Dick Groves
Editor, Cheese Reporter


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The Dairy Industry’s Class I Problem

Question: What do the Northeast and Mideast federal milk marketing orders have in common?

Answer: They have both had to deal in recent months with the impacts of declining Class I sales and the potential uneconomic movements of milk.

And they will both probably have to deal with that issue again in the coming years, because it doesn’t look like there is any end in sight to the long-term stagnation or decline in fluid milk sales.

As we reported on our front page back on August 29th, US beverage milk sales in 2013, at 51.9 billion pounds, were down more than 1 billion pounds from 2012 and the lowest since 1982. And fluid milk sales during the first six months of 2014 were down 2.5 percent from the first six months of 2013, according to USDA statistics.

So what kind of problems are being caused, or allegedly caused, by declining Class I sales in these two federal orders?

In the Northeast order, for the second straight year, Queensboro Farm Products, a pool handler, requested a reduction in the shipping percentages for the months of September, October, and November. In its petition, Queensboro cited declining Class I sales, among other things.

Several entities commented on Queensboro’s request. Agri-Mark noted the continued decline in the Class I utilization percentage for the Northeast order; Alouette Cheese USA noted that the market conditions reported in the 2013 decision that formed the basis for granting the requested reduction in 2013 have deteriorated even further in terms of Class I utilization and sales of fluid milk for the Northeast order; the Greater Northeast Milk Marketing Agency (Dairy Farmers of America, Land O’Lakes, St. Albans Cooperative Creamery, and Dairy Marketing Services) noted a significant drop in Class I utilization through the first few months of 2014; and Upstate Niagara Cooperative noted that Class I sales declines have accelerated in recent years, which presents a challenge in maintaining the pooling of milk supplies while avoiding unnecessary and disorderly shipments of milk for qualification purposes.

In approving Queensboro’s request, Erik Rasmussen, the Northeast order’s market administrator, shed more light on that order’s declining Class I utilization. Monthly pool statistics present a “rather stark picture” of the order’s Class I utilization, he noted.

During the May 2013-June 2014 period, the volume of milk used in Class I was the lowest for that respective month for the 14 or 15 years that the Northeast order has existed, Rasmussen pointed out. The
Class I utilization for June of 2014, at 699.1 million pounds, was the lowest ever out of 174 pool calculations. That was also the first time ever that Class I utilization accounted for less than one-third of the total pool volume.

The Mideast order in recent months has received two separate requests from the Great Lakes Southern Milk Marketing Agency (which consists of Foremost Farms USA, Michigan Milk Producers Association, Continental Dairy Products, and NFO) to reduce the shipping standards and increase the producer milk diversion limits.

Both times, GLSMMA cited weak Class I demand and a continued surplus supply as the cause of projected shortfalls in Class I deliveries and sought to avoid uneconomical milk shipments and unwarranted depooling of milk by reducing the shipping requirements and increasing the diversion limitation percentages to nonpool plants. And both times, for a total of four months, the shipping standards were reduced and the diversion limits were increased.

Queensboro has made its request for two straight years, and GLSMMA made two separate requests for this year. Given what’s taking place with both Class I use and milk production, these won’t be the last time these requests are made.

These examples should be noted while keeping in mind the statistics about fluid milk sales. Beverage milk sales last year totaled 51.9 billion pounds, while milk production totaled 201.2 billion pounds. Thus, fluid milk sales accounted for slightly more than 25 percent of total US milk utilization.

However, here in 2014, beverage milk sales might fall below 51 billion pounds, while milk production is projected to reach 205.3 billion pounds. Thus, for the first time since federal orders were established, fluid milk will represent less than 25 percent of total milk utilization.

This is a different percentage than overall federal order Class I utilization, which last year was around 32 percent. It’s different for at least a couple of reasons.

First, California (which last year accounted for 20.5 percent of US milk production) of course is not (yet) part of the federal order system. The issue of declining Class I utilization is actually worse in California, where in 2013 just 13.1 percent of the state’s pooled milk supply was used in Class 1 products.

Second, almost all of Idaho is unregulated. Idaho last year accounted for almost 7 percent of US milk production, and almost all of that milk was used for making cheese and other dairy products, rather than for fluid milk.

Since federal orders were established several decades ago, fluid milk has always been placed on a “pedestal,” as far as both price and market incentives are concerned. But here in the second decade of the 21st century, that pedestal is no longer deserved nor necessary.

The dairy industry has a couple of choices for dealing with this Class I problem: continue to deal with it in piecemeal fashion, order by order and year by year; or revamp federal orders to recognize the new realities of the beverage milk industry. DG

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