opinion / editorial / guest columnist / WCMA
Stuffing federal orders

John Umhoefer is executive director of the Wisconsin Cheese Makers Association. He contributes this column monthly for Cheese Market News®.

USDA checked their calendar and delivered a real turkey for the holiday season.

In a flurry of activity this November, the agency delivered half-baked make allowances and proposed a hurried hearing to look at stuffing 73 cents into the Class I price in every federal order.

USDA justified its new make allowances in a concise, 23-page tentative final decision Nov. 22. Here’s a summary.

• Cheese make allowance

At the bottom line, USDA combined a Cornell University dairy plant survey (2004-2005 data) with the California Department of Food and Agriculture (CDFA) annual dairy plant survey for 2004. The weighted average cost for making Cheddar in California was 17.69 cents per pound and the Cornell weighted average for the 16 cheese plants surveyed was 16.38 cents. USDA weighted these numbers by cheese production, added a marketing cost of 0.15 cents and adopted a 16.82-cent cheese make allowance.

USDA tossed out Mark Stephenson’s argument that the 16.38-cent weighted average in the Cornell survey should be adjusted to reflect all 53 Cheddar plants in the United States (outside of California). This adjustment to a national weighted average would create a 20.28-cent cheese make allowance. USDA states in its decision that even if this math was “statistically acceptable, the department would not use it as the new make allowance for cheese.” In short, USDA argued that it wouldn’t use a weighted average for all the other make allowances (butter, nonfat dry milk and dry whey) and then used a national weighted average derived by regression for cheese. Too bad Cornell didn’t create national weighted averages for all these products.

USDA dropped the other major survey considered at the hearings. The Rural Business Cooperative Service survey did not find lower costs at larger plants; included only cooperatives; had an incompatible format and no verification; and did not gather info on return on investment.

• Butter make allowance

USDA blended data from the CDFA survey (including eight California butter plants) and the Cornell survey (with four plants). USDA states in its decision that the California plants “provide a reasonable basis on which to reinforce and improve estimating the cost of manufacturing butter outside of California because no other better source of cost data is available.” Or, as Woody Allen put it, “Seventy percent of success in life is just showing up.”

The 12.02-cent make allowance selected by USDA for butter compares with 16.58 cents recommended in the discredited Rural Business Cooperative Service survey, 13.68 cents in the California survey and a weighed average cost of 11.08 cents in the Cornell survey.

• Dry whey make allowance

Interestingly, USDA doesn’t turn to the California plant survey to help develop a make allowance for dry whey. The agency uses only the Cornell study’s weighted average of 19.41 cents, adds the marketing adjustor and arrives at a 19.56-cent per pound make allowance for dry whey.

USDA states that “three of CDFA’s dry whey plants have a manufacturing cost so large that it would be unreasonable to combine the total weighted CDFA value with the 12 plant CPDMP (Cornell) sample.”

Apparently California’s survey, so accurate for cheese and butter, is a dog when it comes to dry whey, even though these dry whey plants are likely have the same ownership as the Cheddar plants. It’s almost comical to read USDA state: “This tentative final decision finds agreement with the proponents of Proposal 1 that combining the CDFA survey with costs representative of federal order manufacturing costs for cheese, NFDM and butter (except dry whey) is the most reasonable approach for determining changes to the make allowances.” (Italics added.) That’s called selecting the data to suit your needs.

• Class I price increase

On the heels of its make allowance decision, USDA is hosting a hearing to consider a National Milk Producers Federation request to effectively raise the Class I differential in each federal order 73 cents.

This request flies in the face of the purpose of federal orders, which attempt to create equity in milk checks by pooling dollars. Arbitrarily raising the Class I price greatly favors those federal orders with high Class I (fluid milk) use.

And as a double whammy, raising Class I differentials will definitely induce an increase in milk production, lowering the Class III and IV prices.

The make allowance decision in November offered a glimpse of how USDA decisions are based on politics and power, not sound economic data. A decision in favor of adding a random 73 cents to federal orders would be final proof.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.