USDA’s Make Allowance Decision: Good News, But Long Overdue

It’s taken seemingly forever, it won’t become effective for at least a couple of months, and it’s still not a sure thing, but last week’s announcement of new federal order make allowances for cheese, butter, dry whey and nonfat dry milk is still a welcome one.

Let’s take a closer look at several parts of the above paragraph to better put this entire process in perspective. By “seemingly forever,” we mean “almost three years.”

Yes, it was almost three years ago, or in September of 2005 to be precise, that Agri-Mark originally petitioned USDA to hold an emergency hearing to increase federal order make allowances. USDA finally held a hearing in January of 2006, did basically nothing for seven months, then reconvened the hearing in September of 2006, or almost exactly one year after the agency received Agri-Mark’s petition.

Things moved fairly quickly after that (at least by federal order standards), with USDA issuing a tentative final decision raising make allowances in November of 2006, dairy producers approving the new make allowances before the end of that year, a preliminary injunction being sought to halt implementation of those new make allowances, the injunction being denied, and the new make allowances going into effect on March 1, 2007.

There was at least one problem, however: the new make allowance for cheese, 16.82 cents per pound, was barely higher than the old make allowance for cheese, 16.50 cents per pound.
At the January 2006 hearing, Agri-Mark had proposed a make allowance for cheese of 18.1 cents per pound. So more than a year later, after energy and other costs had continued to increase, USDA implemented a paltry increase in the cheese make allowance.

Meanwhile, USDA was also conducting separate hearings on make allowances and other issues relating to federal order Class III and Class IV pricing formulas. The first hearing in that proceeding was held in late February and early March of 2007, the hearing was reconvened in April and then reconvened again in July, and USDA finally announced a “partial” decision last week.

Also during this process that’s taken almost three years, California held a hearing on its cheese/whey (4b) and butter/powder (4a) pricing formulas in June of 2006 and implemented new formulas before the end of that year; then held another hearing on those pricing formulas last October and again implemented new formulas before the end of the year.

So when we state that this USDA process has taken “seemingly forever,” well, that’s what we mean.

Then there’s the “effective” part of that first paragraph. Dairy producers still need to approve these new make allowances.
When USDA announced new make allowances back in November of 2006, it took five or six weeks for producers to approve them. The same can be expected this time.

Also, those relatively small increases in make allowances (particularly for cheese) prompted a lawsuit by some dairy producers. USDA these days expects a lawsuit to be filed pretty much every time it issues a federal order decision, and given the potential negative producer impact of this one, a lawsuit seems likely, potentially further delaying the effective date.

These procedural delays aside, this is still a very welcome decision from USDA. Perhaps the best way to look at this is from a California perspective, for a couple of reasons.

First, as noted earlier, California has twice implemented new pricing formulas for 4b and 4a milk, and both of those decisions increased make allowances for at least some products. The first decision, implemented in late 2006, increased the make allowances for cheese, dry whey and nonfat dry milk; the second decision, implemented late last year, increased make allowances for cheese and nonfat dry milk, and implemented a fixed whey value.

Second, USDA’s decision announced last week uses just one source of information for raising the cheese make allowance: the California Department of Food and Agriculture’s 2006 survey of average cheese manufacturing costs. USDA’s decision refers to that survey as the “best available information.”

That observation really drives home the necessity of USDA’s decision. In September of 2005, when Agri-Mark originally petitioned USDA for an emergency hearing to increase make allowances, the most recent CDFA report (released in November of 2004) indicated an average Cheddar manufacturing cost of 17.06 cents per pound. That was for calendar year 2003.

In November of 2005, before USDA held the first hearing on make allowances, the CDFA issued its study of 2004 processing costs; average Cheddar manufacturing costs had climbed to 17.69 cents per pound by then. A year later, in CDFA’s study of 2005 costs, Cheddar manufacturing costs had increased to 19.14 cents per pound.

Finally, last September (prior to California’s October 4b and 4a hearing), CDFA released its study of 2006 costs. The study showed that by 2006, average Cheddar manufacturing costs had risen to 19.88 cents per pound.

Thus, between 2003 and 2006, in California, the average cost to produce Cheddar cheese increased almost three cents per pound. During that time, USDA increased the make allowance for cheese by a measly 0.32 cents per pound.

Certainly, this isn’t an easy decision for USDA or the dairy industry. Any increase in the make allowance means a reduction in farm milk prices, which makes this a tough sell no matter how you look at it.

Like dairy processors, producers are faced with much higher costs these days for everything from fuel to feed to fertilizer. But producers at least saw record-high milk prices last year, and forecasts point to record or near-record prices this year and next.

Cheese makers have faced these much higher costs with just one very small make allowance increase. These new make allowances are necessary, and long overdue. •

Cheese Reporter welcomes letters to the editor. E-mail your comment to Dick Groves at dgroves@cheesereporter.com. Past editorials and other information can be found at www.cheesereporter.com.

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