Dick Groves
Editor, Cheese Reporter




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20 Years Of Reformed Federal Orders: Time For Another Round

It’s kind of hard to believe, but the beginning of 2020 marked the 20th anniversary of the implementation of federal milk marketing order reforms. This anniversary serves as yet another reminder that another round of order reforms is long overdue.

By way of brief background, the last round of federal order reforms had its origins in the 1996 farm bill. That legislation called for both consolidation and reform of federal orders.

Regarding consolidation specifically, USDA was required to limit the number of federal orders to not less than 10 and not more than 14 orders (there were 31 federal orders in the late 1990s; federal order consolidation whittled that down to 11 federal orders starting on Jan. 1, 2000).

As far as other reforms were concerned, under the 1996 farm bill, among the issues USDA was authorized to implement as part of the consolidation of federal orders were the following: the use of utilization rates and multiple basing points for the pricing of fluid milk; and the use of uniform multiple component pricing when developing one or more basic formula prices for manufacturing milk.

Under the 1996 farm bill, USDA was required to implement federal order reforms within three years; however, Congress later extended the deadline and the reforms were implemented on Jan. 1, 2000.

In addition to consolidating the orders, the order reform final rule set forth a replacement for the Class I price structure and replaced the basic formula price (the predecessor of the current Class III price) with a multiple component pricing system. The final rule also established a new Class IV which includes milk used to produce nonfat dry milk, butter, and other dry milk powders; reclassified eggnog; and addressed other minor changes.

Since order reforms were implemented, they’ve been “tweaked” several times, perhaps most notably in the area of make allowances, which were increased in 2008 as a result of a proceeding that actually was launched in 2005 and was finally, mercifully terminated in 2013.

On the consolidation front, as noted earlier, there were 11 federal orders when order reforms became effective 20 years ago. That number fell to 10 when the old Western order was terminated in 2004, but went back up to 11 when the California federal order became effective in late 2018.

While federal order regulations have changed somewhat over the years, it could be argued that the dairy industry has changed considerably more.
Among other things, Class I utilization was over 40 percent in 1999, the year the order reform final rule was approved, but was under 30 percent in 2018.

So that’s where we sit at the beginning of 2020, with a federal order system that last underwent significant reforms 20 years ago. And it seems like we’re long overdue for another round of reforms, for at least a couple of reasons.

First, the US dairy industry is considerably different now than in the late 1990s. Among other things, as mentioned earlier, Class I utilization continues to decline. The Class I utilization percentage isn’t always an accurate indicator of how low Class I use really is, due to depooling, but with California and its low Class I use (12.8 percent in 2017, the last full year the California State Order was in effect) joining the federal order system in late 2018, it’s safe to say Class I utilization in federal orders won’t be above 30 percent again anytime soon (barring large volumes of milk being depooled, which was the case late last year).

Second, the aforementioned make allowances haven’t been adjusted for more than a decade. The cheese make allowance, 20.03 cents per pound, is based on California manufacturing cost data from 2007. In 2016, the weighted average cost for making a pound of Cheddar cheese in California was 24.54 cents, or more than 4.5 cents higher than the current federal order make allowance for cheese.

So at a minimum, it would seem like now is as good a time as any to adjust make allowances for cheese, as well as for butter, dry whey and nonfat dry milk.

But it’s also a good time to reconsider the wisdom of using product pricing formulas at all in federal orders. After all, among the conclusions the dairy industry has probably reached over the past 20 years is that there is no completely fair and reasonable way to use product pricing formulas that will satisfy all industry participants.

There are numerous examples of the problems with product price formulas, but we’ll mention just two. In 1999, when order reforms were finalized, Cheddar cheese accounted for more than 35 percent of US cheese production. In 2018, Cheddar accounted for less than 30 percent of cheese output. But it’s the price of Cheddar that’s used in the Class III price formula.

Also in 1999, dry whey (human) production totaled just under 1.1 billion pounds, and dry whey was included in the Class III price formula. But in 2018, despite the fact that US cheese production has grown by more than 5 billion pounds since 1999, dry whey (human) output had actually declined to under 1 billion pounds.

With all of these problems with current federal order pricing regulations, is there any hope for significant reforms in the future? Yes, there is. The International Dairy Foods Association and American Farm Bureau Federation are conducting reviews of the federal order system and, last fall, AFBF released a federal order reform proposal (for details, please see the story in our Oct. 4th issue). That’s a start.

The next round of federal order reforms can’t come soon enough.

UF Milk Rulemaking Seems To Be Taking Forever

Last Friday, the US Food and Drug Administration announced that it is reopening the comment period on its proposed rule to allow fluid ultrafiltered milk in the manufacture of standardized cheeses and related cheese products. If nothing else, FDA’s announcement served as a reminder that this UF milk rulemaking has been going on seemingly forever, with no end in sight.

The “background” section of FDA’s announcement does provide some perspective on how far back this proceeding goes. It notes that, in the Federal Register of Oct. 19, 2005, FDA proposed to amend its regulations to provide for the use of fluid UF milk in the manufacture of standardized cheeses and related cheese products.

FDA then notes that its 2005 proposed rule was issued in response to citizen petitions from the American Dairy Products Institute and the National Cheese Institute, the Grocery Manufacturers of America, Inc., and the National Food Processors Association.

And therein lie at least a couple of additional indicators of how long the cheese industry has been awaiting a final rule in this proceeding.
First, ADPI’s original petition to FDA was submitted on Dec. 2, 1999. In other words, as we enter the third decade of the 21st century, we’re dealing with a regulatory matter that dates back to the last month of the last century.

Second, none of the associations that submitted the other petition even exist any more, at least not in their current form. At the time that petition was submitted (on Feb. 10, 2000), the National Cheese Institute was a constituent organization of the International Dairy Foods Association. But a year ago, IDFA consolidated the governance structure of its constituent organizations, including the Milk Industry Foundation and the International Ice Cream Association along with NCI, and as of Jan. 1, 2019, NCI ceased to exist.

Meanwhile, the National Food Processors Association changed its name to the Food Products Association in 2005, merged with GMA in 2007 and the new organization became the Grocery Manufacturers Association in 2008. But GMA is no longer; it became the Consumer Brands Association at the beginning of this year.

As can be ascertained by reviewing the background in FDA’s announcement, developments in this rulemaking have been few and far between, to put it mildly. FDA published a proposed rule in 2005, then reopened the comment period in late 2007 on two specific issues raised by comments concerning the proposed ingredient declaration.

Most recently, in August 2017, FDA issued guidance in which it notified manufacturers of its intent to exercise enforcement discretion regarding the use of fluid UF milk in the production of standardized cheeses and related cheese products, provided that the physical, chemical, and organoleptic properties of the cheese or cheese product are not affected.
And that’s it, for the first 20 years after ADPI submitted its petition.

Now, FDA is, through Mar. 30, 2020, seeking new information and public comment on current industry practices regarding the use of fluid UF milk in the manufacture of standardized cheeses, and the declaration of fluid UF milk in the labeling of these products when used as ingredients.

So at least FDA is seeking “new” information on these issues, rather than simply issuing a final rule (or, alternatively, deciding not to proceed with such a rulemaking) based on comments it received well over a decade ago.

But this reopened comment period certainly raises concerns over the future timetable of this proceeding. After all, it’s now been 14-plus years since the original proposed rule was released and, by the time this new comment period ends (assuming the comment period isn’t extended), it will have been almost 12 years since the previous reopened comment period ended (after it was extended).

At this rate, the dairy industry can expect a final rule on the use of fluid UF milk in standardized cheeses sometime around 2035.

As far as comments to FDA are concerned, there are at least a couple of newer issues that should be addressed. First, this entire proceeding has concerned fluid UF milk, but there is also increasing interest in using microfiltered milk to make cheese. If nothing else, maybe FDA should broaden its proposal to include the use of microfiltered milk (granted, this would extend the timeframe).

Second, FDA continues to be concerned about the labeling of standardized cheeses made from UF milk. Notably, when FDA in December 2007 reopened the comment period on its 2005 proposed rule, it sought further comment on two specific issues raised by the comments concerning the proposed ingredient declaration. FDA did so because it had received comments from industry opposing the proposed requirement to declare fluid UF milk as “ultrafiltered milk” in the ingredient statement of the finished cheese.

This issue came up again in 2017 when FDA decided to exercise enforcement discretion, not only on the use of UF milk, but also with respect to the labeling of products made with UF milk. FDA still prefers that industry identify the ingredient as “ultrafiltered milk” rather than just “milk.”

We can’t help but wonder how FDA can actually be concerned about including the word “ultrafiltered” with this ingredient while it continues to allow the use of “milk” and other dairy terms on plant-based foods.
Stay tuned for the third decade of this UF milk rulemaking.

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