IDFA Likes New Dairy Pilot Program

July 19, 2000

The International Dairy Foods Association (IDFA) has voiced strong support for USDA’s newly released final rule on a milk forward contracting pilot program. The final rule incorporates the suggestions that IDFA and several of its member companies gave USDA this spring on how to make the program a success.

Handlers will be allowed to forward contract for milk purchased either from cooperatives or directly from producers. Regulated handlers are limited in the quantity they may contract to the total amount of milk used in Class II, III and IV dairy products. Regulated Class I handlers may use this program up to a limit of the total quantity of milk used in non-Class I products. Handlers can begin contracting with dairy farmers and cooperatives under this pilot program for milk marketed beginning August 1, 2000, and not beyond December 31, 2004.

"We're very pleased that USDA took out regulations from the proposed rule that would have severely limited participation in this pilot," said IDFA Chief Economist Bob Yonkers. "In the final rule, the 'three-day' opt-out rule is removed, as is the 6-month initial contract restriction -- both would have really dampened participation in this program.

"Forward contracting is a tool widely and successfully used in American agriculture. We encourage dairy producers and manufacturers to use this new program to the fullest extent possible in order to help manage market price volatility," he added.

Four items that were part of the proposed rule have been changed in the final rule, as suggested by IDFA:

1. The final rule does not include the provision that allowed dairy farmers or cooperatives selling milk under a forward contract (but not handlers) three days in which to change their mind and cancel the contract.

2. The provision that limited the first forward contract between a producer and a handler to a maximum of 6 months has been changed to a maximum of 12 months. In addition, subsequent forward contracts can be for any length of time, even longer than 12 months.

3. The provision that required the milk pricing formula used in a forward contract to be identical to the milk pricing formula used in the federal order (either butterfat-skim milk pricing or component pricing) has been eliminated.

4. USDA has modified its definition of "handler" under the program; proprietary handlers who do not operate pool plants are now eligible to participate in this pilot program.

Any handler participating in the program for milk regulated under federal orders must still comply with the following regulations:

--Forward contracts must be signed prior to the first day of the month that they are to go into effect.

--Each forward contract signed must be accompanied by a disclosure statement signed by the dairy farmer or cooperative on the same date as the contract.

--A copy of each signed forward contract and disclosure statement must be submitted to the Market Administrator's office prior to the 15th of the month that they are to go into effect.

--Handlers will still be subject to filing all federal order reports that are required, and to account to the pool for all milk at federal order minimum prices.

--The dates of payments under forward contracts are to be the same as payments for milk regulated by the federal order.

In addition, in its final rule USDA affirmed that handlers can aggregate the total volume of milk pooled in Class II, III and IV for the purpose of establishing the maximum amount of milk which is subject to forward contracting under this program. In the case of a multi-plant handler, all milk used in these classes in all plants regulated in a single marketing area may be combined for the purpose of establishing the total amount of milk which may be contracted.

Also, USDA reaffirmed that market administrators will play no role in establishing any other terms of the forward contracts, nor will they enforce the negotiated price provisions of such contracts.

The complete text of this rule is available at USDA's website at http://www.ams.usda.gov/dairy/for_contr_pilot.htm.