The COVID-19 pandemic wreaked havoc with milk markets last year, revealing fault lines in federal milk marketing orders. In the aftermath, the industry is now focused on how federal orders can be improved.
“To consider the change an improvement is a really difficult question, and that answer depends on your perspective,” said Al Zolin, manager of Zolin International, a dairy consulting firm.
Dairy farmers would consider price enhancement an improvement. But that higher price might be problematic for processors because it could make them uncompetitive in the market place, he said during the latest “DairyLivestream” webinar.
“Certainly, changes to federal orders sometimes have unintended consequences,” he said.
True improvement in the federal order system would be one that increases the overall total revenue in the pool that is available to satisfy dairy farmers, he said.
It also has to keep processors whole and allow them to be competitive in the market place, and it needs to be flexible enough to ensure the high-quality and innovative dairy products consumers want and need, he said.
“I don’t know if that type of improvement exists, and I know it certainly cannot be made by small tweaks to the system. But if we keep that major idea as a goal, one day I think we will achieve a system that is considered an improvement by all participants,” he said.
There are several issues that have to be part of the overall change matrix to make things work, and they’re all interlinked, he said.
“That’s one thing about federal orders, make one change and it changes something else. So you really, really have to think about the whole ball of wax,” he said.
Areas to focus on include the Class I pricing system and advanced pricing, which is problematic when it comes to depooling milk and negative producer price differentials, he said.
“There really is no easy answer to solve all these problems. But if you look at them in totality and try to address them as a total solution, I do believe improvements can come about,” he said.
Another area to pay attention to is end-product pricing, which only works if the components of the pricing are updated on a regular basis. Tweaks can be made to the formula, but a better solution would be to go back to a competitive price formula, he said.
When proposing a change, it’s important to have an approach that’s balancing consumers, producers and processors, said Ed Gallagher, president of risk management for the Dairy Farmers of America.
When thinking about changing the pricing structure, it’s important to keep the interface with dairy farmers simpler rather than more complicated, he said.
And it’s important to make sure any changes in pricing are congruous with using milk price risk management, he said.
“Despite what we do with federal order pricing provisions … we are going to be subject to so much price volatility forever that we need these tools to be able to help dairy farmers manage those programs,” he said.