Federal milk marketing orders not a perfect system

posted May 14, 2018 7:47 a.m. (CDT)
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by / Jenessa Freidhof, Regional Editor | jenessa.freidhof@ecpc.com

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NEILLSVILLE — Mark Stephenson of UW-Madison’s Center for Dairy Profitability said federal milk marketing orders are designed to offer orderliness and equity to producers and handlers, but they’re not always perfect.

Through FMMOs, milk is classified into four classes depending on what it will be used for. Class I is fluid milk, Class II is for soft dairy products like sour cream and yogurt, Class III is for hard cheeses and Class IV is used to make butter and milk powder. The classifications do not reflect on the quality of the milk, but instead determine the price handlers, or dairy processors, pay for the milk, with Class I milk usually highest and Class IV milk lowest.

“The farmers are a bit indifferent because we calculate a weighted average across all those uses of milk. Farms in the same area, in the same zone receive the same price if they have the exact same components to their milk,” Stephenson said at a Farm Bureau-sponsored meeting May 7 in Neillsville.

FMMOs are voted in by farmers for a specific marketing area. Handlers compete for milk in that area depending on their needs. Class I processors have the first shot at milk in an area and have the advantage of advanced pricing. They receive a report the Wednesday on or before the 23rd of the month announcing the prices. Other class processors only receive the prices on or before the 5th of the following month, after they have already taken in and processed what they are going to use.

“(Advanced pricing) is probably the better business model. If you are in the other classes and you made more than you would have wanted to with the price, it isn’t the end of the world because you can store it and the next month not make as much,” Stephenson said.

Although FMMOs may improve prices, Stephenson said it is not a support program and if farmers are looking to fix low milk prices, FMMOs are probably not the right tool. He said FMMOs work hard to not miss the mark on pricing because that can lead to surplus and other marketing problems.

“We did this back in the 1980s with our price-support program. We had a price support set too high and the government bought more in one year than all of Canada made in that one year. That is surplus,” Stephenson said.

Through FMMOs, dairy farmers are assured a reasonable minimum price for the milk throughout the year and consumers are assured an adequate supply of milk to meet their needs. One of the disadvantages is it is hard to find the price that makes everyone happy.

“Orderliness and equity are hard to define, but you know when you haven’t achieved them. If price is going to err on the side of being wrong, we are going to do so a little low and let premiums pick up the difference,” Stephenson said. “I’m prepared to say that we might be on the side of too low. We have asked premiums to pick up a little too much of the lift and that has caused us some problems in the past years. If the minimum price is too low, it is irrelevant.”

He said if FMMOs begin to look like they are out of control, a hearing process may be held to give farmers and other interested parties the opportunity to testify on what needs to be changed. The U.S. Department of Agriculture then reviews that testimony and comes up with a recommendation of what they think is fair for everybody.

“The real trick of this is what you are voting for is not just for the change you want, you are voting for the entire federal milk marketing order. If you don’t like what USDA says, it is too bad. You are voting on what they suggested or nothing. That is how you keep this balance of power,” Stephenson said. “USDA acts like a traffic cop in the middle. They are not trying to create the milk price; they are trying to discover what the price should be.”

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