Federal Orders: Enhancing Prices, Crushing Margins

Government Pushing Processors to the Breaking Point

Volume 131, No. 40, Friday, April 6, 2007

This column has disparaged federal milk marketing orders on occasion, but now it is clear that perhaps that was without a complete understanding of the system. 

While Wisconsin Cheese Makers Association has believed that orders are to provide orderly marketing conditions, assure a supply of fresh fluid milk and set minimum prices for milk in various classes, the real money is in over-order premiums. 

In the March 10 issue of Hoard's Dairyman, Jim Bird described the value of orders, including “Federal orders also provide a tool or structure by which over-order pricing agencies …generate additional revenue on top of federal order minimums. Last year, that value amounted to over $89 million.” Based on context, Jim appeared to mean over $89 million for the Upper Midwest order.

The Hoard's editorial staff backed that argument in the same issue, stating: “The fact is that we’re all in the fluid milk business. And that’s a part of our business that could be damaged significantly without the pricing framework for Class I minimums and over-order premiums that federal orders provide.”

So federal orders provide a framework for over-order premiums. Producers use the federal government to leverage bonus premiums from the free market.

And not just on Class I milk sales. It’s also happening with Class III milk.
In 2000, federal order reforms brought component milk pricing and the value of milk used in cheesemaking became based on the value of cheese, butterfat and dry whey. Dry whey was used to value the “other solids” in Class III milk, that is, the solids that were not cheese proteins.

When USDA added an other solids value to the Class III cheesemilk price, the federal government essentially mandated the free market cheese industry to enter the whey market. The government was saying, “You have to pay the farmer the value of dry whey, so you better start selling the stuff.”

Talk about price enhancement - first these orders facilitate bonuses on Class I milk and now farmers are getting paid for a product that most cheese manufacturers don’t even produce. No wonder some producer representatives defend federal orders.

This mandate to market whey in the federal order Class III price was relatively benign while the value of dry whey was low and unchanging. But the explosion in whey prices during the past six months has grown the other solids value like a malignant tumor. 

According to USDA’s National Agricultural Statistics Service (NASS) survey, the weighted averaged price for dry whey in 2005 was 27.81 cents per pound. In March 2007 that price was 69.66 cents, a 150 percent increase over the 2005 average.

As a result, the other solids value is ballooning the Class III price far above the value of cheese. In 2005, other solids added an average of 70 cents/cwt to the Class III price. In March 2007, other solids added $2.94 to the Class III price.
Most cheese manufacturers don’t have that revenue to pay to producers. Most cheese makers do not produce dry whey. And most didn’t realize the federal government could push them to. 

One Wisconsin cheese maker recently told Wisconsin Cheese Makers Association, “I’m a cheesemaker and I want to focus on being a quality cheese producer. I was never big enough to afford a whey processing plant.” 

Cheese makers like this sell their whey as whole or skimmed wet whey, sometimes chilled, sometimes not. In March, the cheese maker quoted above earned, for his wet whey, about 11 percent of the value of the March other solids price. Read the previous sentence again.

So in a time when milk prices look bullish and dairy commodity markets appear healthy, many cheese processors are suffering from vanished margins. If all the data above has been too much, just consider this: in March 2007 the Class III base price for milk was $14.96 and the cheese market averaged $1.36. It doesn't compute.

Dairy producers that crow about the value, the necessity, of federal orders to pull bonus premiums out of the Class I market and pull nonexistent whey revenue out of cheese manufacturers will find that this government construct is straining processors to the breaking point. 

A healthy industry requires balance, and the Class III price is far out of kilter. •

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at jumhoefer@wischeesemakersassn. org

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