June Negative PPDs Total $528 Million
July 28, 2020
The negative Producer Price Differentials (PPD) that resulted from the skyrocketing cheese and Class III prices in June totaled $528 million, according to analysis by the American Farm Bureau Federation.
“The difference was largest in California at -$135 million, followed by the Northeast at -$100 million,” says John Newton, AFBF chief economist. California also had the most negative PPD at -$7.91 in June.
“Normally, milk manufacturing plants and cooperatives draw revenues from the Federal Milk Marketing Order (FMMO) pool to pay the regulated minimum milk price to their producers,” explains Newton. “However, when the manufacturing milk price exceeds the Class I milk price, there is an economic incentive not to pool manufacturing milk to avoid paying into the FMMO pool.
“Handlers and cooperatives de-pooling can then keep the proceeds from the sales of higher-valued dairy commodities instead of paying into the pool. With these funds, cooperatives and handlers can pay higher prices to their producers through higher premiums or a 13th check, use it as retained equity, or use it to offset anticipated or previously incurred operating, marketing or balancing costs,” he says.
Newton notes that across the 7 Federal Order that use component pricing, there was 4.7 billion pounds less milk pooled in June 2020 than June 2019, a decrease of 37%. The Upper Midwest had 66% less milk pooled this June compared to last year.
This likely will not be a one-off issue, says Newton. Large negative PPDs are expected in July and into the fall months.
There is no short-term fix in the offing, either. Some alternatives being discussed include eliminating advanced pricing in the FMMO formulas, reconsidering the fixed 72₵/cwt “higher of” component in the formulas or requiring mandatory pooling of milk in all classes. Any changes, however, require amending FMMOs.