After more than a year of research conversations with its members, participation in a multi-state task force, and engagement with other stakeholders, one of the nation’s largest dairy cooperatives, Edge Dairy Farmer Cooperative , unveiled two key policy priorities for milk pricing reforms focused on flexibility and fairness.
Discussions about the future of the Federal Milk Marketing Order (FMMO) system have escalated in recent years, moving from the Class I movers formula to negative producer price differentials (PPDs) to make allowances and beyond. The effects of the pandemic have only intensified the debate.
“What we keep coming back to is the relationship between our farmers and our processors,” Edge CEO Tim Trotter said at a June 27 press conference announcing the priorities. “This relationship must move from a strictly transactional relationship to a strategic relationship, a relationship based on a longer-term vision, adaptability to markets and customers, and product requirements. A transparent business-to-business approach will be critically important to the success of farmers and processors. »
As part of prioritizing flexibility, Edge’s proposal takes into account differences in product mixes across the country, says Mitch Davis of Davis Family Dairies in Le Sueur, Minnesota, who is a board member. of Edge and participated in the working group.
“We believe greater regional flexibility and federal milk marketing orders would benefit everyone,” Davis said. “We believe that regulations should promote fair and equitable relationships between farmers and processors.”
Davis explains in Edge’s proposal that each federal ordinance would have the power to manage its milk order in a logical way, which it already does to some degree. But that would take into account geographic differences in population, farmer base and product mix. Flexibility would help avoid unintended consequences of the current uniform rules, such as frequent changes, pooling status, and negative farmgate price differentials due to the declining share of total milk production being pooled. common on this command.
“It’s about changing the incentives to keep processors consistently grouped together in ordering, and at the same time giving producers more certainty and efficiency when managing risk so they don’t have to the nonsense we had in 2020 with negative PPDs completely surprising the producers. blue, which makes them feel like food to engage in risk management papers,” says Marin Bozic, a prominent dairy economist who is an advisory member of Edge’s board of directors and also recently testified before the House Agriculture Committee on the provisions of the Dairy Farm Bill.
Keeping FMMOs relevant
Bozic explains that the original purpose of the FMMO regulations was to ensure that all dairy farmers in a certain geographic area could participate in the revenue from the sale of drinking dairy products. The problem is that over the next 10 years, the share of milk production used in beverages is expected to rise from 18.3% this year to 14.5%, according to Bozic.
“My estimates are that over the next decade, between 45% and 60% of all additional skim milk solids will need to be exported,” he says.
“The only way FMMOs won’t become irrelevant to the cheese-producing Upper Midwest is to go back to the original idea of FMMOs,” he says. “That’s the essence of a ‘same benefits’ approach. More cross-subsidies between manufacturers and more negative PPVs.
Bozic says he’s heard many common themes from producers about the changes they’re looking for. “They want to have a fair deal and a good faith relationship with a buyer of their milk. They want to understand how the buyer of their milk compares to others in terms of the price of the milk they receive. They want to understand their milk control, and once they understand their milk control, they want to manage price risk effectively. »
Agriculture Secretary Tom Vilsack said industry consensus was needed for price reform to be possible. Bozic adds that the 2018 Farm Bill process shows that consensus shouldn’t be so narrowly defined, and that policymaking behind tightly closed doors creates a fragile and flawed design.
Trotter says Edge’s policy proposals offer a starting point for conversations, but also provide an opportunity to define what co-ops feel is necessary to get the “big picture” with this if we really want to move forward. future of dairy generations for generations to come. come.”
Bozic says some of these principles are implemented through federal orders, for example, timely payments for milk verification of samples tested by weight.
“The challenge for the long-term sustainability of this approach is that processes can shrink as manufacturing increases,” he explains. “That’s why we think it was perhaps necessary to pass a separate law that will specifically provide meaningful safeguards to the relationship between dairy processors and producers. »
Trotter says that right now the industry is paying the price for not having the big picture and those guardrails outside of the federal order. “As long as we stay focused on the future, we believe it will definitely be a win-win situation for everyone.”
Bozic says the enabling legislation to the federal milk marketing ordinance might need a slight modification to allow orders to be worded differently from the uniform price principle. The other law, which could be part of the farm bill discussion or a separate standalone bill, is the premise and contractual part of the policy priorities.
The proposal also calls for a standard set of ‘contract principles’ to make the pricing system fairer and more equitable and build trust between farmers and processors. This includes the following priorities:
Written contracts: All milk supply agreements must be in writing.
One-time payments: Farmers must be paid on time, every two weeks, and with a maximum lag of three weeks. Advance checks must be paid in accordance with what is known of the current month’s prices.
Verification of weights, tests and samples: Unless a farmer opts out, certified third-party organizations should be used to verify milk weight, component testing and samples. Verification bodies are also authorized to provide other services to farmers.
Transparent pricing formulas: For farmers to be able to effectively manage risk and understand the financial implications of improving farming practices, milk composition and quality incentive schemes (such as CCS, protein premiums and by volume) must be clearly spelled out in milk supply agreements, and sufficient advance notice given before incentive formulas change. Processors should be allowed to set price formulas as needed to be competitive in domestic and foreign markets.
Notice of termination of the contract: Except in extraordinary circumstances, processors must give reasonable notice before contracts can be terminated.
Principle of good faith: Processors and farmers must act in good faith and disputes must be settled through an arbitration process with meaningful penalties for unfair behavior.
Equal opportunities for all farmers: No special offers should be allowed. Incentive payments offered to a customer must be offered to all customers meeting the same processor criteria, including but not limited to differences in farm location, size and quality.
Competitive risk management: Farmers should be able to effectively manage price risk using a combination of processor-specific base contracts and private or government-supported risk management instruments.
Exclusivity and volume limits: Processors should not impose exclusivity if they impose volume limits or two-tier pricing.
Equal treatment of subcontractors: These conditions should apply to all milk buyers in the United States, regardless of their ownership structure or participation in FMMOs.