Milk check mysteries: Depooling and distress

by Tamara Scully

Dr. Chris Wolf recently explained just how dairy farmers actually get paid. The mysteries behind the milk check were found to be threefold: the Federal Milk Marketing Order (FMMO) uniform (or blend) price, regional order differences and farm level concerns such as components and milk hauling costs. They all have an effect on the final milk check received.

Each FMMO sets a minimum price for fluid milk, based on weighted averages for each class of milk, and depending on how milk is used within the FMMO. This is the beginning of the equation for determining actual farm price. The Class III (cheese) price is subtracted from this uniform or blend minimum price to determine the Producer Price Differential (PPD) paid by the FMMO. The PPD is actually an accounting measure which attempts to balance the milk supply with the money available to pay for it.

The PPD is the same for all farmers in a given FMMO. It normally is a positive number, as Class I milk is typically at a higher price than Class III, leaving extra money which can be paid to farmers as premiums.

Sometimes, if the Class III price is higher than the Class I price for fluid milk, the PPD can be negative, and money is subtracted from the milk check. This has been happening due to upsets in the market from the pandemic.

Depooling

Depooling is the process of removing milk from the FMMO. When the Class III price is high, depooling is likely to occur. Class I milk must be pooled and paid at least the blend price established by the FMMO, although cooperatives legally are not bound to pay the uniform price.

“Fluid milk must be pooled. They don’t have a choice. Cheese milk does not need to be,” Wolf said.

When Class III pricing is inverted, commanding more than Class I milk, depooling occurs.

Normally, fluid milk buyers pay a bit more money than cheese milk buyers do. But when Class III milk is priced higher than Class I milk, cheese buyers have to pay into the pool, rather than draw out of it. When this happens, some buyers might decide that pulling out of the FMMO to avoid paying more for milk is in their best interest.

Each FMMO has its own regulations governing depooling. Those that depool may not be able to return to the FMMO for a given amount of time before they can re-qualify and participate again. Certain percentages of milk must be pooled in high-demand times of the year, specifics of which vary from order to order.

“There’s definitely a calculation here,” Wolf said. “It has financial implications.”

If a plant or organization depools, “you’ve got to pay whatever it takes to get the milk you want to buy,” he said.

If milk is depooled, then the plant has to decide what to pay producers. They could pay the Class III minimum to their producers, who will then get a higher price than they’d get if they were in the pool, because the PPD is negative. Or they could pay the uniform blend price the farmers would have gotten anyway, saving the plant money.

But while the dairy producers selling to the depooled plant might be happy, the rest of those in the FMMO won’t be. Because the Class III milk didn’t get sent to the pool, other producers in the FMMO will now receive a decreased uniform price, substantially below what it would have been if this depooled Class III milk had remained in the FMMO, Wolf said.

The pooled milk volume in June 2020 dropped significantly from June 2019 volumes. There was 32% less milk pooled across FMMOs, which represented over an eight billion-pound drop in pooled milk.

“If you don’t like this depooling, one of the things you can do is increase the qualifications,” Wolf said. “Change the months and the amounts where you have to pool to qualify,” or make re-qualifying more difficult.

Distress Milk Sales

When COVID-19 hit, restaurants and foodservice abruptly shut down, and consumers were seeking retail milk instead. But most dairy is consumed when eating out, and wholesale producers were suddenly left with large amounts of milk for a market that no longer existed. While consumers in some areas found empty retail shelves, milk was being dumped at the farm level.

At the onset of the pandemic, 131 million pounds of milk were dumped in the Northeast FMMO, or about one-third of the 350 million pounds dumped across the U.S. Because the Northeast FMMO serves markets where people eat out frequently, and has a large portion of its pooled milk used as Class I, it was hit harder than other FMMOs.

Distress milk sales happened during the beginning of the pandemic. These sales are initiated by the supplying cooperative, and the price is typically discounted at 30% – 70% of the Class III or Class IV price. Excess milk was purchased for the Class IV market, and butter stores are now increased.

Stocks of butter have been increasing over the past four years and are higher than they normally historically are. World prices for butter have also been lower.

“We have had a loss of demand. It’s not been a huge loss in aggregate. If you look at the daily production of butter, it really ramped up in May and June,” Wolf said. “That’s not a huge amount of butter. It’s nothing like the early ‘80s where we have to worry about working that off. To balance these markets, the butter churn started going harder.”

Dairy Checkoff

Checkoff dollars are paid by farmers at the rate of 15 cents/cwt. and are targeted for promoting dairy, new product development and nutrition education. Importers of dairy products also pay into the checkoff program, at the rate of 7.5 cents/cwt. equivalent.

Up to 10 cents of each contribution from dairy farmers can go to their state or region, while five cents goes to the national campaign. In 2018, $328.5 million was raised through checkoff dollars. Processed milk producers pay 20 cents/cwt. into the MilkPEP program, which also promotes milk products, with $83 million collected in 2017.

Based on economic analysis, producers gained roughly $3 – $4 of benefit from checkoff dollars for fluid milk and cheese.

Future Pricing

Wolf expects the market will return to a normal PPD, as Class III and Class IV pricing converges over time. Currently, Class III is around $21/cwt. while Class IV is low at $13/cwt. He expects them to meet around $16/cwt. in about a year, as butter stocks are reduced and cheese normalizes.

Currently, there is a big spread between block and barrel cheese prices due to the pandemic and the changing market for dairy products. Some processors who normally purchase blocks have found themselves retrofitting equipment to utilize barrels instead and take advantage of lower prices.

“An average milk price year is what we’re forecasting for 2021,” Wolf stated.

Leave A Comment