Editorial Comment Publisher/Editor


Extending Multiple Component Pricing Makes Sense, And Cents

Dick Groves
Cheese Reporter Publishing Co., Inc.
dgroves@cheesereporter.com 608-316-3791

April 6,, 2018


Last week, 14 dairy cooperative associations, along with several state and national dairy producer trade associations, asked the US Department of Agriculture to hold a hearing to consider adoption of uniform multiple component pricing plans for the Southeast and Appalachian federal milk marketing order markets, along with adjustment for somatic cell count.
This proposal makes sense for today’s dairy industry, and it also will make cents for the industry.

As noted in last week’s front-page story on this proposal, MCP has been used in the federal order program for 29 years, and is also employed in California, Canada, the European Union and other countries. The federal order reform final decision, released 19 years ago this month, provided a uniform, protein-based MCP plan for all seven markets outside of the southeast and Arizona (that is, outside of the Southeast, Appalachian, Florida and Arizona-Las Vegas federal orders).

Since federal order reform went into effect on Jan. 1, 2000, things have changed a bit in the dairy industry, to put it mildly. As the MCP proposal notes, the Southeast and Appalachian markets in the 1990s had high Class I use and were largely supplied by milk originating in or near the markets.

But milk production within that southeast region has declined since order reforms went into effect, the proposal points out. Specifically, milk output in the 10 states that largely comprise the Southeast and Appalachian orders fell by 18 percent from 2000-05, another 12 percent from 2006-11 and 1 percent from 2012-16. Of those 10 states, only Georgia posted a milk production increase over the 2000-16 period.

Today, the southeast region relies on milk supplies from dairy producers who have access to MCP markets, the proposal explains. Milk originating in MCP markets would “rationally” be reluctant to supply fluid milk needs in the southeast if that meant giving up greater revenue from MCP in the market of origin. A high component producer within or near the southeast market would rationally seek an MCP market buyer, rather than serve southeast fluid needs, to enhance farm revenue from the payment for protein.

The proposal illustrated half a dozen examples of the “costly marketing inefficiencies” due to the adjoining MCP and skim-butterfat markets. For example, high protein milk in or near the southeast markets is transported away from the southeast to MCP market plants, while lower protein milk from more distant sources is shipped to the southeast for fluid use, adding unnecessary transportation costs on the outbound as well as on the inbound milk as tanker trucks pass each other going in opposite directions.

Interesting. In recent years, the US dairy industry has committed considerable resources to becoming more sustainable, yet we still have situations where, as the MCP proposal explains, milk marketing and movement in the southeast is being directed by the unequal regulated pricing systems in adjacent federal orders rather than serving market needs and promoting “marketing efficiencies.”

Put bluntly, if the US dairy industry is truly interested in becoming as sustainable as possible, it will embrace this proposal to extend multiple component pricing to the Southeast and Appalachian orders just to reduce milk marketing inefficiencies. This is just common sense.

It also makes “cents” to embrace this MCP proposal. As the above example notes, transporting high protein milk out of the southeast markets and lower protein milk into the southeast markets adds “unnecessary transportation costs,” both for the outbound as well as the inbound milk.

But that’s just one of several indirect mentions of economics in the MCP proposal.

Here’s another example from the proposal: “Fluid milk suppliers to the southeast markets must bear extra costs from transportation, component content, and source of supply when procuring milk for fluid use.”

And then there’s this: The proposal is expected to benefit producers by “reducing costs associated with supplying fluid markets in the southeast, and enhance average regulated revenue to producers under an MCP plan.” And some producers with lower than average protein will experience less regulated revenue, while other producers experience more. “The cross-subsidy to low protein producers by high protein producers will end.” Sounds fair to us.

Finally, “it is expected that adoption of an MCP plan for the two southeast markets will decrease costs to handlers and cooperatives supplying the southeast fluid milk market and possibly increase costs to manufacturing plants (if any) that do not now pay for the value of skim milk solids used in manufacturing.”

The proposal also points out that average protein in producer milk in MCP markets has increased following adoption of an MCP plan, while somatic cell count levels have dropped “significantly.” A similar response can logically be expected from southeast producers who do not have prior experience with MCP or SCC adjustments.

So from an orderly marketing standpoint, extending multiple component pricing to the Southeast and Appalachian federal orders would appear to make a great deal of sense. And from an economic standpoint, extending MCP to those two orders will benefit southeast region pool producers based on the enhanced market value of skim solids over the value of skim milk under the current pricing system.

Extending MCP to the southeast region is an idea with little or no downside. This proposal should go forward ASAP.

Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to
dgroves @cheesereporter.com.



Dick Groves

Dick Groves has been publisher/editor of Cheese Reporter since 1989. He has over 35 years experience covering the dairy industry. His weekly editorial is read and referenced throughout the world.
For more information, call 608-316-3791 dgroves@cheesereporter.com

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