Columnist / Guest Opinion / Editorial
USDA must act on make allowances

by John Umhoefer

John Umhoefer is executive director of the Wisconsin Cheese Makers Association.

It’s been more than two years since Agri-Mark Cooperative petitioned USDA for an emergency hearing to update dairy product make allowances in federal milk price formulas. USDA doled out meager changes in a tentative decision last winter. In the same time frame, California adjusted its state make allowances twice, leaving manufacturers nationwide far less compensated than the Golden State’s modern dairy facilities.

California’s latest changes to their state milk price formulas for cheese (4b price) and butter/powder (4a price), announced Nov. 20, reflect the state’s 2006 manufacturing cost study. The federal order make allowances tweaked a year ago reflected data from Cornell University’s plant cost study (2004 and 2005 data) and California’s 2004 manufacturing cost study.

Federal make allowances are woefully, chronically out of date.

In light of California’s milk price formula changes, set to take effect this month, USDA must act. The cheese market in the United States is a national market and cannot support two grossly-different, government-based price structures.

Luckily, USDA has not issued a final rule on make allowances in federal milk prices. Their tentative decision last winter could be updated with new manufacturing cost data and a final decision released as soon as possible.

To that end, WCMA offers this open letter to the U.S. Secretary of Agriculture, in support of swift action:

Dear Mr. Secretary,

New dynamics in cheese and whey markets, as well as a new milk pricing decision in California, require your Department to address milk pricing formulas used in federal milk marketing orders.

Last November, the Department announced a tentative final decision to change make allowances in the Class III and Class IV milk price formulas. The make allowances announced were lower than dairy manufacturers had requested, stressing the financial position of these manufacturers.

Following that decision, whey prices and cheese prices reached record heights, inflating the Class III milk price. As you know, the price of dry whey is built into the Other Solids value in the Class III milk price formula. This inflated milk price drove cheese manufacturer margins deeply into the red nearly every month this year.

Why? Because nearly all medium and small sized cheese manufacturers in the United States do not manufacture dry whey. These manufacturers make whey protein concentrate or sell liquid whey to other processors. These whey markets did not offer the returns that dry whey earned throughout the spring and summer of 2007 and manufacturer margins were strained.

Now the situation has increased in urgency.

On Nov. 20, 2007, the California Department of Food and Agriculture announced changes to its 4a and 4b milk price formulas, including higher make allowances for the manufacture of cheese and nonfat dry milk and a new fixed whey value of 25 cents per hundredweight.

This change in California’s milk pricing will create an untenable difference between the value of milk used in cheesemaking in California and the value of cheesemilk in federal milk marketing orders. If the California formula changes were applied to the first ten months of 2007, California’s 4b milk price would have been, on average, $2.63 per hundredweight lower than the Class III milk price in federal orders.

If a broader time frame is compared, for example Jan. 2005 through Oct. 2007, the difference remains striking: the California 4b price would have averaged $1.60 per hundredweight lower than the Class III price. By comparison, the actual California 4b averaged 52 cents per hundredweight lower than the Class III price during that time.

This is an issue of fairness and competitiveness in the dairy industry. Dairy manufacturers in federal order regions have seen milk prices inflated by high-priced products — products they do not produce — while California has chosen to lower its milk prices, creating a difference in prices so large that cheese manufacturers throughout the United States will be unable to compete with cheesemakers in California.

Therefore, we urge you to amend the tentative final decision on manufacturing allowances in federal milk price formulas. The hearing record on these make allowances could not anticipate the recent, sudden increase in the dry whey and cheese prices. Nor did the hearing record anticipate California’s extraordinary milk price changes. An increase in the federal make allowances for cheese and dry whey will stabilize the cheese industry, stem widespread losses and assure orderly marketing of milk.

Thank you for your immediate attention to this important issue.

Sincerely,
Wisconsin Cheese Makers Association.

CMN

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