Negative PPDs Persist Post Pandemic

from Jersey Journal, August 2021

Summary of June AJCA, NAJ Board Meetings

Excerpts from the report of Erick Metzger, General Manager National All-Jersey Inc. (NAJ) at the 63rd Annual Meeting of the organization on June 26, 2021, in Bettendorf, Iowa.

Though most of agriculture is returning to more normal conditions post pandemic, the dairy industry is still experiencing long-term fallout due to negative Producer Price Differentials (PPDs) and de-pooling. As well, momentum is gaining for an overhaul of Federal Milk Marketing Orders (FMMOs) so the system better reflects industry trends. It is as important as ever for Jersey breeders to come together through an entity like NAJ to ensure the interests of high component producers are represented in dairy policy.

State of the Industry

The single most important thing to know is that we are producing a lot of milk—record levels of milk, in fact. May production was up 4.6% over last year and 4.2% over 2019. We produced more milk this May than we have since USDA has been tracking production. Cow numbers are way up too, with more than 9.5 million cows (up 145,000 over May 2019). And there appears to be no end to the growth, with an additional 5,000 in May versus April.

If the U.S. continues to crank out milk at this pace, demand, principally as exports, will need to continue too. Exports have been strong the first half of the year, especially to China, and world prices are favorable. Last month, the Global Dairy Trade auction, a proxy for world prices, reported cheddar prices $0.45 per pound higher than the Chicago Mercantile Exchange (CME). Butter was $0.30 higher and skim milk powder was $.25 higher. Based on these prices, the U.S. should have ample export opportunities.

Negative PPDs

Negative PPDs and de-pooling have had great impact on milk checks over the past

year. Though we have seen negative PPDs drops further and causes even greater negapreviously, they have largely come and gone tive PPDs. In our example, if 200 million in short order. This time, they have hung pounds of Class III milk dropped to 10 around. The PPD average across the seven million pounds of pooled Class III milk, the FMMOs has been negative 10 of the past uniform price would drop to $12.97 and the 11 months. In the California and Pacific PPD to -$8.00. Northwest Orders, the PPD has been nega- This is what happened in Federal Order tive 11 straight months. after Federal Order, month after month, Negative PPDs occur when the FMMO over the past year. Class III price is greater than the uniform And while de-pooling was certainly a price (a weighted average of Class I, II, III great contributor to negative PPDs, even and IV milk). In normal circumstances, more impactful was the spread between the the uniform price is greater than the Class Class III and Class IV price, according to an analysis by Dr. Marin Bozic Calculation of Producer Price Differential of the University of MinJUNE 2020 - POOLED nesota and Dr. Christopher Wolf of Cornell University. Class Pooled Pounds Utilization Price Pooled Value For the first five months Class I 50,000,000 15.6% $11.42 $5,710,000 of 2020, the spread averClass II 20,000,000 6.3% 12.99 2,598,000 aged a relatively normal Class III 200,000,000 62.5% 21.04 42,080,000 $1.14 per hundredweight. Class IV 50,000,000 15.6% 12.90 6,450,000 In this situation, Class I Total 320,000,000 $56,838,000 milk was the highest priced Uniform Price/Hundredweight PPD 17.76 (3.28) in the pool and resulted in a positive PPD. But the rapid runup of Class III JUNE 2020 - DEPOOLED milk prices after the first six Class Class I Class II Class III Class IV Pooled Pounds 50,000,000 20,000,000 10,000,000 50,000,000 Utilization 38.5% 15.4% 7.7% 38.5% Price $11.42 12.99 21.04 12.90 Pooled Value $5,710,000 2,598,000 2,104,000 6,450,000 weeks of the pandemic disrupted that balance. Cheese prices that were previously $1 per pound on the CME were trading at $3. However, Class IV prices for Total 130,000,000 $16,862,000 butter and nonfat dry milk, Uniform Price/Hundredweight 12.97 which determine the Class PPD (8.07) IV price, did not follow suit. The last seven months III price and the PPD is positive. But we of 2020 yielded an average spread of $7.20 have had anything but normal price rela- between Class III and Class IV prices. With tionships since the onset of the pandemic. a spread that large, the uniform price canThe example above illustrates how a lower not be higher than the Class III price, and uniform price ($17.76) and a higher Class a negative PPD will result. III price ($21.04) equates to a negative PPD Also contributing to the negative PPDs (-$3.28) for June 2020. was a restructure of the Class I price forWhat compounds the PPD issue is de- mula. With the 2018 Farm Bill, the formula pooling, whereby handlers of Class III milk was changed from being the higher of Class have the option to keep their milk in the III or Class IV to be the average of the two, pool or not. They can keep their milk in the plus $0.74 (the historical difference bepool and pay the FMMO the equivalent of tween Class III and Class IV milk). Though the negative PPD ($3.28) so all producers traditional price relationships support posican be paid the uniform price ($17.76). Or tive PPDs, recent months cannot. they can take that milk out of the pool— de-pool it—and pay the going rate. When Estimating the Value of De-Pooled Milk widespread de-pooling occurs, significant What is the value of that de-pooled milk? amounts of the higher-priced Class III milk And why does it matter? are pulled from the pool. The uniform price (continued to page 34)

At the AJCC Research Foundation auction, $16,065 was bid for items in the annual sale held June 24, 2021, at the 153rd Annual Meeting of the American Jersey Cattle Association (AJCA) and National All-Jersey Inc. (NAJ) held in Bettendorf, Iowa. Established in 1967, the AJCC Research Foundation is a 501(c)(3) permanent trust operated exclusively to promote and sponsor scientific Jersey-specific research in the dairy industry.

More than 150 Jersey enthusiasts were in attendance to enjoy dinner and a social hour before being called by auctioneer Todd Woodruff, Urbana, Ohio, and AJCA Executive Secretary and CEO Neal Smith, to support the cause funding Jersey-specific research. The sale consisted of a live and silent auction with a total of 39 unique items. At the end of the live lots, the silent items were brought up for any additional bids before they were declared sold.

Much excitement was in the room as the items began to tick off the sale order. Prices were steadily flowing at $1,500, $1,000, $1,300 and then came Lot 9 of the live auction—the #1 edition of a sculpted Jersey cow created by Iowa’s own Norma “Duffy” Lyon. It was a donation from the personal collection of the late Maurice Core (executive secretary of the association), and his wife Carol Core.

Bids quickly escalated to $2,000 before it came down to just two bidders—Paul Chittenden, Schodack Landing, N.Y., and the Lyon family of Iowa. In the end, it was past AJCA President Paul Chittenden placing the final bid of $2,500.

Long-time supporters of the auction, Duane and Roslyn Norman, Fulton, Md., donated the next high selling lot—choice of two original 36 x 24 acrylic paintings on canvas by artist Thais Cassel. Janice and Benny Rector, Dalhart, Texas, placed the final bid of $1,000 on the choice and then asked Norman if he would consider selling both. He thought for a moment and nodded his head yes. The two beautiful paintings “Summer Memories” and “Your Highness” will now reside with

This sculpted model cow—#1 in the series—created by Iowa’s own Butter Cow Lady, Duffy Lyon, sold for $2,500 to top the research auction. the Rector family.

Donna Phillips, Newton, Wis., added to her Lowell Davis collection with “Blossom, The Grass is Greener” figurine. She paid $1,500 for the hand-painted porcelain. The artist, Lowell Davis, used Jerseys from the J.B. Kunkel herd, Carthage, Mo., as his models. His works are highly-sought after for their unique style and feel. The piece was donated by the American Jersey Cattle Association. She and her husband, Dan, also purchased two pieces of the Crown Devon Series—cream and sugar set and a condiment jar for a total of $510. The cream and sugar set was donated by Linda Peterson, Greenwich, Ohio.

Ted and Cheryl DeMent of Kenney, Ill., are two more long-time supporters of the AJCC Research Foundation. Their beautifully crafted woodburnings garner much attention each year. This year they created the front-view of “The Jersey” for a one-ofa-kind antique ironing board. The piece kicked off the sale and found brother and sister—Scott Bohnert and Tara Bohnert Yoder—bidding against each other to take the piece home. Eventually big brother, Scott, won the battle and took the ironing board home to East Moline, Ill., for his household for $1,300.

An antique Elsie galvanized milk box cooler, donated by Wes and Brenda Snow, Brookfield, Vt., brought the fourth high price of $1,100. Margaret (Stevens) Sennett, Waynetown, Ind. Margaret is the daughter of Lowell Stevens the 2021 recipi-

Duane and Roslyn Norman, Fulton, Md., consigned the sale’s second high-seller, a pair of Thais Cassel acrylic on canvas.

Blossom: The Grass is Greener figurine sold for $1,500 as the third high seller of the evening to Donna Phillips.

A woodburnt ironing board featuring The Jersey and a galvanized Elsie Milk Bottle cooler were two of the highlights of the AJCC Research Foundation Auction in Bettendorf, Iowa. ent of the Award for Meritorious Service. The remaining items in the live auction were purchased by Tara Bohnert Yoder (Beswick cow and bull); Larry Place, Perry, Mich., (stamp set featuring 250 years of Jerseys in the United Kingdom); Todd Woodruff, (Vintage Elsie advertisement featuring the birth of her twins, donated by Grand Central Jerseys LLC, Bristow, Iowa); John Boer, Dalhart, Texas, (Marlu Dispersal Catalog, donated by Ray and Margaret Schooley, Niangua, Mo.); Bruce and Laura Vanderveen, Sharon, Wis., (Jersey a print from the California Dairy Industry Advisory Board); Veronica Steer, (custom-made wooden golf ball cage made and donated by Dr. Joe Lineweaver, Blacksburg, Va., and The Jersey Review donated by Ray and Margaret Schooley); Rodney Hodgson, Shawano, Wis., (The Dairy Queen, signed by Derrick Frigot); Jerry Emerich, Mooers, N.Y., (Curtiss Candy Breeding Box, donated by Grand Central Jerseys LLC); Roger Owens, Frederic, Wis., (The Milkmaid); three paintings by Rozann Henning, donated by the Iowa Jersey breeders were purchased by Janice and Benny Rector, Roger Herrera, Hilmar, Calif., and Kathy Lyon, Wilton, Iowa; Bradley Taylor, Boonsboro, Miss., (20 units of Sooner Centurion semen, donated by Cedarcrest Farms, Faunsdale, Ala.); Garry Hansen, Canby, Ore., (10 ampules of Milestones Generator semen, donated by Cedarcrest

(continued from page 32)

NAJ estimated the value by comparing the volume of pooled milk in 2020 versus 2019 and then applying that price across the seven Federal Orders over the past 12 months. In all, more than $6 billion worth of Class III milk was de-pooled from June 2020 through May 2021.

This is significant because the de-pooled milk still had value in the market, but not in announced Federal Order prices and thus not in producer paychecks. The financial hardship of negative PPDs experienced by producers over the past year has run the gamut.

Independent producers who sold to cheese plants were sometimes paid full value for their product. Other times, the cheese plant offset the negative PPD by splitting the difference. Other times, producers felt the full brunt of negative PPDs.

Cooperatives, which market 80-85% of the country’s milk, likely received the full value of Class III milk from cheese plants. They had three options for passing along the value: retaining it as earnings; paying premiums to producers; or lessening the impact of the negative PPD with a milk check somewhere in between.

For producers, this value is also important because it impacts risk management strategies. Most often, producers are protecting against a decline in the price of Class III milk. When Class III prices increase, an indemnity is not received nor expected. In this market, high component producers should be capitalizing on high cheese prices. But they are not because of negative PPDs and de-pooling.

Where Are We Headed?

The Federal Order system has been tweaked, but not overhauled since 2000 through Federal Order Reform. Numerous issues are now accumulating for modifications.

Among the proposals is one to revise the Class I price. Some want to move back to the old system. Others say the current formula will work itself out in the long term. Still others want to maintain the average but update the adjuster every two years. Given recent trends, the adjuster would be $1.63 rather than $0.74. Or, if we want Class I milk to be priced higher than Class III milk, we should base Class I on Class II and eliminate Class IV from the equation altogether. There are many worthy concepts that will be considered in the next 18 months.

Another issue on the table is makeallowances for cheese, butter, nonfat dry milk, and dry whey, which have not been updated since 2008. Manufacturers argue make-allowances have not kept pace with costs of processing. Producers argue yield factors are out of date too. The current cheese yield formula assumes 90% of butterfat is utilized for cheese and the balance ends up as whey. However, modern, efficient cheese plants are recovering 94-95% of butterfat.

And finally, from a conceptual standpoint, can we continue a system designed around fluid sales, which is what the Federal Order system is designed to do? The market is changing. In 2000, bottling accounted for 33% of milk produced. Last year, just 20% was used for fluid consumption.

The dairy industry will need to decide how change comes about and the most efficient way to make it happen, be that through Federal Order hearings or the 2023 Farm Bill. Because there is going to be a lot of debate on these issues, high component producers need to have a voice in dairy policy, like NAJ.

Other Developments

NAJ encourages dairy producers to get on board with Dairy Margin Coverage. During the first four months of 2021, a dairy producer would have received just under $9,000 in indemnity payments for each one million pounds insured at the $9.50 coverage level. The annual premium for all of 2021 would be just $1,500 for one million pounds. It is too late to enroll for 2021. But be sure to get enrolled for 2022.

The A2 milk research study by Purdue University is now complete. The analysis took longer than expected due to issues with documenting lactose intolerance. While 853 people with suspected lactose intolerance applied for the trial, just 36 were diagnosed as actually being lactose intolerant. The study of four different milks—conventional, lactose-free, Jersey milk and A2 milk—showed little difference between Jersey milk and conventional milk. A2 milk produced lower hydrogen after consumption (a pre-curser to digestive comfort) as compared to conventional milk and lower total digestive discomfort. Research did show a benefit of A2 milk.

Given the low frequency of the A1 gene in Jerseys, there is no reason not to breed away from it. As well, the number of consumers who believe they are affected is significant, presenting a marketing opportunity for A2 milk.

Finally, it is time to update the sustainability study published by Jude Capper and Roger Cady in 2010. Their research at that time showed that Jerseys had a 20% lower carbon footprint than Holsteins when milk was used to make cheddar cheese. A lot has changed in the years since. Production and components for both Holsteins and Jerseys have increased. On an energy corrected milk basis, Holstein production is up 3,196 lbs. milk (12.3%). Jersey production is up 3,722 lbs. (17.3%). And while the increases are a great starting point, we need to keep in mind they may be partially attributed to increases in cow size and feed intake, which negatively impact sustainability. A proposal to update the study will be formalized in the coming weeks.

As always, NAJ thanks Jersey breeders for their continued support. Remember, we are just a phone call away for help with milk marketing issues.