The Evolving Federal Milk Marketing Orders: From 1996 to 2002, and Beyond

As IDFA reported earlier this month, the U.S. Department of Agriculture (USDA) recently published a final rule on Class III and IV price formulas for all Federal Milk Marketing Orders (FMMO). While this is the latest event in a process that began in 1996, it may not be the last. When implemented, this final rule will significantly increase the minimum regulated milk prices paid by cheese manufacturers regulated by federal orders, while marginally lowering the minimum milk price paid by manufacturers of some other dairy products, such as butter, nonfat dry milk, ice cream and yogurt. The exact impact on fluid milk processors depends on the complex federal order price formula used, but it is expected that the average minimum prices for milk used in these products will be higher.

As we now prepare for the next steps in the process, it is important to review the extended journey that USDA has taken in order to "reform" the federal order system.

A Short History of Federal Order Reform
This process began when Congress required in the 1996 farm bill that USDA consolidate the existing 33 federal milk marketing areas to between 10 and 14. Congress also indicated, but did not mandate, that USDA could consider the adoption of component pricing in all marketing areas. To that end, Congress allowed the use of informal rulemaking (no hearing was required), rather than the formal rulemaking procedures that are normally required, to change the federal orders.

USDA then launched an extensive three-year process in which any interested party had ample opportunity to provide suggestions and comments to USDA regarding changes in milk price regulation needed to comply with the farm bill. In April 1999, USDA published the federal order reform rule. While USDA did not take into account all of the suggestions submitted by IDFA, the provisions reflected a serious effort to significantly reform the federal order system, and IDFA generally supported the rule. However, this reform rule was never implemented, because several dairy producer groups filed suit to block its adoption — even though dairy farmers and their cooperatives voted overwhelmingly to adopt the provisions in USDA referendums in each of the 11 new federal milk marketing areas.

These same farmer groups also successfully lobbied Congress to change one key provision of the reform rule, despite the fact that USDA considered the reform rule as a complete package. Congress mandated that there be a significant increase in the Class I differential applied to milk used in fluid dairy products. In addition, Congress directed USDA to conduct a formal rulemaking process in order to reconsider the Class III and IV price formulas contained in the reform rule, with a deadline to implement any changes by the end of 2000. The plaintiffs in the court cases withdrew their case, and the modified reform rule was implemented in January 2000.

The required formal rulemaking began with a five-day hearing in May 2000 to consider proposed changes to the Class III and Class IV milk price formulas. With a pressing deadline to implement changes by the end of 2000, USDA was not able to publish a recommended decision and accept comments prior to implementing any proposed changes. Therefore, USDA published a tentative decision in late November 2000 that was to be implemented in January 2001, with USDA planning to accept public comments on this tentative decision after it was implemented. However, IDFA and many others in the dairy industry believed that at least one provision contained in the tentative decision (the separate Class III butterfat price) was improperly included by USDA. IDFA, along with many dairy producer groups, successfully argued this view in a federal district court; USDA was forced to implement the tentative decision as modified by the judge. IDFA also considered several other provisions of the tentative decision to be incorrectly applied by USDA, so IDFA argued those points in its comments to USDA. Implemented in January 2001 following the court action, this tentative decision significantly increased the minimum prices for milk used in all classes under the federal order system. This can be shown by comparing the milk price regulations from the reform rule (in effect during the entire 2000 calendar year) with those in the tentative decision (in effect beginning January 2001 through the present) using the actual wholesale dairy product prices during the 33-month period from January 2000 through September 2002:

• USDA's tentative decision implemented as of January 2001 increased the FMMO nonfat solids component price. This in turn increased the Class IV price for milk with 3.5% butterfat by an average of 11 cents per cwt for the period from January 2000 through September 2002. The same formula is used for the Class II milk price, which means this price also increased by 11 cents per cwt.

• In USDA's tentative decision, there was a separate Class III butterfat price calculation. However, the U.S. District Court enacted a stay that prevented USDA from implementing that one aspect of the overall tentative decision. The result was that the Class III price, as implemented following the court stay, was an average of 16 cents per cwt higher, for the period from January 2000 through September 2002.

Nearly 30 months after the May 2000 hearing, USDA published a final rule in November 2002. USDA adopted only a few of the IDFA's suggestions in comments submitted on the recommended decision and continued to ignore information clearly presented in testimony at the hearing. Again, as has been the case throughout this process, the milk price formulas in the final rule result in a substantial change in minimum milk prices — compared to either the tentative decision price formula now in effect or the reform price formulas implemented in January 2000:

• Overall, the Class IV price at 3.5% butterfat will be lower (for any assumed wholesale dairy product prices) than the current (tentative decision) price formulas. Since the Class II price is based on the Class IV price formulas — plus 70 cents in both the final rule and the current price system — Class II prices will also be lower. For the period beginning January 2000 and ending September 2002, this difference averages 15 cents lower per cwt of milk for both Class II and Class IV compared to the tentative decision price formulas. Compared to what the Class IV price would have been under the price formulas contained in the reform rule as implemented in January 2000, the combined net effect of the tentative decision (as implemented with the court stay) and the final rule is a FMMO Class IV price which would have been 4 cents lower on average for the period beginning January 2000 and ending September 2002.

• Overall, the Class III price for milk with 3.5% butterfat will be higher under the final rule than under the current (tentative decision) pricing system. For the period January 2000 through September 2002, this difference averages 19 cents higher per cwt of milk. Compared to what the Class III price would have been under the price formulas contained in the reform rule as implemented in January 2000, the combined net effect of the tentative decision (as implemented with the court stay) and the final rule is a FMMO Class III price which would have been 34 cents higher on average for the period beginning January 2000 and ending September 2002.

In addition, several parties are considering legal action challenging the decision and seeking a stay on implementation of the rule.

IDFA will continue to press USDA for sound reforms in the ongoing battle to seek a more market-oriented milk pricing system, and encourages its members to continue working through IDFA to help USDA correct its serious missteps in this process.

Posted November 25, 2002