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Can we get to the source of the PPD problem?

April 12, 2021

Maggie Gilles, Kansas Dairy Farmer

Producer price differentials (PPDs) have headlined many dairy economic discussions throughout the pandemic. As the negative number printed on milk checks went up and up last summer and fall, producers have raised the pertinent question: Should Federal Milk Marketing Orders (FMMOs) be altered to try to manage PPDs from swinging so far to the negative?

“What does it do?” Cornell’s Andy Novakovic questioned the April 7 Hoard’s Dairyman DairyLivestream audience in relation to the purpose of FMMOs.

“It’s a system of rules. It says this is how this system is going to work. It is not a price support,” Novakovic reminded the audience of federal orders. “They (federal orders) were never designed to guarantee that you would get the cost of production.”

The discussion on the purpose and framework of FMMOs is at the heart of the issue with negative PPDs. As Tom Wegner, director of governance and leader development at Land O’Lakes, described it during the webcast, negative PPDs are a symptom of many converging factors that are all heavily intertwined.

“Let’s go to the source of the negative PPDs as more of an issue here,” Wegner proposed. “The great difference between Classes III and IV really tumbled a lot of stuff. Advance pricing has something to do with it, the 74-cent mover fixture has something to do with it, and depooling,” he said, noting the 74-cent mover impacts Class I pricing in federal orders.

“In my mind, we have to make sure we understand what we’re trying to solve as opposed to the thought ‘let’s get rid of PPDs and everyone will be happy.’ It’s the markets and the way the markets are exemplified through this process,” Wegner continued.

When PPDs are analyzed through this lens, it’s a scalpel knife rather than a broadsword that is required to alter FMMOs and find a balance in PPDs.



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