Hoard's Dairyman article: The Federation’s Bold Proposal

The Federation’s bold proposal

Here’s a look at Foundation for the Future.

Let us know what you think.

Margin protection rather than price protection is the driving strategy of Foundation for the Future (FFTF) developed by a National Milk Producers Federation task force. The plan has three components: margin protection (milk price less feed cost), market stabilization (growth management), and federal order revisions.

(Most of what is presented here is from the FFTF website [www.futurefordairy.com] and com­­­­­­munication with NMPF staff.)

A key part of FFTF is replacing the dairy price support and MILC programs. NMPF believes the support program, at times, interrupted U.S. dairy export markets and made the U.S. an inconsistent supplier. The MILC program only covers 45 percent of the difference between the actual Class I base price and $13.69, and it doesn’t treat all farms equally because of the per-farm cap.

FFTF’s margin insurance program provides all producers a base level of protection for catastrophic times, along with a voluntary level of supplemental coverage. Each producer would have a historical milk base . . . the highest annual milk production from the three years prior to the program’s start. That base would be fixed for duration of the farm bill.
The “milk base” will only be transferable with the operation itself, or it will stay with the producer if he/she moves to a different operation. If the operation is sold, the milk base will be transferable with the operation. The currently estimated guarantee for the base program, $4 per hundred, is about half of the historical margin levels.

The margin used will not be income-over-feed-cost figures calculated from USDA’s monthly Agricultural Prices report. Rather, they are now feed costs that will reflect the costs of feeding entire herds, not just milking cows, and prices paid by dairy farmers, not the prices received by crop farmers.

An example was given of a 200-cow operation with a production base of 4.1 million pounds. The owner wanted $2 in supplemental or additional margin protection for 90 percent of his milk. The annual premium rate was 15.5 cents per hundredweight or $5,720 for the year. During 2009, the owner would have received $32,595 from the base (no-cost) coverage and $52,521 from the supplemental coverage. The total paid out during 2009 was $85,116 or $2.08 per hundredweight. The net amount received (less supplemental premium) was $79,396 or $1.92 per hundredweight.

FFTF’s margin protection program would be administered by USDA’s Farm Service Agency, not the Risk Management Agency, and there would be no insurance companies or agents involved. Base coverage would be available to all producers at no cost, and a producer’s premium for supplemental coverage would be fixed for the duration of the farm bill.

NMPF believes the government costs of the margin protection program will be no more than that of price supports and MILC.

There would be no cap on participation. NMPF is firmly committed on this since the margin protection is not a direct payment program.

Overproduction signals
The market stabilization part of the package is designed to prevent wide swings in milk prices. It works by sending a strong message to producers when there is an imbalance between supply and demand, margins are too low due to high input costs, or both. Then producers will be paid only for a portion of their milk, based on a three-month rolling average of the most recent milk marketings or the same month in the previous year.

When the actual national margin (milk price less feed cost) is below $6 for two consecutive months, producers will receive payment for 98 percent of their base milk marketings and be subject to a maximum reduction in payment equal to 6 percent of current milk marketings. When the actual national margin is below $5 for two consecutive months, producers will receive payment for 97 percent of their base. Growing dairies will be subject to a maximum reduction in payment equal of 7 percent of current milk marketings. When the margin goes below $4 for one month, producers will receive payment for 96 percent of their base, while those expanding will be subject to a maximum reduction of 8 percent.

The monies will be collected through milk check reductions and be used to stimulate consumption of dairy products domestically. FFTF proposes that a board of producers be established to direct how that money is spent.

The basic premise of FFTF’s order reform proposal is that competitive pricing results in less price volatility. Also, competitive pricing would place all milk processors (making all types of dairy products) in competition with each other. Currently, the price manufacturers of all types of cheese pay for milk is based on a Cheddar formula. What ice cream manufacturers pay for milk is based on the formula price for butter and nonfat powder. A competitive pricing system would have these manufacturers competing directly with each other. The make allowances and yield factors built into these formulas have become a source of conflict in the industry and have created winners and losers.

Each month, USDA would survey prices paid by proprietary cheese plants to cooperatives and individual producers for milk used to make cheese. Neither California nor forward contracted milk would be included. Co-op plants would not be included because payments for milk can be affected by membership factors.

The proposal maintains the number and basic structure and provisions of federal orders. There would be two classes . . . fluid (Class I) and manufacturing (formerly Class II, III, and IV). There still would be “higher of” pricing for establishing the fluid use (Class I) minimum, and current Class I differentials would stay in place.

All milk used in manufactured dairy products will be competitively priced. Consequently, there will be no minimum prices manufacturers are required to pay for milk used to produce these products. Milk used to produce fluid milk (Class I) products will be subject to minimum pricing, plus market-based premiums.

The national fluid milk (Class I) price mover will be the higher of the national weighted average competitive cheese milk price survey, or the current Class IV formula butter/powder milk value.

There would continue to be a producer price differential. Handlers of Class I milk would contribute to the pool the lagged difference between their Class I price and the lowest regional competitive price. Handlers of products generally now in Class II would contribute a fixed differential of 30 cents. Handlers of milk used to make cheese would have no contribution or draw.

Handlers of milk used to produce butter and milk powders would receive a payment from the pool when the national value of milk used to make powder and butter as calculated using the current Class IV formula adjusted for energy costs is less than the regional competitive cheese milk price. When the Class IV formula is higher than the regional competitive cheese price, the Class IV handler shall pay the difference into the pool. The blended result after distribution would be a producer price differential for all pooled milk that would be paid directly from the market administrator to producers and cooperatives.

This article appears on page 329 of the May 10, 2011 issue of Hoard's Dairyman

We welcome comments and questions about the Foundation for the Future proposal.
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