The National Milk Producers Federation is calling for changes to the Class I fluid milk price mover in federal marketing orders.
The effort is aimed at recovering losses dairy farmers have faced due to extreme price disruptions caused by the COVID-19 pandemic and preventing further losses.
An adjustment to the Class I mover, put into effect in May 2019, was meant to provide better risk management for fluid milk processors. But it’s proved costly to dairy farmers in wildly abnormal markets.
The mover sets the base Class I price to which a location differential is added. Beginning in January 2000, the Class I mover was calculated as the “higher of” the advanced Class III and Class IV skim milk pricing factors.
In May of 2019, that was changed to the average of Class III and Class IV plus 74 cents per hundredweight, which reflected the average difference of those Class III and Class IV pricing factors and the higher of the two.
From May 2019 through June 2020, dairy producers gained an average of 2 cents per hundredweight with the new mover compared to the previous mover, Peter Vitaliano, NMPF chief economist, said in a virtual meeting in late October.
That was about $29 million for all milk pooled in federal orders, he said.
“Normally the current mover is somewhat higher than the previous ‘higher of.’ But that has reversed itself from July through October,” he said at the time.
The Class III price rose well above the Class IV price, primarily due to government cheese purchases, and USDA announced another round of the Farmers to Families Food Box Program on Jan. 4.
NMPF estimates dairy farmers are facing losses of roughly $800 million in revenue under the current Class I mover compared to the previous mover. That’s a forecast of the largest cumulative amount of losses by this spring, Vitaliano told Capital Press.
It’s due to the lower value of Class I milk in federal order pools because the current Class I price mover has fallen so far below the previous “higher-of” mover during the second half of 2020. That’s because Class III milk values have been so much higher than those for Class IV milk during that period, he said.
“The intent behind the current mover was a revenue-neutral solution to the concerns of fluid milk processors about hedging their price risk,” Jim Mulhern, NMPF president and CEO, said in a press release.
But the significant gap between Class III and Class IV prices that has developed during the pandemic has exposed dairy farmers to asymmetrical losses not experienced by processors.
“We need a solution that provides more equity and balance between farmers and processors,” Mulhern said.
“We are seeking consensus across the dairy industry for changes to the Class I mover that remedy economic damage to dairy farmers who have disproportionately suffered as a result of this pandemic,” he said.
NMPF’s executive committee unanimously supported a motion directing the organization to explore, with other industry stakeholders, updates to the pricing formula.
The committee also discussed other dairy pricing improvements as part of an ongoing in-depth examination of issues related to federal marketing orders.