 17 and 18 as
[[Page 57605]]
they limit risk-management opportunities for Class I processors. In its
post-hearing brief, MIG reiterated its opposition to any proposal
(Proposals 16, 17, and 18) seeking to eliminate advanced pricing, which
MIG claimed is critical to Class I processors. MIG further argued that
eliminating advanced pricing would negatively impact those market
segments. With respect to Proposal 16, MIG expressed concern with
pricing Class I milk solely off Class III prices as it would be a
significant departure from the current practice and completely divorce
fluid milk supply and demand from the Class IV market. According to
MIG, the record contains testimony from cooperatives that Class IV
remains the ultimate balancing utilization.
In testimony and in its post-hearing brief, MIG opposed a return to
the higher-of mover under Proposals 13, 17, and 18 as it would severely
limit risk-management opportunities. MIG argued in its brief that a
return to the higher-of is unnecessary and not supported by the facts
as the industry has acknowledged the higher-of does not work. Dairy
farmers' concerns are not about the average-of, MIG asserted, but
rather the fixed $0.74 addition. USDA should support moving the
industry forward, not revert to an outdated policy because it is
familiar, MIG stated.
MIG argued NMPF introduced no evidence the average-of mover hinders
a sufficient supply of milk for fluid uses. Rather, MIG wrote, a return
to the higher-of mover would result in disorderly marketing as larger
spreads between Classes III and IV would lead to higher prices under
the higher-of mover and raise the uniform price, incentivizing the
lower-priced manufacturing milk to remain pooled. In that situation,
MIG argued, FMMOs should not be raising the uniform price paid out to
the lower-priced manufacturing class, thus, encouraging it to remain
pooled. This compensation, argued MIG, overvalues the lower-priced
manufacturing milk in the marketplace and incentivizes milk to move to
the lower manufacturing class instead of to a higher performing class.
According to MIG, the average-of mover would better move milk between
the manufacturing classes as the market needs. MIG argued the FMMOs are
designed to ensure processors have sufficient milk supplies for fluid
use, but FMMOs should not be drawing milk away from Class III or IV
when a manufacturing use would be the highest and best value for the
milk. According to MIG, Class I does not need more milk, and FMMOs
should not be disrupting the market to pull milk for fluid utilization.
MIG argued in its brief that revenue neutrality is not a valid policy
consideration without evidence to establish revenue neutrality is
necessary to ensure a sufficient supply of fluid milk.
A witness representing Lamers testified in opposition to the
elimination of advanced pricing in Proposals 16, 17, and 18. The
witness stated Class I handlers need to know prices in advance so they
can set wholesale pricing with their retail customers.
In its post-hearing brief, Select opposed the elimination of
advanced pricing set forth in Proposals 17 and 18, arguing that
testimony at the hearing made clear that the majority of producers
prefer using the higher-of, and the majority of handlers prefer to
maintain advanced pricing which Select believes is in the best interest
of stability in the Class I market.
Class I and Class II Differentials
Numerous witnesses appeared on behalf of NMPF testifying in support
of increasing the Class I differentials as provided for in Proposal 19.
Witness testimony centered around the themes of increased hauling
costs, changes in milk supply and demand locations, changes in supply
patterns resulting in longer hauls, and insufficient over-order
premiums to cover the full cost of servicing the Class I market. The
witnesses said the outdated assumptions embedded in the current Class I
differentials threaten the willingness of milk suppliers to serve the
Class I market.
An NMPF witness argued current differentials are antiquated, since,
other than the three southeast FMMOs, they have not been updated in
almost 25 years. In that time, they said, fuel costs and hauling
distances have increased due to changes in supply and demand locations.
The witness stressed over-order premiums should not be considered an
effective substitute for FMMO prices because they are very difficult to
obtain and maintain at levels adequate to cover the cost of servicing
the Class I market. The witness argued inadequate Class I differentials
contribute to price inversions and incentives to depool, which further
jeopardize the availability of milk to meet Class I demand.
The NMPF witness described the methodology used to arrive at the
proposed differential levels. According to the witness, NMPF requested
an update of the U.S. Dairy Sector Simulator Model (USDSS) which was
used during Order Reform as a basis for the differential levels adopted
January 1, 2000.
The USDSS model owners testified on the USDSS methodology, the
updated data and parameters, and explained the results. They explained
the USDSS model evaluates the geographic value of milk at fluid milk
processing plants across the U.S by finding the lowest cost solution of
assembling milk at farms and delivering it to plants. They said the
model accounts for approximately 90 percent of the U.S. dairy
processing and manufacturing plant capacity, and considers such factors
as milk supply locations, transportation costs (both variable and
fixed) associated with raw milk assembly, final and intermediate
product distribution, per capita demand by county population, and road
weight limits. In the model, plant capacity, products produced, and
milk components demanded at each plant are constrained by a variety of
government and private sources. The resulting values, said the
witnesses, represent the value of an additional load of milk at a
specific plant location (otherwise known as the ``marginal value'').
The witnesses said two sets of USDSS results were provided to NMPF,
May and October 2021, to provide marginal values for both flush and
deficit months. According to the witnesses, the results suggest
considerable differences between the values of milk at fluid plants
derived from spatial economic modeling and current Class I differential
values, with differences as large as $3.00 per cwt in some locations.
The witnesses attributed these differences to changes in the location
of milk production, the composition of dairy product demand, changes in
the location of dairy product demand from regional population shifts,
and the cost of transportation. Both witnesses discussed how modeling,
even though complex, is a simplification of reality and that there may
be unaccounted factors in some areas that would justify deviations from
the model results, including local traffic congestion, geography,
infrastructure restrictions, and price alignment across orders. The
witnesses said the model does not account for other factors, such as
existing business relationships and FMMO regulations, because they
could cause a departure from a market efficient solution. Lastly, the
witnesses noted the USDSS does not produce a base differential value;
it merely provides the additional value needed to move milk to a
particular location.
While NMPF cooperative member witnesses testified on how they used
the USDSS results to arrive at the proposed differentials, NMPF
witnesses stated they followed the same iterative process applied
during Order Reform, starting
[[Page 57606]]
with USDSS results and adjusting for milk movements, plant locations
and historic price relationships.
One witness said NMPF started with a base differential assumption
of $1.60 per cwt, as currently contained in the Class I differentials.
The witness said the costs embedded in the base differential (Grade A
maintenance, balancing, and a competitive factor) are still applicable
and those costs have not decreased over the past 25 years. The witness
said the base differential should also serve to limit class price
inversions, incentivize Class I milk deliveries, and ensure class price
alignment. To accomplish these goals, the witness said that in some
parts of the country the base differential is recommended to increase
to $2.20 per cwt.
One NMPF witness testified regarding the dairy farmer cost of
maintaining Grade A status. The witness said that in order to
participate in the FMMO program, dairy farmers incur costs associated
with obtaining and maintaining Grade A licenses. The witness was of the
opinion partial cost reimbursement for maintaining a Grade A license,
which currently represent $0.40 per cwt in the base differential,
should continue to be provided. The witness detailed standards for
maintaining Grade A status, which include
[…truncated; see source link]Indexed from Federal Register on July 15, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.