February 13, 2003

Price volatility for milk is greatly diminished by the use of forward contracting, according to a report released recently by USDA on the use and effects of the forward contracting pilot program. Launched in August 2000, the voluntary pilot program allows milk handlers to contract with either farmers or cooperatives through December 31, 2004, for non-Class I (beverage) milk at prices different from the federally regulated prices.

The congressionally mandated study also found that the prices farmers received for contract milk may have been about the same as long-run average non-contract prices for U.S. Grade A milk. "These results show that forward contracting is a great tool to manage milk price volatility, which will help producers and processors be better financial managers," said Bob Yonkers, PhD, chief economist and director of policy analysis, International Dairy Foods Association. "IDFA has consistently encouraged the dairy industry to use this pilot program to the fullest extent possible."

The USDA report found that 71.4% of participating plants indicated they would continue to offer contracts if the forward contracting pilot program was extended beyond 2004.