USDA's FMMO Decision: A Mixed Bag for Dairy Farmers
Tuesday, Jan 7, 2025 4:31 pm ET
ANSC --
FMAO --
The USDA's final decision on proposed amendments to the pricing formulas governing all 11 Federal Milk Marketing Orders (FMMOs) has left dairy farmers with a mixed bag of changes, some beneficial and others detrimental to their profitability. As the industry awaits the results of the USDA referendum, stakeholders are evaluating how these changes could impact milk pricing, market dynamics, and profitability. This article breaks down the differences between the recommended and final decisions, estimates their pricing implications, and highlights key considerations for dairy farmers.
In its recommended decision, USDA increased the protein, other solids, and total (nonfat solids) composition factors but proposed a 12-month delay in their implementation. This meant that while all other adjustments would take effect when the new order regulations are implemented, the increases in composition values would be postponed for a year. USDA claimed this delay would have allowed producers who use risk management tools, such as CME futures and Dairy Revenue Protection insurance, to adjust their positions and mitigate potential financial harm from regulatory changes. However, in their final decision, USDA shrunk the 12-month delay in composition factor implementation by half, to six months. This reduction from 12 months to six months is an improvement but still deprives farmers of revenue during a time when fair compensation should be prioritized. A static analysis of class price formulas from 2020 to 2023 indicates that updating composition factors would have generated an average cumulative annual benefit of $220 million for producers, meaning this delay could cost dairy farmers more than $100 million during the first six months alone.
USDA's final decision introduced additional increases to all four make allowances beyond those in the recommended decision, exacerbating large negative impacts to dairy farmers' milk checks. Make allowances provide for the costs incurred by processors to convert raw milk into finished products, such as cheese, butter, nonfat dry milk (NFDM) and dry whey. These allowances are deducted from the value of raw milk before calculating the prices paid to farmers. Higher make allowances generally result in a lower pay price to dairy farmers, all else being equal. In addition to the increases outlined in the recommended decision, USDA added a $0.0015 per pound marketing cost factor into the make allowances for all four commodities. This addition reflects USDA's determination that post-packaging expenses — such as warehousing, transportation, and maintaining sales staff — are integral to the manufacturing process and had been inadvertently excluded from the recommended decision. In addition to the $0.0015 increase in make allowances across all commodities, USDA revised the methodology for calculating the NFDM make allowance. The recommended decision initially relied on an average of Dr. Mark Stephenson’s 2021 cost of processing survey and 2016 data from the California Department of Food and Agriculture, reflecting California's significant role in NFDM production. However, stakeholders raised concerns about the outdated 2016 data and methodological issues with the 2021 survey. In response, USDA substituted the 2016 data with Dr. Stephenson’s updated 2023 low-cost processing survey results. This change increased the NFDM make allowance by 1.1 cents, even before the addition of the marketing cost factor.
USDA's recommended decision proposed increases to all Class I differentials, except for two counties in southwest Oklahoma. After digesting additional comments from stakeholders, USDA made changes in the final decision to Class I differentials in 37 counties across seven states. The adjustments ranged from a reduction of 10 cents across 22 counties, to an increase in 10 cents across seven counties and an increase of 20 cents in eight counties. USDA claims the adjustments within the final decision reflect updated economic realities and aim to ensure equity among producers and handlers. The changes account for increased transportation costs, the perishability of milk, and market consolidation, which has resulted in fewer plants and greater distances between supply and demand. Localized factors, such as urban service costs and historical price relationships, also informed USDA’s adjustments.
In conclusion, USDA's final decision on proposed amendments to the pricing formulas governing all 11 FMMOs has left dairy farmers with a mixed bag of changes. While the reduction in the delay for implementing increased composition factors is an improvement, the additional increases to make allowances and adjustments to Class I differentials may have negative impacts on dairy farmers' profitability. As the industry awaits the results of the USDA referendum, stakeholders should evaluate how these changes could impact milk pricing, market dynamics, and profitability. Dairy farmers should stay informed and engaged in the process to ensure their voices are heard and that the final decisions reflect their needs and concerns.
In its recommended decision, USDA increased the protein, other solids, and total (nonfat solids) composition factors but proposed a 12-month delay in their implementation. This meant that while all other adjustments would take effect when the new order regulations are implemented, the increases in composition values would be postponed for a year. USDA claimed this delay would have allowed producers who use risk management tools, such as CME futures and Dairy Revenue Protection insurance, to adjust their positions and mitigate potential financial harm from regulatory changes. However, in their final decision, USDA shrunk the 12-month delay in composition factor implementation by half, to six months. This reduction from 12 months to six months is an improvement but still deprives farmers of revenue during a time when fair compensation should be prioritized. A static analysis of class price formulas from 2020 to 2023 indicates that updating composition factors would have generated an average cumulative annual benefit of $220 million for producers, meaning this delay could cost dairy farmers more than $100 million during the first six months alone.
USDA's final decision introduced additional increases to all four make allowances beyond those in the recommended decision, exacerbating large negative impacts to dairy farmers' milk checks. Make allowances provide for the costs incurred by processors to convert raw milk into finished products, such as cheese, butter, nonfat dry milk (NFDM) and dry whey. These allowances are deducted from the value of raw milk before calculating the prices paid to farmers. Higher make allowances generally result in a lower pay price to dairy farmers, all else being equal. In addition to the increases outlined in the recommended decision, USDA added a $0.0015 per pound marketing cost factor into the make allowances for all four commodities. This addition reflects USDA's determination that post-packaging expenses — such as warehousing, transportation, and maintaining sales staff — are integral to the manufacturing process and had been inadvertently excluded from the recommended decision. In addition to the $0.0015 increase in make allowances across all commodities, USDA revised the methodology for calculating the NFDM make allowance. The recommended decision initially relied on an average of Dr. Mark Stephenson’s 2021 cost of processing survey and 2016 data from the California Department of Food and Agriculture, reflecting California's significant role in NFDM production. However, stakeholders raised concerns about the outdated 2016 data and methodological issues with the 2021 survey. In response, USDA substituted the 2016 data with Dr. Stephenson’s updated 2023 low-cost processing survey results. This change increased the NFDM make allowance by 1.1 cents, even before the addition of the marketing cost factor.
USDA's recommended decision proposed increases to all Class I differentials, except for two counties in southwest Oklahoma. After digesting additional comments from stakeholders, USDA made changes in the final decision to Class I differentials in 37 counties across seven states. The adjustments ranged from a reduction of 10 cents across 22 counties, to an increase in 10 cents across seven counties and an increase of 20 cents in eight counties. USDA claims the adjustments within the final decision reflect updated economic realities and aim to ensure equity among producers and handlers. The changes account for increased transportation costs, the perishability of milk, and market consolidation, which has resulted in fewer plants and greater distances between supply and demand. Localized factors, such as urban service costs and historical price relationships, also informed USDA’s adjustments.
In conclusion, USDA's final decision on proposed amendments to the pricing formulas governing all 11 FMMOs has left dairy farmers with a mixed bag of changes. While the reduction in the delay for implementing increased composition factors is an improvement, the additional increases to make allowances and adjustments to Class I differentials may have negative impacts on dairy farmers' profitability. As the industry awaits the results of the USDA referendum, stakeholders should evaluate how these changes could impact milk pricing, market dynamics, and profitability. Dairy farmers should stay informed and engaged in the process to ensure their voices are heard and that the final decisions reflect their needs and concerns.