Dairy cooperative introduces milk pricing reform
Jun 28, 2022
Priorities center around flexibility and fairness for producers and processors in current milk marketing order.
After more than a year of research conversations with its members, participation in a multi-state task force and engagement with other stakeholders, one of the nation’s largest dairy co-ops, Edge Dairy Farmer Cooperative, unveiled two key policy priorities for milk pricing reforms centered around flexibility and fairness.
Discussions about the future of the federal milk marketing order (FMMO) system have increased in recent years, drifting from the Class I mover formula to negative producer price differentials (PPDs) to make allowances and beyond. The effects of the pandemic only intensified the debate.
“What we keep coming back to is the relationship between our farmers and processors,” shares Edge CEO Tim Trotter during a press conference June 27 announcing the priorities. “That relationship must transition from strictly transactional to strategic ― one that is based on a longer-term view, adaptability to markets and customers, and requirements for products. A transparent, business-to-business approach will be critically important to success for both farmers and processors.”
Under the flexibility priority, Edge’s proposal accounts for differences in product mixes across the country, explains Mitch Davis of Davis Family Dairies in Le Sueur, Minn., who is a member of Edge’s board of directors and participated in the task force.
“We believe more regional flexibility and federal milk marketing orders would benefit everyone,” Davis says. “We believe that regulation should support fair and equitable dealings between farmers and processors.”
Davis explains in Edge’s proposal, each federal order would have the authority to operate its milk order in a way that makes sense, which to some extent is already done. But this would account for geographic differences in population, farmer base and product mix. The flexibility would help avoid unintended consequences of the current uniform rules, such as frequent switching, pooling status, and negative producer price differentials because of declining share of total milk production pooled on that order.
“It’s about modifying incentives for processors to stay consistently pooled in the order, and at the same time offering producers more certainty and effectiveness when they manage risk so they don’t have the nonsense that we had in 2020 with negative PPDs completely surprising producers out of the blue making them feel like food for getting engaged with risk management materials,” says Marin Bozic, a leading dairy economist who is an advisory member on Edge’s board of directors and also recently testified before the House Agriculture Committee on dairy farm bill provisions.
Keeping FMMOs relevant
Bozic explains the original purpose of FMMO regulations was to ensure that all dairy producers in a certain geographic area can participate in revenue from the sales of beverage milk products. The problem is that over the next 10 years, the share of milk production utilized in beverage products is likely to fall from 18.3% this year to 14.5%, Bozic says.
“My estimates are that over the next decade between 45% and 60% of all additional milk skim solids will need to be exported,” he says.
“The only way that FMMOs do not become irrelevant to the cheese-producing Upper Midwest is if we return to the original idea of FMMOs,” he says. “That is the essence of a ‘uniform benefits’ approach. No more cross-subsidization between manufacturers, and no more negative PPDs.”
Bozic says he heard many common themes from producers on changes they seek. “They want to have fair treatment and a good faith relationship with a buyer of their milk. They want to understand how the buyer of their milk is performing relative to others in terms of the milk price that they’re getting paid. They want to understand their milk check, and once they understand their milk check, they want to effectively manage price risk.”
Agriculture Secretary Tom Vilsack has said industry consensus is necessary for pricing reform to be possible. Bozic adds that the 2018 Farm Bill process shows that consensus should not be so narrowly defined and crafting policies behind tightly closed doors creates a fragile and flawed design.
Trotter says the policy proposals from Edge offer a starting point for conversations, but also offer the ability to frame up what the cooperatives believe needs to go “big picture with this if we really want to look to the future of dairy generations for the generations to come.”
Bozic says some of these principles are being implemented through federal orders, for example, timely payments for milk verification of weight-tested samples.
“The challenge for the long-term sustainability of that approach is that processes can decrease as manufacturing rises,” he explains. “That’s why we believe that perhaps there was a need for a separate statute that will specifically provide some meaningful guardrails to the relationships between dairy processors and producers.”
Trotter says right now the industry is paying the price for not having a big picture read and these guardrails outside of the federal order. “As long as we stay focused on the future, we believe that this will definitely be a win-win for all.”
Bozic says enabling legislation to the federal milk marketing order may need to just be a slight tweaking to allow orders to be formulated differently than the uniform price principle. The other statute, which could be within the farm bill discussion or a separate stand alone bill, is the premise and contracting portion of the policy priorities.
The proposal also calls for a standard set of “contracting principles” to make the pricing system more fair and equitable and strengthen trust between farmers and processors. This includes the following priorities:
Written contracts: All milk supply agreements must be in writing.
Timely payments: Farmers must be paid in a timely manner, every two weeks, and with no more than three weeks lag. Advance checks should be paid in accordance with what is known about the current month’s prices.
Verification of weights, tests and samples: Unless a farmer opts out, third-party, certified organizations should be utilized to verify milk weights, component tests and samples. Verification organizations are also allowed to provide other services to farmers.
Transparent pricing formulas: For farmers to be able to effectively manage risk, and understand financial implications of improvement in farm practices, milk composition and quality incentive formulas (such as SCC, protein and volume premiums) must be clearly spelled out in the milk supply agreements, and sufficient advance notice given before incentive formulas change. Processors should be allowed to set pricing formulas as needed to successfully compete in domestic and overseas markets.
Contract termination notice: Other than in extraordinary circumstances, processors must give a reasonable amount of time as notice before contracts can be terminated.
Good faith principle: Processors and farmers must act in good faith, and disputes should be addressed through an arbitration process with meaningful penalties for unfair behavior.
Equal opportunity for all farmers: No special deals should be allowed. Incentive payments offered to one patron must be offered to all patrons meeting the processor’s same criteria, including but not limited to differences for farm location, size and quality.
Competitive risk management: Farmers should be able to effectively manage price risk using a combination of processor-specific basis contracts and private or government-supported risk management instruments.
Exclusivity and volume limits: Processors should not impose exclusivity if imposing volume limits or two-tier pricing.
Equal treatment of processors: These terms should apply to all milk buyers in the United States, irrespective of their ownership structure or participation in FMMOs.