Welcome to the Bullvine Podcast, your source
for cutting -edge dairy industry insights and
analysis. I'm Bella. In our 196th episode, we're
tackling what might be the most significant economic
shift for American dairy farms in a generation.
And I'm Douglas. Thanks for joining us, folks.
We've got an urgent topic today, the federal
milk marketing order reforms coming June 1st,
just 81 days from now. These changes will fundamentally
reshape how your milk is valued and who profits
from it. Some regions will win big, others could
face devastating losses. That's right, Douglas.
Today we're breaking down exactly how these reforms
will impact your operation, region by region,
with specific strategies you need to implement
before this June deadline hits. Let's dive in.
So Douglas, let's start with the basics. When
we talk about federal milk marketing order reforms,
or FMMO reforms, we're essentially talking about
the rules that determine how milk is priced across
America, correct? Exactly right, Bella. The federal
milk marketing orders are essentially the rulebook
that determines who gets what slice of the dairy
revenue pie. And that pie is about to be cut
very differently starting June 1st, 2025. And
we have some critical dates our listeners should
be aware of, right? Absolutely. The USDA published
the final rule on January 17th of this year,
after the producer referendum passed with the
required two -thirds majority on December 31st,
2024. The main changes kick in June 1st. That's
81 days from today. But one critical component.
The milk composition factor updates won't take
effect until December 1, 2025. That six -month
delay has significant financial implications
we'll discuss later. This is all happening very
quickly. Why are these reforms so significant
compared to previous FMMO changes? Two reasons,
Bella. First, this is the most substantial milk
pricing overhaul in 25 years. Second, and more
importantly, while some aspects benefit farmers,
Like returning to the higher -of, class -one
pricing formula, processors have secured make
-allowance increases that could cost a typical
100 -cow dairy approximately $56 ,000 annually.
That's potentially devastating for many operations.
Let's talk about that higher -of formula first.
I know many producers consider this a victory,
but what exactly does it mean for dairy farmers?
The higher of formula determines how Class 1
milk, that's fluid milk sold as a beverage, is
priced. Back in the 2018 Farm Bill, they changed
from using the higher of Class 3 or Class 4 prices
to an average plus 74 cents formula. That experimental
change backfired spectacularly during the pandemic.
How badly did it backfire? Catastrophically.
During market upheavals like we saw in 2020,
That flawed formula transferred an estimated
$725 million from farmers' pockets to processors'
profit margins. That's money that should have
gone to producers but didn't because of this
formula change. So the return to the higher -of
formula isn't really giving farmers something
new. It's restoring what was taken away in 2018.
Exactly. It's like if someone took $725 from
your wallet, then handed you back $700, and expected
you to thank them for their generosity. The return
to the higher -up formula isn't some grand gift
to dairy farmers. It's merely returning what
was taken through that disastrous 2018 change.
Did the USDA acknowledge this problem? Yes. Dana
Cole. Deputy Administrator of the AMS Dairy Program
actually admitted that the 2018 Farm Bill formula
resulted in steep reductions in producer income
as a result of market disruptions during the
COVID -19 pandemic. The new order, according
to Cole, gives you certainty as to what lies
ahead. You know what's coming. Now let's talk
about these make allowance increases that will
impact producers negatively. What exactly are
make allowances and why are they changing? Make
allowances are essentially the margin built into
pricing formulas to cover manufacturing costs.
They're based on estimates of what it costs processors
to make a pound of butter, cheese, whey, or dry
milk powder. The bigger the make allowance, the
lower the price the formula gives to producers.
And how significant are these increases? They're
substantial. Since 2008, Cheesemake allowances
are increasing 25 .8%, from 20 .03 cents per
pound to 25 .19 cents. Butter allowances increased
32 .5%, from 17 .15 cents to 22 .72 cents. Nonfat
dry milk sees the biggest jump, 42 .6%, going
from 16 .78 cents to 23 .93 cents. And dry whey
increases 34%, from 19 .91 cents to 26 .68 cents
per pound. CERN, those are huge increases. What's
the processor industry saying about this? Michael
Dykes, president and CEO of the International
Dairy Foods Association, called these important
updates to elements of the FMMO system, including
much -needed changes to make allowances. He also
noted that, while the USDA process did not address
all issues within the supply chain, particularly
for Class I and organic milk processors, IDFA
is optimistic that this process has laid the
groundwork for a unified and forward -looking
dairy industry. But farm organizations don't
see it that way, do they? Serious, not at all.
Zippy Duvall, president of the American Farm
Bureau Federation, strongly criticized the process.
stating that USDA instead bases make allowances
on an unscientific voluntary survey that allows
processors to opt out, skewing the results in
a direction that results in lower milk prices
for farmers. Farm Bureau analysis suggests that
changing the make allowance without a mandatory
audited survey could lead to unjust penalties
for dairy farmers, which directly defies the
intended purpose of the FMMO system. You know,
what would these make allowance increases have
meant? if they had been implemented earlier.
According to USDA analysis, if these changes
had been implemented between 2019 and 2023, they
would have reduced Class III prices by $0 .90
per hundredweight and Class IV prices by $0 .85
per hundredweight. Those reductions directly
impact producer payments, particularly in regions
with high manufacturing utilization. To the strength.
This brings us to what might be the most important
aspect for our listeners. how these changes will
impact different regions. It sounds like there
will be clear winners and losers based on geography.
That's absolutely right, Bella. The nationwide
referendum that approved these changes masked
profound regional disparities in how these reforms
will impact farm -level profitability. Let's
break it down region by region. Let's start with
the Northeast. I understand they might actually
benefit from these changes. Correct. Northeast
dairy producers face what industry analysts describe
as a period of potential competitive advantage
after years of challenging margins. The key factor
is their higher Class I utilization, meaning
more of their milk goes into fluid products.
This makes them less vulnerable to the make allowance
increases, which primarily affect manufacturing
classes. According to Farm Bureau analysis, Northeast
producers stand to benefit significantly from
the reforms. There's also new processing capacity
coming online in that region, right? Yes, and
that timing couldn't be better. New processing
investments in New York and Pennsylvania create
a unique window of opportunity. Before Northeast
producers break ground on expansion plans, though,
they should ensure they're extracting maximum
value from their existing herds through optimized
nutrition, genetics, and management practices
focused on component production efficiency. What
about upper Midwest producers? I imagine Wisconsin
and Minnesota operations are viewing these changes
differently. The outlook is much more concerning
there. Edge Dairy Farmer Cooperative directly
acknowledges that the reforms would slightly
decrease the minimum regulated price private
milk buyers have to pay to pooled milk producers
in the upper Midwest order. This regional disadvantage
stems from several technical aspects of the reform
package, particularly how components are valued.
The decision to update skim milk composition
factors without corresponding increases in butterfat
factors creates particular complications for
upper Midwest producers who typically emphasize
butterfat production. According to industry analysis,
These adjustments could significantly impact
the upper Midwest pool value. It threatens the
region's competitive position and demands immediate
adaptive strategies. And what's happening with
Western operations? California, the Southwest,
and Pacific Northwest? They face the most significant
challenges. According to Farm Bureau analysis,
California would experience a $94 million reduction
in pool value, while the Southwest would see
a $72 million decrease. These regional disadvantages
stem from the higher proportion of milk utilized
in Class III and IV manufacturing in these areas.
With make allowance increases directly reducing
the value of milk used in these classes, Western
producers face the most dramatic negative impacts.
That's a staggering regional disparity. What
about central and midiest regions? They're actually
positioned to see modest price improvements.
According to industry analysis, the reforms would
slightly increase the price to producers in the
central and midiest orders. This advantage stems
from their geographic proximity to major population
centers and fluid milk markets, giving them a
competitive advantage under the reformed pricing
structure. Let's shift gears to what producers
can do right now. With implementation just 81
days away, what strategies should forward -thinking
dairy farmers be implementing? The strategies
vary dramatically by region, Bella. Northeast
producers should focus on maximizing component
production while potentially exploring strategic
expansion due to their favorable positioning.
They should be thinking about how to capitalize
on what industry analysts call a period of potential
competitive advantage. What about upper Midwest
producers facing decreased regulated minimum
prices? They need to pursue enhanced over -order
premium negotiations immediately. With concerns
about potential pool value losses, these producers
must identify alternate revenue streams. According
to Mark Stevenson, a noted dairy policy expert,
To the extent that co -ops are not losing money
at these higher make allowances, that wouldn't
be coming off as a deduction, potentially. And
to the extent that you have more proprietary
firms covering their make allowances, they may
be able to put some of those overorder premiums
back into place. They face the most significant
challenges and need to evaluate whether their
current scale and efficiency can overcome these
regulatory disadvantages. Some may need to consider
more dramatic business model adjustments. Cost
containment will be absolutely critical, as will
exploring alternative marketing arrangements.
You mentioned component production earlier. There
are some significant changes to milk composition
factors coming in December, right? Yes, but not
until December 1st, 2025, six months after the
main implementation date. True protein will be
updated from 3 .1 % to 3 .3%, other solids from
5 .9 % to 6 .0%, and nonfat solids from 9 .0
% to 9 .3%. What's the impact of these changes?
These adjustments will slightly increase revenue
from beverage, class 1, milk sales to pooled
producers, creating incentives to optimize component
production. The six -month delay in implementation
means producers won't see this benefit until
December. Industry analysis suggests this delay
could cost dairy farmers more than $100 million
during the first six months alone. Helia, but
there's no change to butterfat standards. That's
one of the most problematic aspects. USDA decided
against updating butterfat solids factors despite
growth in milk butterfat content in recent years.
This imbalanced approach creates new strategic
considerations for feeding and breeding programs,
particularly for operations that have historically
emphasized butterfat production. Let's talk about
risk management. How will these changes impact
producers' hedging programs? The structural changes
to pricing formulas necessitate an immediate
review of risk management strategies. Industry
experts have specifically cautioned about complications
for dairy producers' hedging programs. Producers
utilizing Class III milk futures or equivalent
USDA insurance products may face increased exposure
to butterfat price risk under the new system.
What should producers be doing right now to prepare?
Progressive operations are already consulting
with risk management specialists to recalibrate
their hedging programs, particularly regarding
the alignment between component production, forward
contracting practices, and futures positions.
The transition period between now and full implementation
presents a critical window for adjusting these
strategies. Absolutely. Removing 500 -pound barrel
cheddar cheese from pricing calculations means
Class III pricing will be based solely on 40
-pound block prices. According to industry analysis,
industry advocates of this removal believe relying
solely on 40 -pound block cheddar cheese to set
the monthly announced cheese price will reduce
the volatility of cheese prices. However, this
change requires careful reconsideration of existing
risk management approaches. We've covered a lot
of ground today, Douglas. As we wrap up, what
are the key takeaways dairy producers should
remember about these FMMO reforms? Four critical
points, Bella. First, processor advantage. Make
allowances are surging 25 to 42 percent, potentially
costing farmers $56 ,000 annually per 100 cows.
Second, regional impacts vary dramatically. Northeast
operations gain from high Class I utilization.
while Midwest and California operations face
potential losses exceeding $94 million. Third,
the restored higher -of formula recovers what
was essentially stolen from farmers by that flawed
2018 policy change. And fourth, the implementation
countdown. Just 81 days remain to renegotiate
premiums, adjust hedging strategies, and optimize
component production. It sounds like the coming
months. will be critical for dairy operations
across America. What's your final advice to our
listeners? Your competitors aren't waiting for
perfect reforms. They're adapting to what's coming.
The question is whether your operation is similarly
prepared for dairy's new economic landscape.
While these changes will create market stability,
that stability will benefit some regions far
more than others. Make your adaptation strategy
a top priority today. not 80 days from now when
it's too late. Thank you, Douglas, for that expert
analysis. And thank you to our listeners for
joining us for this critical discussion. For
more dairy industry insights and analysis, visit
www .thebullvine .com. Until next time, I'm Bella.
And I'm Douglas. Thanks for listening to The
Bullvine Podcast.