Political Maneuvering on Federal Order Issues Sets Dangerous Precedent

The U.S. Department of Agriculture (USDA) last week published a decision on changes to Class I prices in the Southeast region that is based on nothing more than politics. Using a regulatory program that is intended to ensure adequate supplies of milk for nothing more than price enhancement strikes us as a pretty dangerous precedent, because it changes competitive relationships and disrupts established marketing patterns while leaving little opportunity for recourse on the part of processors.

Here's how we think this unfolded. Last year, producers in the Southeast region were successful in getting key members of Congress on the agriculture committees to urge USDA to hold a hearing to consider higher Class I prices to offset their increased costs (which is not the purpose of federal orders). Now, as the Bush Administration is parrying with Capitol Hill over final Farm Bill negotiations, it seems it was convenient to issue this decision to ensure the favor of those same Congressmen to help uphold a veto threat. Such are the games in Washington, D.C., but it's extremely unfortunate to see this fundamental milk pricing system used as a pawn in that process.

The specifics of USDA's decision are as follows:

It's a "tentative partial decision," which means it goes into effect pending approval in a producer referendum (so probably effective May 1), but comments can be filed and a modified "final" decision could be issued at some later date. Not only is it a flawed policy decision, in our view, but it's sufficiently fuzzy as to what the final future course might be and that makes it difficult for companies to make long-term business decisions. This is a real and fundamental difficulty with how the Federal Milk Marketing Order program is being run.

Here's the real meat of the decision: USDA proposes to increase Class I differentials in the Appalachian, Southeast and Florida marketing areas by up to $1.70 per hundredweight (cwt) - nearly 40%, which increases the government-mandated price fluid milk processors must pay to producers and their cooperatives by up to 15 cents per gallon. USDA estimates blend price increases per cwt of about 26 cents for the Appalachian order, 64 cents for the Southeast order and $1.19 to $1.22 for the Florida order. If the same prices had been applied during the 2004 through 2006 marketing years, USDA estimates the total pool increase would have been $74 million per year.

In addition, USDA proposes to change the diversion percentage limits, the producer delivery days (called "touch base" provisions) and the transportation credit provisions of the Appalachian and Southeast orders. Reducing the diversion percentage limits, as proposed, would restrict the amount of milk that could be diverted to other facilities, thus limiting the amount of pooled milk, which increases its value per cwt. Loosening the producer delivery days, or days that milk must "touch" plants in the region, as proposed, would make it easier for producers to qualify for pooled money. Expanding the use of transportation credits to two additional months and raising the assessment on fluid handlers to build the fund for these credits will provide more money to cover the cost of moving farm milk into the region during these months.

Proponents of these changes include the Dairy Cooperative Marketing Association (DCMA) and the Southeast Producers Steering Committee (SPSC). DCMA represents the Arkansas Dairy Coop, Cooperative Milk Producers, Dairy Farmers of America, Dairymen's Marketing Coop, Lone Star, Maryland and Virginia, Select, Southeast Milk and Zia. SPSC is comprised of the North Carolina Dairy Producers, the Georgia Milk Producers, the Upper South Milk Producers, the Kentucky Dairy Development Council, the North Carolina Department of Agriculture and the North Carolina Farm Bureau.

At the hearing held last May, representatives from the Milk Industry Foundation (MIF), Dean Foods Company, The Kroger Company and National Dairy Holdings opposed the suggested increases, saying that the declining production in these markets had not presented a supply emergency because an adequate national supply of milk exists. They also expressed concern that increasing the differentials in select marketing areas could create problems for plants that border other marketing areas as well as among plants within these marketing orders.

In fact, the MIF testimony included a quote from Lloyd Day, administrator of USDA's Agricultural Marketing Service, taken from his earlier comments to the House Committee on Agriculture's Subcommittee on Livestock, Dairy and Poultry. "The marketing order program is not a price or income support program," Day was quoted as saying. "USDA operates the Milk Price Support Program and the Milk Income Loss Contract (MILC) for price and income support purposes."

Apparently Day agrees that the federal orders are not the policy outlet for any group seeking to alter broad-based structural changes in regional milk production due to the underlying economics of producing milk in any one region.

In the near future, IDFA will hold strategy discussions with members on an appropriate response to all of this, but we must point out now that political maneuvering with this very fundamental pricing system is a serious breach from the system's true intent and sets a dangerous precedent.

Posted March 3, 2008