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Dairy farmers seek better prices

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by Karen E. Culp

SBJ Staff

Dairy farmers in the Ozarks could see better prices for their milk if a proposal to reduce the number of milk marketing orders becomes a rule. Officials at Dairy Farmers of America and Rep. Roy Blunt agreed that the proposal, if it becomes a rule, will be good for local dairy farmers.

U.S. Secretary of Agriculture Dan Glickman has proposed a new rule that would reduce the number of federal milk marketing orders from 31 to 11.

Officials at Dairy Farmers of America (DFA), the cooperative created by the merger of Springfield's Mid-America Dairymen with three other cooperatives, are pleased that southern Missouri will now be included in the southeast region of the milk marketing orders rather than the central area it was previously included in.

"We asked that the whole southern region of Missouri be included in the southeast area. The southeast has a higher rate of fluid sales than the southwest plains area. As part of the southeast marketing area, we would get to share in that higher rate of fluid sales. This area is a reserve supply for the southeast. If they are ever short of fluid, they buy their supplemental supplies from us," said John J. Wilson, vice president of fluid-milk marketing and economic analysis for DFA.

The U.S. Department of Agriculture will accept comment on the proposal until March 31. DFA has not yet formulated its response to the new system.

Secretary Glickman announced the proposal at a news conference Jan. 23, Wilson said.

The new marketing areas are not the only thing the proposal would change in the milk-selling industry. The department has proposed that there be four classes of milk.

The proposal also contains provisions to reduce the volatility of milk prices by implementing a weighted average system that would price milk according to an average that is weighted toward the most recent month's production, Wilson said.

In late 1996, milk prices saw about a 30 percent drop between September and December.

The proposal also addresses concern about price differentials. Differentials are used in calculating the price for fluid milk to account for transportation costs of the product.

In late 1997, a federal judge in Minnesota ruled against the differential system. That ruling would have prohibited the secretary of agriculture from enforcing Class I (fluid milk) differentials in the federal milk marketing-order program.

Class I differentials are essentially federal monies added into the Class I price for milk. Class I dairy products include fluid milk.

A stay was granted in the case, and that allowed the continued use of differentials until Feb. 15, Eldridge said.

Feb. 9, there will be a hearing in St. Louis in the Eighth Circuit Court of Appeals on the case. The hearing in St. Louis should ultimately decide whether differentials will continue to be used, Eldridge said.

The differential added to Class I prices was to level the market somewhat for dairy farmers, said Bill Brooks, director of statistical analysis and commodity research for Mid-Am, in a previous interview.

Certain areas of the country can produce more milk at one time than others, and in order that the entire country have a fresh supply of milk all the time, that milk has to be shipped to the areas where it is needed, Brooks said.

Differentials were established to offset that shipping cost, although studies have shown that differentials do not quite cover all transportation costs.

The differential also allowed areas like the southeastern United States, which had a limited amount of milk production

compared to the upper Midwest, to produce milk at a competitive price, Brooks said.

The proposed rule contains two options for differentials. Option 1A in the proposal would essentially keep differentials as they are now, Eldridge said. Option 1B would reduce differentials substantially in every area of the country except the upper Midwest, Wilson said.

Historically, the upper Midwest region has felt somewhat discriminated against because the differentials being paid to other areas of the country were higher in order to encourage milk production in low-producing areas, such as the southeast, Wilson said.

Option 1B has three potential methods of implementation. One option is a straight reduction in current differentials by 20 percent each year for five years. The second option is a revenue-neutral option and the third is a revenue-enhanced option.

As an example, the current differential in Springfield is $2.19 per hundredweight. Under the revenue-neutral plan, that figure would be $2.56 per hundredweight the first year, $2.19 the second, $1.86 the third, $1.59 the fourth and $1.31 the fifth year.

Under the revenue-enhanced implementation program, the differential would be $3.11 per hundredweight the first year, then $2.54, then $2.06, then $1.69, then $1.31.

The revenue-enhanced option would obviously enhance income to dairy farmers in the early years, but ultimately arrive at the same level after the five-year implementation.

The 1A option has been Mid-Am's preference historically, and will likely remain DFA's.

"We've been on record as supporting 1A before, and I'm sure we will again," Eldridge said.

The reformation of the milk marketing order system is part of a congressional recommendation under the Federal Farm Act.

The new rule, once final, is scheduled to become effective in April 1999, Eldridge said.

Meanwhile, Dairy Farmers of America will get an opportunity to present its case for a floor price for the basic formula

price for Class I and Class II milk to the USDA.

Glickman also announced Jan. 23 that he would hold emergency hearings on the case Feb. 17.

Before the merger, Mid-Am sent a letter to Glickman and the department requesting the hearings. That letter was dated Nov. 26, Eldridge said.

The cooperative asked at that time that the basic formula price for Class I and II milk be "floored" at $13.50.

Because the hearings are on emergency status, the Department of Agriculture will be able to promulgate a rule on the matter immediately, without the comment period and recommended decision phase normally required.

The rule will be put to a referendum vote and, if that is favorable, will go into effect immediately afterward.

The floor price proposal will only be effective until the new proposal by Glickman goes into effect in April

1999.

"The $13.50 number has been generally recognized as one that would generate some return for our farmers. It would also add some stability to the Class I and II prices," Eldridge said.

There could be some opposition to the Mid-Am proposal by milk processors because a ruling to ensure a floor price would also ensure that they would be paying a certain level of prices for products to be processed, Wilson said.

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