The U.S. Department of Agriculture (USDA) last week announced a long-awaited decision on changes to the Class III and IV product-price formulas used to set all federal minimum milk prices. Although the proposed rule raises the make allowances, or margins that processors can use to cover manufacturing costs, the decision is tentative and partial, and does not reflect several proposals made by IDFA that would have had a major impact on price formulas.

"This is yet another example of a broken milk pricing system," said Connie Tipton, IDFA president and CEO. "Our members must make business decisions every day and can't wait an entire year for a tentative decision that might change again six months or more down the road."

Tipton sees this action as further evidence that the Federal Milk Marketing Order system cannot keep up with the pace of business today and must be reformed.

USDA issued the proposed rule as a "tentative partial final decision" that recommends implementing amendments to the make allowances for cheese, butter, nonfat dry milk and dry whey powder on an interim final and emergency basis. Specifically, the decision proposes to adopt the following make allowances: cheese at $0.2003 per pound, butter at $0.1715 per pound, nonfat dry milk at $0.1678 per pound and dry whey at $0.1991 per pound. The decision also proposes to increase the butterfat yield factor in the butterfat price formula to 1.211, up from 1.20.

Created through a federal order reform process mandated by Congress in the 1996 Farm Bill, the make allowances fix the margins that USDA permits processors to apply to cover the manufacturing costs of turning raw milk into a finished dairy product. Until now, margins were based on industry manufacturing cost data from 2004 and 2005, so they were well below today's true costs. As a result, many cheese, butter and powder plants have been forced to operate at a loss, because they don't have the margins to cover all the costs necessary to run their operations.

"This decision provides a little bit of relief to dairy product manufacturers, but costs, especially for energy and fuel, have increased dramatically since the industry first requested a hearing and emergency action from USDA in September 2006," said Bob Yonkers, IDFA vice president and chief economist. "It's also unfortunate that USDA rejected very strong arguments for making other changes that would help processors deal with the over-valuation of barrel cheese and whey cream in the price formulas."

IDFA had submitted a proposal seeking to eliminate the current three-cent add-on to the barrel price of cheddar cheese that is used to calculate the protein price formula. In another proposal, IDFA recommended adjusting the protein price formula to account for the lower value of whey cream versus sweet cream.

USDA rejected these and all but three other proposals that recommended changes to the Class III and IV product-price formulas. USDA plans to address the three proposals – which seek to establish a manufacturing cost survey, create a monthly energy cost adjustor for make allowances and omit a cost surcharge when reporting sales transactions prices – in a separate recommended decision.

"These proposals needed to be addressed now, because they may well affect other aspects of the price formulas. Processors deserve to know the formulas they're working with, so they can make informed business decisions," Yonkers said.

USDA has issued a 60-day comment period, with a deadline of August 19. IDFA plans to file comments and urges members to do the same.

For more information, members may contact Yonkers at byonkers@idfa.org or (202) 220-3511.