Guest Editorial
A whey forward

by Connie Tipton

Connie Tipton is president and CEO of the International Dairy Foods Association. She contributes this column exclusively for Cheese Market News®.

When congressional leaders throw up their hands and invite the dairy industry to propose its own policy solutions, we need to seize the moment. Thanks to the House version of the Farm Bill that was passed this summer, we may soon have the opportunity to come together to improve federal milk pricing policies and find a way forward for continued industry growth and prosperity.

The House bill calls for the establishment of a Federal Milk Marketing Order Commission to be composed of 18 industry representatives. The commission members would be charged with making recommendations to USDA and Congress about policy and regulatory changes to improve the competitiveness of the dairy industry. They would evaluate the effectiveness and fairness of the federal order pricing system for producers, processors, consumers and taxpayers.

At IDFA, we see the commission as the best way to tackle our current pricing problems. Although the commission’s report would be non-binding, it would present a set of well-considered recommendations, including points of industry consensus as well as minority dissenting opinions. All kinds of ideas have recently been proposed, such as scaling back to a two-class pricing system, instituting one national order and even deregulating prices altogether. Working together to examine these ideas and others, commission members would be less politically motivated to put in place changes that would only benefit a few.

Here’s a prime example of the type of challenges the commission would be asked to sort out. The current use of the price of dry whey in setting federal order minimum milk prices demonstrates how rigid federal milk market order formulas and class prices make it impossible for companies to react to changing market conditions. Sometimes, in fact, they can trap segments of the industry into losing propositions.

High in protein and lactose and low in fat, dry whey has increasingly been in demand for use in a variety of foods, such as crackers, breads and cereals and, more recently, energy and power bars and protein drinks and powders. Dry whey also is used as an energy and protein supplement for animal feed. This increased demand for dry whey is healthy for the industry, but current federal order pricing formulas are causing inequitable and harmful results.

This is because the pricing formula, unlike the marketplace, locks in the value of only one whey product — dry whey — when there are several of types, including whey protein concentrates and isolates, on the market today. During the past 10 years, many dairy companies made substantial investments to process additional whey products with higher concentrations of protein than dry whey. These business decisions were soundly based on the market realities of that time as well as on market expectations for the future; they were not based on the government’s milk pricing formulas, which in 2000 adopted the use of the dry whey price.

Today, the market has evolved, but the formulas have not. We know that international demand for U.S. dry whey has driven prices for dry whey to record highs, while the higher-protein whey products have seen much smaller price increases. As a result, federal order minimum milk prices reflect the record-high market value of dry whey. Plants that don’t make dry whey are at a serious disadvantage because their milk supply is priced as if they make dry whey, even though they make different products that have a different market value. In effect, these plants are penalized because they’re not making what the government price formula dictates.

This is the type of unintentional but negative consequence that a well-balanced Federal Milk Marketing Order Commission can address. Positives changes to dairy policies and regulations, based on industry consensus and market realities, can and will restore much-needed confidence in the federal order pricing system.

Because almost 70 percent of farm milk today is priced under the federal order system, we all have an interest in how the government makes milk pricing decisions. Perhaps more importantly, we know that the future of the federal order system will have a huge impact on our industry, including our farms, our businesses and our consumers.

The House version of the Farm Bill got it right with respect to the federal milk marketing orders. Creating a commission to chart the way forward is something that processors and producers certainly agree on. We hope the Senate will keep this provision top of mind when legislators return in September to start deliberations on their version of the Farm Bill.

CMN

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