Dick Groves
Editor, Cheese Reporter


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Time For Another Round Of Federal Order Reform

Last year in this space, we looked at a couple of issues related to the current shortcomings (at least in our opinion) of federal milk marketing orders: product price formulas (May 9, 2014) and declining Class I sales (October 3, 2014).

Tying these two columns together, and adding some other problems with current federal order pricing and pooling regulations, we’ve reached the conclusion that it’s time for another round of federal order reform.

Before we make that case, however, we offer one caveat: our preference has long been, and will continue to be, for the complete elimination of federal milk marketing orders (at least their pricing and pooling provisions; federal orders can and should continue to play a role in areas such as accuracy of weights, milk component testing, contract enforcement, auditing, and in data gathering and publication of statistics). But federal orders aren’t going away anytime soon.

Indeed, sadly and frustratingly, it was almost 20 years ago (in our April 7, 1995 issue, to be exact) when we wrote a column with the following headline: “Time To Terminate The Federal Order Program.” The final sentence of that column was as follows: “Given all the problems of the federal order program, starting over seems like a better solution than trying to salvage the current mess.”

For better or worse, Congress disagreed with that advice, and instead, in the 1996 farm bill, mandated the reform of federal orders. Those reforms went into effect on January 1, 2000, and included, among other things, the consolidation of federal orders from more than 30 to just 11 (today there are 10; the Western order was terminated about a decade ago), a switch to product price formulas, and a new way of pricing Class I milk.

Since those order reforms were implemented, the dairy industry has spent considerable resources (in the form of time, money and energy) trying to improve them by, among other things, raising make allowances in product price formulas, amending the definition of a producer-handler, and changing the requirements for depooling milk.

Still, federal orders remain a work in progress. To illustrate that point, it’s noteworthy that there have been at least a couple of instances in the last seven years or so in which further reforms of federal orders were recommended, at least indirectly.

The first was the 2008 farm bill, which called for the establishment, subject to the availability of appropriations (money), of a ‘‘Federal Milk Marketing Order Review Commission” to review and evaluate various aspects of federal orders. That commission was never actually established, and the 2014 farm bill included a section repealing the authority to establish such a commission.

The second grew out of the 2009 milk price crisis. US Secretary of Agriculture Tom Vilsack established a Dairy Industry Advisory Committee in 2009, and that panel released its final recommendations in 2011.

The second of the DIAC’s 23 recommendations (and one supported by all 17 DIAC members) was to review federal milk marketing orders. More specifically, the recommendation was for the US secretary of agriculture to appoint a committee to review implications of federal orders, including, but not limited to, end-product pricing’s impact on milk price volatility and the impact of classified pricing and pooling on processing investment, competition and dairy product innovation.

It’s been about four years since the DIAC released its final report, but we’re no closer to any sort of federal order review committee now than we were four years ago. And for what it’s worth, Tom Vilsack is still the secretary of agriculture.

Also for what it’s worth (millions if not billions, of dollars), end-product pricing continues to impact milk price volatility, and classified pricing and pooling continue to affect processing investment, competition and dairy product innovation — and not in positive ways.

There have been at least a couple of other interesting developments in the federal order arena in recent years that are worth mentioning here.

First, three dairy cooperatives that represent over three-quarters of the milk produced in California (California Dairies, Inc., Dairy Farmers of America, and Land O’Lakes) have for the past year and a half or so been developing a proposed California federal milk marketing order.

If such an order were to be implemented, federal orders would obviously become considerably more entrenched (at least as far as the percentage of milk pooled under federal orders is concerned) than they are now.

Second, Class I milk continues to decline in importance in the federal order system (at least as far as percentage utilization is concerned). Back in the late 1960s, over 60 percent of all milk pooled on federal orders was used in Class I, but that declined to less than 50 percent by 1980, and to under 40 percent by 2000, when federal order reforms became effective.

In 2013, the last year for which statistics are available, Class I utilization was under 33 percent. In other words, less than one-third of all milk pooled on federal orders in 2013 was used in Class I.

As a side note, if California becomes a federal order, that percentage will drop some more. In 2013, California’s Class 1 utilization was just 13.1 percent.

Industry changes since the last round of federal order reform back in the late 1990s make it essential that another round of these reforms be undertaken, preferably sooner rather than later. DG

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