December 6, 2000

USDA's recently announced modifications in the pricing formulas in the federal milk marketing order system should result in a modest increase in dairy farmer prices, according to an analysis by the National Milk Producers Federation. NMPF found that the changes would have resulted in a higher Class III price of approximately $.05 per hundredweight during the first 11 months of 2000 for milk with 3.5 % butterfat, and a higher Class IV price of $0.12 per hundredweight. But those numbers will depend on the market price for cheese, butter and nonfat dry milk powder which form the basis of the classified pricing system.

Last Friday, USDA announced a series of proposed changes in the federal order pricing system affecting butter, nonfat dry milk, cheese and whey. The changes will be implemented on Jan. 1, although the decision allows for additional comments by interested parties during the next 60 days.

The proposed adjustments came after six months of review by the government of the newly reformed federal order system, which, among other things, assigns a complex interplay of pricing formulas to manufactured dairy products.

"NMPF did not expect that the modifications would result in a huge windfall to producers. It's time we stop tinkering around with the federal order system and focus our efforts on other methods of augmenting dairy farmer income," said Jerry Kozak, CEO of NMPF.

Under the "tentative final" USDA decision of last week, the manufacturing allowance for the two Class III products, cheese and whey, were adjusted in opposite directions: the cheese make allowance will move from $0.1702 per pound to $0.165. NMPF had recommended an even lower cheese make allowance of $0.1536/lb. However, USDA increased the whey make allowance from the current $0.137/lb. to $0.140/lb.

Beyond those changes, the Class III producer price will also be altered because USDA is adjusting the relative value of butterfat and protein used to make cheese. The new Class III formula also changes the standard moisture content for barrel cheese to 38%, down from the current 39%. NMPF estimates that this will increase Class III producer returns slightly, with the net effect of all of these changes resulting in a slightly higher Class III price, on the order of five cents per hundredweight for 3.5% milk during the year 2000 to date.

The decision also adjusted upward the Class IV make allowances with butter's moving from $0.114 per pound to $0.115 and nonfat dry milk from $0.137 per pound to $0.140. Both adjustments should lower producer prices for Class IV. However, because the USDA also changed the yield factor for nonfat dry milk from 1.02 to 1.00, the net effect of the USDA's decision will be slightly higher overall Class IV prices, on the order of 12 cents per hundredweight, during 2000.

"Dairy farmers all across the country will see slightly more money in their milk checks from these changes, so that's a positive," Kozak said. "But even though every little bit helps, we still need to look at other options of boosting producer revenue."

NMPF's newly-created milk pricing task force will meet later this week to consider ways to specifically increase Class III producer returns with the goal of having a proposal ready to take to the new Congress next month.