May 21, 2024
The Honorable Glenn ‘GT’ Thompson The Honorable David Scott
Chairman Ranking Member
House Agriculture Committee House Agriculture Committee
1301 Longworth House Office Building 1010 Longworth House Office Building
Washington, DC 20515 Washington, DC 20515
Dear Chairman Thompson and Ranking Member Scott,
We write to voice strong support for the language you have included in the House farm bill to restore the previous “higher of” formula in the pricing of fluid milk under USDA’s Federal Milk Marketing Order (FMMO) program. The current formula has not performed as intended in multiple economic climates, costing dairy farmers nationwide over the past five years more than $1 billion in Class I skim milk revenue that they would not have lost under the previous formula.
The Class I mover is the formula used to compute the base Class I (fluid milk) skim milk price under the FMMO system. This system uses classified pricing and milk pooling to determine the minimum price of milk that processors pay to dairy farmers in most of the United States. USDA classifies milk into four classes, with Class I used for fluid milk products; Class II for soft products (ice cream, yogurt, etc.); Class III for cheese and whey; and Class IV for butter and dry products (nonfat dry milk, powder, etc.). The FMMO system is intended to promote orderly marketing conditions for milk while ensuring stable incomes for farmers and an adequate supply of milk for consumers.
Prior to the 2018 Farm Bill, the Class I mover was based on the higher of the Class III or Class IV price each month, commonly called the “higher of” formula. Dairy farmers supported that “higher of” formula, but fluid milk processors sought to modify it so that they could better manage price risk. Dairy farmer cooperatives and proprietary processors agreed to restructure the mover as the monthly average of the Class III and Class IV prices, with a $0.74/cwt. adjustment factor added to that average. The goal was to develop a mover that would allow processors to better hedge against risk while still paying farmers a similar price for their Class I milk, meaning the new mover was intended to be revenue neutral for farmers. The historical record from January 2000 through August 2017 indicated that this new mover would be revenue neutral for dairy farmers by maintaining roughly the same Class I skim milk revenue as farmers would have received under the higher of mover. The new mover was enacted in the last farm bill and took effect in May 2019.
In 2020, COVID-related policies tilted dairy product demand toward cheese (Class III). This caused a wide chasm between the monthly Class III and Class IV prices, making the average of the two significantly lower than the “higher of” the two, even with the $0.74/cwt. adjustment factor added. As a result, Class I skim milk prices averaged $3.56/cwt. lower during the second half of 2020 than they would have under the previous mover. This dramatically undercut the revenue neutrality that formed the foundation of the new mover, undermined the orderly marketing of milk, and represented a net loss to dairy producers of more than $750 million in Class I skim milk revenue from July through December 2020.
Then, in 2022, a long period of tight milk supplies pushed Class IV prices notably higher than Class III prices. This occurred because cheese and whey plants received relatively adequate milk supplies while butter and nonfat dry milk plants played their traditional balancing roles, resulting in less production and tighter supplies. As a result, the spread between Class III and IV widened sharply once again, and dairy farmers lost roughly $250 million in Class I skim revenue that year.
The story continued throughout 2023 and so far into 2024. Class IV prices have significantly outpaced Class III prices for many months. Last year, the current mover reduced the Class I farmer milk price by $1.02/cwt. in July 2023, by $1.67/cwt. in August 2023, and by $2.03/cwt. in November 2023. Additional losses have piled up each month this year, saddling dairy farmers with a cumulative loss of more than $1.1 billion in Class I skim revenue. Given the nature of the formula there is virtually no opportunity for producers to recoup those losses.
These episodes expose the fundamental flaw in the current mover. It saddles farmers with asymmetric risk. There is a ceiling on how much better the current mover can perform compared to the old mover. That ceiling is 74 cents per hundredweight, which would occur when the Class III and IV prices are identical. However, there is no floor to how much worse it can perform. The current mover may track closely with the old mover, but it will never exceed it by much, so it will not bring in the revenue needed to make up for when it generates significant losses. The asymmetric risk makes these losses effectively permanent, running completely contrary to the intent of the 2018 agreement and making the current mover anything but revenue neutral.
Given the price volatility that persists in today’s dairy markets, the current “average of” formulation will continue to meaningfully cost dairy farmers relative to the previous mover, even with the $0.74/cwt. adjustment factor. Some stakeholders have suggested adding a look-back mechanism to the “average of” structure to help farmers recoup losses later. This would fail to provide farmers with accurate market signals because it would pay farmers based on their milk production one or two years ago, instead of their current milk production. This approach is cold comfort to the many dairy producers who cannot wait years to be paid the money they have previously earned. This runs contrary to the intent of Congress in enacting the mover and undermines the fundamental purposes of the FMMO system.
Dairy producers have included a return to the “higher of” mover as part of a larger petition submitted to USDA for a national FMMO hearing process. However, even if that administrative process plays out in as timely a manner as is possible, a return to the “higher of” would not likely occur until late 2024 or early 2025. Dairy producers need to stop the bleeding as soon as possible.
Therefore, we thank you again for including language to restore the previous “higher of” Class I mover in the next farm bill. The current mover has not performed as was intended, so Congress should restore the “higher of” mover which served producers well for decades, responds quickly to and accurately reflects the marketplace, and encourages the orderly marketing of milk. We look forward to continuing to work with you on this issue as the bill moves forward and we thank you for your years of service and support for dairy industry priorities.
Sincerely,
National Milk Producers Federation
American Farm Bureau Federation
National Council of Farmer Cooperatives
National Farmers Union
Agri-Mark, Inc.
Alabama Dairy Producers
Arizona Dairy Producers Trade Association
California Dairies, Inc.
California Dairy Campaign
Cayuga Milk Ingredients
Center for Dairy Excellence (PA)
Colorado Dairy Farmers
Cooperative Milk Producers Association
Dairy Farmers of America
Dairy Producers of New Mexico
Dairy Producers of Utah
Foremost Farms USA
Georgia Milk Producers
Illinois Milk Producers Association
Indiana Dairy Producers
Iowa State Dairy Association
Kansas Dairy Association
Kansas Livestock Association
Kentucky Dairy Development Council
Land O’Lakes, Inc.
Lone Star Milk Producers
Maine Dairy Industry Association
Maryland & Virginia Milk Producers Cooperative Association
Michigan Milk Producers Association
Milk Producers Council (CA)
Missouri Dairy
Mount Joy Farmers Cooperative Association
Nebraska State Dairy Association
North Carolina Dairy Producers Association
Northeast Dairy Farmers Cooperatives
Northeast Dairy Producers Association
Northwest Dairy Association/Darigold
Ohio Dairy Producers Association
Oneida-Madison Milk Producers Cooperative
Oregon Dairy Farmers Association
Pennsylvania Dairymen’s Association
Prairie Farms Dairy
Professional Dairy Managers of Pennsylvania
Scioto Cooperative Milk Producers’ Association
Select Milk Producers
South Dakota Dairy Producers
South East Dairy Farmers Association
Southeast Milk, Inc.
Tennessee Dairy Producers Association
Texas Association of Dairymen
United Dairy Farmers of Florida
United Dairymen of Arizona
Upstate Niagara Cooperative, Inc.
Vermont Dairy Producers Alliance
Virginia State Dairymen’s Association
Washington State Dairy Federation
Western States Dairy Producers Association
