New milk pricing may hurt farmer income

by Karen E. Culp

SBJ Staff

Agriculture Secretary Dan Glickman announced March 31 a rule to change the way wholesale milk is priced. The rule was entered into the federal register April 2, according to a release from the U.S. Department of Agriculture, and the new system will be effective Oct. 1, following a referendum vote of milk producers.

The rule makes changes to the federal milk marketing order program that has governed the way milk is priced. The new system is designed to streamline and simplify the way milk is priced and marketed, the release stated.

Milk marketing orders are geographical divisions that regulate initial buyers of milk. Milk orders establish a system of pricing that is designed to "prevent handlers from playing producers against each other in an attempt to drive down the prices that handlers have to pay for milk," the USDA release states.

Until Glickman's new rule takes effect, there are 31 milk marketing orders. The new system reduces that number to 11, in an effort to streamline pricing. The dairy farmers in southwest Missouri, now in the central area, will be placed in the southeast region.

Officials with Dairy Farmers of America, a Kansas City-based cooperative, had said that division was the best one for southwest Missouri farmers to be placed in because of its higher rate of fluid sales. Elvin Hollon, director of fluid marketing and economic analysis for DFA, said the geographic break-up of the orders was generally good.

"In discussions we've had about geography, we've been pleased with the break-up of the orders. The combinations established are reasonable and good," Hollon said.

DFA is more concerned with the "absolute level of differential prices" that it fears will diminish income for dairy farmers across the nation, Hollon said. DFA, formed by the merger of four cooperatives, including Springfield's Mid-Am, is the nation's largest dairy-farmer-owned cooperative.

Class I differentials are paid to producers for their Class I (fluid) milk, and differentials vary from order to order. The differentials are "price incentives to move Grade A milk from points of production to fluid milk processing plants, which are typically located closer to population centers than to production areas," according to the USDA definition.

The differential is added to a calculated price for Class I milk, which is the minimum price that regulated handlers must pay for milk used in fluid products. The differential is used to offset transportation costs for producers, Hollon said, and DFA, along with a number of other cooperatives, are concerned about the new differentials as set out in Glickman's rule.

"In many cases, we feel they are too low to move milk within a particular market," Hollon said.

Ken Bailey, an economist with the University of Missouri Extension Program, points to the Class I differentials as being the new rule's biggest obstacle, according to research and analysis he has conducted and posted on his dairy outlook page on the Internet.

The differential per hundredweight of milk, which is now $3.08, will be $2.90 under the new rule in the southeast region. While that is a decrease, some areas will see increases, such as Florida, which will see a 25 cent increase per hundredweight in its differential.

"In certain segments, the differentials are great, but in other areas they simply are not where they need to be," Hollon said.

Gary Hanman, DFA's president and chief executive officer, said preliminary analysis has led the cooperative's officials to believe dairy farmers' income could be lowered by as much as $270 million nationwide.

"While we support, and are pleased with some of the recommendations for the upper Midwest. When viewed as a whole, these reforms lower income to dairy farmers throughout the country," Hanman said. He added that prices paid to dairy farmers in some areas will result in an inadequate supply of local milk.

In addition to reducing the number of orders and establishing new differentials, the rule also replaces the basic formula for establishing minimum prices for milk used in nearly all dairy products, with separate prices for Class III (cheese) and Class IV (butter and nonfat solid) products.

Prices for Class I will be set by using either Class III or IV price, whichever is higher, plus a differential.

The price for Class II products (soft products such as yogurt and ice cream) will be figured by adding 70 cents to the Class IV price.

The old system expires Dec. 31. The newly consolidated orders have to be approved by two-thirds of producers in a marketing area or by producers who supply two-thirds of the milk in a marketing area.

The 1996 Farm Bill mandated that the 60-year-old milk marketing system be reformed with implementation of the new program in 1999. Congress can re-visit the order system at any time, however, Hollon said.

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