FMMO’s Next Steps Begin

Its Federal Milk Marketing Order (FMMO) hearing now concluded, USDA is now considering more than 12,000 pages of testimony as it formulates its plan for FMMO modernization. NMPF is still doing what it can to ensure that proposal best reflects the interest of dairy farmers and their cooperatives, two NMPF economists said in a Dairy Defined podcast. 

The key to successful modernization is a comprehensive approach that addresses the complexity of federal orders in a way that respects the entire dairy industry while keeping in mind that orders most fundamentally must work for farmers, Dr. Peter Vitaliano, Vice President for Economic Policy and Market Research, and Stephen Cain, Senior Director for Economic Research and Analysis at NMPF. That’s always been the bedrock principle behind NMPF proposals on areas ranging from returning to the “higher-of” Class I mover to updating milk composition factors.

 “What separates National Milk's proposals from processor groups is more of our holistic approach,” Cain said. “You can't look at the federal order system having not been updated in 20 years and not address all facets of the industry, right? You can't say in good faith that Class I differentials need to be updated because costs have gone up without also conceding the fact that make allowances need to go up for the same reason. So we took that holistic approach. That is going to help move the industry forward together.”

Transcript

Alan Bjerga: Hello and welcome to Dairy Defined.

It's over, but we've only just begun. USDA's Federal Milk Marketing Order Hearing has concluded after 49 hearing days and about 12,000 pages of testimony. Joining us today is the record holder for most time on the stand and NMPF Economist, Dr. Peter Vitaliano, and colleague economist Stephen Cain, who was integral to the development and defense of NMPF's position.

But we're not here to tell war stories. This is about the future. Where do dairy farmers stand in what's now been a three-year process toward modernization? What happens next?

Thank you for joining us, Peter and Stephen.

Stephen Cain: Thanks for having us.

Peter Vitaliano: Glad to be here.

Alan Bjerga: Peter, you led off testimony on every one of NMPF's federal order proposals. Now that the hearing is over, where do they stand?

Peter Vitaliano: Well, five proposals to be specific. And since we initiated the hearing, the hearing was organized in general areas along the same lines as those five proposals we put in. Including some rebuttals arguing for exactly the opposite that we wanted and some related things.

The first three had to do with the manufacturing prices. Class III and Class IV formulas in the last two were basically Class I issues. The Class I mover that everybody knows about and the Class I differential surface. We feel that we presented a very good hearing record. Half the room was full of basically USDA related people. We watched them closely for their body language and other things. Although we're under ex parte, as you know, where communications between USDA and the industry are very limited just to procedural things. I'd say I'm very comfortable that we're going to get a decision that our members will be able to live with.

Alan Bjerga: Members will be able to live with, that doesn't sound like the ringing endorsement, that NMPF's going to get everything that it wants.

Peter Vitaliano: Well, nobody at the hearing is going to get everything they want that's pretty clear. USDA is going to give each party, particularly each of the major parties a little something. The final result will be a market improvement over what we have now.

Federal order pricing formulas, which is the only thing this whole hearing was about have basically maintained by and large a fixed structure of the dairy industry. And over the 25 years or so that those formulas have been in effect, the industry has changed considerably. The formulas are now increasingly out of step with what the industry looks like. Our proposals are to bring it back up to... Bring those formulas up to match where the industry is now and where it will be going forward.

Alan Bjerga: One of the main points in this hearing, and you're talking about moving forward, but a big part of our proposal is kind of moving back to the future and I'm talking about the Class I mover. We've seen a call from the American Farm Bureau Federation for USDA to essentially accept NMPF's proposal, which is returning to the higher of calculation in terms of Class I milk pricing. I'm interested in your thoughts as far as the importance of the mover to the proposals and just in general, what is the importance of these proposals to dairy farmers?

Peter Vitaliano: The Class I mover, the big issue that we have with the current Class I mover is that producers are losing money with the change. That was not expected but, again, the industry has changed in ways that even surprised some of us. The current mover clearly loses money for dairy farmers. That has not been in dispute at the hearing.

The processors have come up with a proposal that on paper would not cost producers any money. It would make up for any income losses, but in a very cumbersome fashion, national Mill is basically saying we need to restore the former higher up proposal. There's lots and lots of producer support for that all around the country, and that's what we're looking for. The processors have put up a very, very strong argument that they need some sort of average based mover in order to do risk management on Class I fluid milk prices, particularly for extended shelf life products that are growing in importance. Again, we're not going to be sure exactly where the USDA is going to come out until we see the recommended decisions this summer, but they say we feel very comfortable about it, but we're not overly confident until we can see what's going to finally come out.

Alan Bjerga: Noting that there are some strong arguments, but we're backing NMPF's argument. Why is NMPF right and the other guy's wrong?

Peter Vitaliano: NMPF is right because USDA, basically, we went back to USDA's original argumentation for the hire of mover back at the time of federal order reform. And those, contrary to most of the other formulas that we are proposing updates and modernization for, USDA's arguments for maintaining the higher of as a Class I mover are still valid, still totally valid. So a good part of our proposal and our argumentation for our proposal was to basically reiterate the reasons USDA gave for choosing the higher of back at the time of federal order reform. We have a very strong argument for that.

In the meantime, it is undeniable that risk management has become more important for the dairy industry as prices have become more volatile and the processors are hanging their argument on the importance of risk management and the necessity for keeping some version of an average of base mover in order to facilitate risk management.

There are two very important constituents of the US dairy industry, producers or processors. We are not dismissing the arguments. I mean, we are posing the arguments to the other side, but we're not dismissing the importance of them. In the end though, it is dairy farmers who vote for the orders.

Alan Bjerga: I want to bring Stephen Cain into this because Stephen, you were watching hours and hours and hours of this testimony understanding on this Class I mover issue that there is the argument to be made on risk management. Do we actually know if processors are actually using this for risk management the way that they're claiming in terms of its importance?

Stephen Cain: We've had some processors that testified that they were. The Class I mover changed to the average of plus 74 cents has been in place for several years at this point. If this was such a dire, desperate need as some of the processors have testified to throughout this hearing, I think we would've seen more of this take place than we've seen thus far. We've had a few here and there testify to using some hedging to mitigate the risk on Class I products, but not quite to the extent as you would expect if this was such a dire need.

So some are but, to Peter's point, it's growing importance for extended shelf life products. We'll see some more production of those moving forward. I think it's more important for those rather than the HTST products that we're using today, mostly for fluid milk consumption, but they made some good arguments to Peter's point. But at the end of the day, the federal order system is here to protect producers, and I think I've got full faith in the USDA that they're going to recognize that, understand that, and come up with a package that continues to support producers.

Alan Bjerga: One fact that we do know is that because of the change in this mover, that's a lost income opportunity for dairy farmers that appears to be around 1.2 billion and counting right now. We also know that even if you have some of these processor proposals on where you have formulas that could potentially adjust in ways that farmers would eventually be compensated years after the fact for what would be losses to the formula now that doesn't necessarily keep a dairy farm in business while they're waiting for that reimbursement. It just seems like some of these proposals from the processor side it, frankly, just seems to be about money.

Peter Vitaliano: The Class I movers where as you say shortfalls may be made up years later, if you look at them closely or not even that closely, they are inconsistent with the fundamental purposes of the order program, which is to promote orderly marketing and to assure an adequate supply of Class I milk for fluid use. And we stuck to that fundamental argument throughout the process and were able to, I thought, effectively score points against the positions that the other side was taking as inconsistent with those fundamental principles of operating the order system.

Alan Bjerga: Stephen, what did you learn about our system in different approaches on federal orders, and what do you think USDA is hearing overall after 49 days of listening to different contending interests, talking about how they think the world should be different?

Stephen Cain: Yeah, it's a fair point. We had five proposals. They were 22, so there were a lot of differing opinions on how the orders should be updated, and opposition groups did a good job at laying out their case as best they could. At the end of the day, the industry needs both producers and processors so at some point we're going to have to find some common ground.

But really what makes, I think point was made earlier Alan, that this seems like it's all about price, and that's effectively what makes most of the processor points kind of difficult to swallow is that they're so blatantly against anything that's going to raise prices. And that's really, I think, what separates National Milk's proposals from processor groups is more of our holistic approach. You can't look at the federal order system having not been updated in 20 years and not address all facets of the industry, right? You can't say in good faith that Class I differentials need to be updated because costs have gone up without also conceding the fact that make allowances need to go up for the same reason.

So we took that holistic approach. That is going to help move the industry forward together where the opposition groups really are for policies that would lower milk prices and ultimately farmers milk checks. So, at the end of the day, USDA understands all of these things. I think they're going to look at this and make the best decision possible to help put the federal orders in a position that helps the industry operate more effectively today.

Peter Vitaliano: Except for the make allowance issue, which would reduce prices, at least temporarily, which National Milk did not fully oppose. We just are insisting that we need mandatory cost studies, which is a provision that's in the Farm Bill, before we can really be comfortable adjusting those make allowances down to four decimal places of a dollar, the way they always have been in the formulas. But in everything else, anything that would increase prices, the opposition basically said the way things were in federal order reform is still working. So, in that sense, they were basically taking in what we might call an originalist position. The original federal order reform still should work, and we were arguing just the opposite.

Alan Bjerga: Peter, you were talking about the process earlier. Where do we go from here? What keeps you and NMPF busy these days?

Peter Vitaliano: Well, we have a time... We're maybe halfway through the whole process. The formal process began, I guess, last spring. We submitted the initial proposal that started the process off. Last July they announced the hearing. The hearing began in August. It wrapped up at the end of January. And the next big deadline is April 1st when the briefs from all the parties are due. The briefs are going to be sort of lengthy summations of the 12,000 word hearing record that each party will put together to make, once again in a condensed focused form, all of their arguments for all the positions they are supporting and opposing. That will be sort of the official substance that USDA will use and will cite in its decision. Then around beginning of July, there will be a recommended decision from USDA that sums up, draws on all of those briefs, and all of anything that is necessary in the hearing record that will support what their final decision is.

Alan Bjerga: Stephen, go into a little more detail, if you can, about the significance of USDA's July-ish announcement

Stephen Cain: After do all the things with the briefs, get those put to USDA and provide everything the USDA needs to make this decision, they're going to come out with a recommended decision in early July. And that's really going to be the first time that we see what USDA is thinking. And largely that's going to be what the final decision is largely going to look like. We get this recommended decision in July, and then there's some opportunity for back and forth between the industry and the USDA, but there's really not going to be a lot of substantive changes, right?

USDA is going to come out with a recommended decision that they feel comfortable with implementing today. So when it comes down to making the final decision, I don't think we're going to see too much deviation from that recommended decision. There might be a little changes around the edges if something is really a big issue with industry and a lot of folks kick up a lot of mess about it, but we'll get what will effectively be the final decision in July with that recommended decision. So it's a very big step. That's the next big, big deadline or next big step that we're looking forward to.

Alan Bjerga: And it would be inappropriate not to note just how involved farmers and cooperatives have been in this effort. We're talking more than 30 co-op experts testifying, more than 30 farmers, and those are just folks who are directly saying things. That's not the support that was given to formulating these proposals by the task forces. This is not talking about the efforts of NMPF board members. Incredible farmer and farmer led cooperative involvement in this.

Peter, Stephen, thank you so much for your time. Is there anything you'd like to add?

Peter Vitaliano: Yeah, I'd just say stay tuned. As indicated, we're not going to really know an awful lot until July 1st, but once July 1st comes out, you can count on hearing an awful lot from us about what the recommended decision looks like and what it will mean.

Alan Bjerga: And we'll look forward to hearing what you have to say about it.

We've been speaking with Dr. Peter Vitaliano, he's the Vice President for Economic Policy and Market Research, as well as Stephen Cain, Senior Director for Economic Research and Analysis at NMPF.

Thank you for joining us. For more about NMPF's leadership in federal milk marketing order modernization, again, you can visit our website at www.nmpf.org. You can also find the Dairy Defined Podcast on Apple Podcasts, Spotify, and Google Podcasts. 'Til next time.