Something to Consider
Proposed Changes to the Class I Price Formula: What Could the Impact Be? BY GARY LATTA
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s of late June, the U.S. Department of Agriculture had not yet received a formal hearing request to address modifying fluid milk price formulas under the Federal Milk Marketing Orders. At this time, three very different proposals have surfaced from cooperative groups. We will take a brief look at them here. The current formula, implemented in May 2019, is the simple average of the announced Advanced Class III and IV prices plus 74 cents. The intent of this new formula was to help minimize much of the uncertainty that existed under the previous “higher-of” formula and maintain revenue-neutrality. The benefits of improved forward planning and hedging for producers and processors under the new formula were embraced by both the International Dairy Foods Association and National Milk Producers Association. The formula change was authorized by Congress in the Farm Bill signed in late-December 2018. The new formula worked as intended until COVID-19 ravaged the dairy marketplace and pushed it into the perfect storm. In March 2020, Class III and IV prices collapsed, as the country went into lockdown. In many areas, milk was being dumped, and cooperatives implemented internal supply management programs. In mid-April 2020, the USDA announced the Coronavirus Food Assistance Program, which directs support to farmers and ranchers, as well as the Farmers to Families Food Box program. Cheese exports were strong to begin with due to previous commitments, and the attractiveness of the low U.S. price for a short time on the international market further increased sales. Within weeks, cheese prices rocketed to record highs. The spread between Class III and IV widened. At times, monthly Class III prices were higher than previously announced Class I prices. High Class III prices incentivized depooling and helped generate negative producer price differentials through 2020. 22 • Northeast Dairy Foods Association, Inc.
In February 2021, the National Milk Producers Federation began releasing comments and ideas to address what it felt was a $725 million shortfall in Class I revenues attributable to the use of the new “average of +$0.74” price formula that was agreed on and implemented in May 2019. NMPF feels that if the older formula (“the higher of”) was still in place, at least $725 million more Class I revenue would have been realized. In other words, all the rise in Class III was not captured under the newer formula, which simply averaged Class III and IV. Had the previous “higher of” formula been in place, Class III cheese would have been the primary driver of Class I fluid and would have increased revenues for producers. NMPF’s plan is to increase the Class I skim milk price mover from the present 74 cents per cwt to $1.63 per cwt for a two-year period to recoup much of the $725 million from the marketplace. We can assume that raising the mover to $1.63, an increase of 89 cents per cwt, will likely increase retail prices at least 8 cents per gallon. According to a NMPF release, the Class I increment (add-on) would be adjusted based on a moving average of the difference between the “average of” and the “higher of” the advanced Class III and IV skim milk pricing factors over the prior 24 months of May through April. Increment adjustments would take place only once every two years based on this moving average, and the adjustment would remain in place for the following 24 months. The increment would not be lower than 74 cents per cwt nor increased if the calculated adjustment were less than 5 cents per cwt. So far, NMPF has not formally submitted its proposal to the USDA. Following NMPF’s idea, two more cooperative Class I formula proposals have stepped forward in the past few months. The simplest of the two is FarmFirst’s proposal to return to the “higher of” formula for calculating Class I fluid prices. FarmFirst Dairy Cooperative is headquartered in Madison, Wisconsin, and represents producers in Wisconsin, Indiana, Illinois, Iowa, Michigan, South Dakota and Minnesota. The
