Implement Make Allowances ASAP

"Tentative" Decision Needs Immediate Attention

Volume 133, No. 1 Friday,July 4, 2008

They arrive all too frequently now, letters from suppliers beginning with “To Our Valued Customers.” One Wisconsin cheese manufacturer sent WCMA a stack of 20 letters from the past six months all from suppliers announcing the need to increase the cost of goods or services.

The increases, including cleaning chemicals, cultures, milk testing, environmental sampling, trucking, natural gas, plastic packaging bags, cheese ingredients, electricity, uniforms and even steel strapping, are undoubtedly driven by necessity.

And USDA’s “tentative partial final decision” June 20 to raise make allowances is necessary too, with implementation as soon as possible.

For USDA, of course, as soon as possible will be perhaps September 1. Following the June 20 publication of new make allowances for cheese, butter, nonfat dry milk and dry whey, each federal order has set in motion a process to hold producer referendums on the decision.

This balloting will require a month - ending July 20. If approved, USDA will announce the producer decisions and select an effective date for the new make allowances - September 1 if all moves smoothly.

Few other industries are as hemmed in as dairy manufacturers. Cost of production (make allowance) is set by an expensive, slow, Byzantine structure of hearings, briefs and decisions. And the result, the June 20 announcement of increases, is based on 2006 cost data. The system, by its design, will always be too little, too late.

Cheese makers also are hemmed in on the sales side. Cheese pricing nationally follows a thin Chicago cash market that reflects the increasingly unique supply conditions for Cheddar cheese.
Admittedly, the market’s addiction to the cash price for block Cheddar is not USDA’s creation, but the Cheddar market remains the touchstone for buyers, and the starting point of nearly every cheese sales transaction.

Future Decisions
USDA’s June 20 decision is described as partial because the agency left decisions on some proposals for a later time. These proposals deserve prompt attention, because they hold the promise of more frequent and timely adjustments to make allowances.

For example:
1. USDA will address the National Milk Producers Federation proposal to incorporate a monthly energy cost adjustment into make allowances based on Bureau of Labor Statistics data on the price indices for industrial natural gas and industrial electricity.

2. Agri-Mark proposed an annual manufacturing cost survey executed by federal order staff.
Both ideas have merit, especially if results from either idea can be automatically executed in milk price formulas without requiring a hearing process. The monthly energy adjustor, executed correctly, would come closest to mimicking market conditions.

Mimicry is USDA’s poor substitute for the real marketplace. WCMA is on record, as of December 2006, supporting a free market system for dairy pricing rather than federal milk marketing orders.

But these are pragmatic times - dairy manufacturers need the system at hand to deliver higher make allowances, and with hope, faster mechanisms to update make allowances.

Other Decisions
Little has been written about USDA's June 20 decisions on other industry proposals. Here’s a summary:

•USDA rejected a proposal to raise the butterfat recovery rate in the protein price formula from 90 percent to 94 percent. While new cheesemaking technology may recover more than 90 percent of butterfat in cheese, evidence from processors at the hearings found that most existing equipment recovers about 90 percent.

•USDA upheld the shrinkage (milk loss) factor found in the pricing formulas. The 0.25 percent figure used today “is a reasonable factor that represents the loss of producer milk when shipped from farm to plant,” USDA wrote.

•The cheese yield factor in the protein price formula will not change, USDA decided.

•USDA rejected the obvious when it failed to accept IDFA’s proposal to change the protein price formula to reflect that fact that a portion of the cream value in this formula is whey cream which earns less than the Grade AA butter price.

USDA stated that little data exists on sales of whey cream and there is no public listing of market prices and volumes for whey cream butter. Industry knows that whey cream has less value than Grade AA butter, but USDA won’t acknowledge it, or develop tools to find the price difference.

•Drop the three-cent addition to the barrel Cheddar price found in the protein price formula? USDA disagreed. While the cash market price difference, on average, between Cheddar blocks and barrels has virtually disappeared, the three cent addition for barrels relates to the additional cost to package block Cheddar, USDA stated.

One processor (Davisco) displayed evidence that this difference in packaging is no longer valid, but evidence from one plant “is insufficient to conclude that this is representative across Federal Order manufacturing plants,” the decision stated.

•Drop Cheddar barrels altogether from the protein price formula? Absolutely not, USDA stated, noting that barrel production is often more than 50 percent of the total cheese volume surveyed by NASS each week.

•USDA rejected a proposal to blend a weekly CME average price for Cheddar cheese with the NASS survey to create a cheese price series with less lag. USDA noted that the recent move to mandatory industry reporting to NASS “will make the accuracy, but not the timing, of price data less of an issue.”

•One proposal would have flat-out replaced the NASS Cheddar price survey with the CME Cheddar price in formulas. USDA turned down this proposal and firmly placed its support with the NASS survey.

•USDA denied a proposal by National All Jersey to eliminate the Other Solids price and expand the protein price formula to include the value of dry whey.

•USDA did accept one idea (in addition to changing make allowances). The agency changed the butterfat yield value from 1.20 to 1.211 in the protein price formula, agreeing that the current number reflected a mathematical error.

Interestingly, USDA commonly cites a lack of data when it rejects hearing proposals from industry. Yet the nature of federal order hearings means that proprietary data on costs or on volumes or on sale prices must be aired publicly, an unattractive proposition for many companies.

A lack of industry data also springs from the ponderous nature of the hearings - in this case three full weeks of testimony and cross examination with no time limits and no schedule of when an individual will be called upon to speak. It’s a ridiculous system for an industry with tight budgets and minimal personnel, and an intimidating environment for anyone without a law degree. •

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


Other John Umhoefer Columns

Security Reforms
Spring Forward
A Week of Clarity
The California Whey

Success Despite Federal Orders
Modest, Affordable Producer Security
The Dry Whey Gap
Feeding Frenzy

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