WCMA Notes: Fresh Reasons to Fix Federal Orders

Submitted by John Umhoefer, WCMA Executive Director

Credit International Dairy Foods Association (IDFA) for an honest and fresh look at an old debate – what to do about the rusting machinery of federal milk marketing orders.

IDFA’s new report: “Modernizing U.S. Milk Pricing: An Exploration” falls short of detailed solutions, but candidly describes a fast-changing dairy landscape: “Competitive difficulties brought on by restrictive U.S. price regulation are slowly pushing the industry toward voluntary deregulation in several ways,” the report states.

IDFA, National Milk Producers Federation, Edge Cooperative and others are actively engaged in member discussions to fix federal orders.  Wisconsin Cheese Makers Association has engaged a diverse group of members to explore the subject with their unique expertise in cheese, whey and butter production.

“Voluntary deregulation,” the term coined in the IDFA report, is declining participation in federal order pools caused by shrinking Class 1 (bottled milk) sales, producer and cooperative-based manufacturers able to pay for milk below federal order regulated prices, and proprietary companies departing orders as pool values decline and free market opportunities such as exporting rise.

The key role exports play in the U.S. dairy industry is fresh fodder for the aging debate over flaws in federal orders.

The IDFA report estimates that with current domestic dairy sales and declining production of bottled milk, any milk production growth over 0.75-1.0 percent annually needs to be exported.

Regulated monthly pricing in federal orders conflicts with dairy export opportunities. While federal orders change minimum regulated prices each month, exporting manufacturers are asked to set three- to six-month flat pricing on products often two months before these long-term contracts begin. In contrast, the IDFA report notes, competing countries don’t face monthly regulated pricing. These milk buyers abroad negotiate farm milk prices based on anticipated revenue from future contract sales – the export sale precedes the price established with farms.

For cheesemakers, the report holds that U.S. exports are more likely to come from unregulated manufacturers – plants located in states without federal orders or states where processors are choosing, with greater frequency, to not participate in orders.

And while operating outside of federal order regulation offers a bit more international opportunity for cheese manufacturers, “in many cases, manufacturers operating outside of FMMOs must still compete for milk with firms paying regulated minimum prices,” the report states. Cheese is particularly vulnerable to the connection to federal orders because cheese exports are less storable and more “made to order” than milk powder.

The IDFA report warns that the U.S. remains focused on exporting commodity products that earn, overall, a lower value per pound than dairy exports from New Zealand and the European Union. It states: “International buyers explicitly mentioned that U.S. powder manufacturers are primarily concerned with clearing large volumes of producer-member milk and keeping plants running full rather than focusing on highest-quality, highest-value product.” 

The report notes that federal order pricing and pooling subsidizes production costs of milk powder, driving volumes for export sale. “Simply put,” the report notes, “comparatively low-value products make up a bigger share of U.S. exports.” It cites a weighted average unit price for EU dairy exports per pound at $1.64, compared to $1.14 for the U.S. (2012 through 2020).

America finds itself with excess milk powder to export because federal orders are designed to create uniform payments for all classes of milk, and that choice creates a “powerful incentive to invest in less capital-intensive butter/powder plants,” the report states.

In short, federal orders incent America to produce commodity dairy products, then make long-term export sales contracts riskier to sign.

Make allowances in federal orders add to the argument that the U.S. is incenting commodity production instead of value-added dairy products. Make allowances, particularly allowances that have become woefully out of date, are only sufficient for the largest, most automated plants producing commodity products – commodity cheeses. 

Without a doubt, manufacturers of specialty cheeses face production costs that exceed the current make allowance for cheese. The notion that these manufacturers must find money in the marketplace to meet federal order regulated prices, while other large commodity plants do not, is an inequality: a price signal from a government program to make commodity cheese.

And it gets worse for the specialty cheese manufacturer.  The federal order Class 3 milk price includes a value for dry whey. Because of that, mid-sized cheesemakers are paying farmers for the value of dry whey, but they do not make dry whey. Many value-added cheese factories, particularly in the Upper Midwest, sell skimmed, concentrated or unconcentrated, wet whey to processors who make a final product.

When dry whey prices are high, like now, this value of whey in the milk price must be pulled from whatever extra value cheesemakers are earning for their cheese.  It’s another very real signal that producing value-added cheese comes with a government-set, federal order penalty.

IDFA’s observations on the negative effects of federal orders on higher-value exports, and on value-added innovation in cheese or fluid milk domestically, are a current, candid take on the need to update federal orders or watch “voluntary deregulation” take hold.