Dairy Processing - April 2021 - 64

Class | Milk Price (USD/cwt.)

$28
$28
$24

Old formula

New formula in effect

New formula

$22
$20
$18
$16
$14
$12
$10
Jan-18

Jul-18

Jan-19

Jul-19

Jan-20

Jul-20

Jan-21

(in millions)

Cumulative Difference in Class | Revenue
between New and Old class | Price Formulas
$300
$200
$100
0
-$100
-$200
-$300
-$400
-$500
-$600
-$700
-$800

Jul-18

Oct-19 Jan-20 Apr-20 Jul-20 Oct-20

64 APR 2021 | DAIRYPROCESSING.COM

Nate Donnay is the director of Dairy Market
Insight at StoneX. He has been covering
complicated systems and statistical analysis to the
international and US dairy markets since 2005.
He can be reached at nate.donnay@stonex.com.

USDA, FMMOs, StoneX Calculations

A priority of the FMMO system is to
make sure there is always enough
Class I milk available to bottlers
throughout the country.

Hedgers didn't know if they should hedge using the
Class III futures or the Class IV futures because they
didn't know which one would be higher in the future.
Both farmers and processors came together and
changed the Class I formula to use the average of the
Class III and IV prices, plus 74¢ cwt. Averaged over
the long-run, this formula would have returned the
same Class I milk price as the old higher-of formula,
but it would make hedging easier. Then came
the pandemic.
In 2020 cheese prices set new record highs while
butter and NFDM prices were mostly on the weak
side. That resulted in a very high Class III milk
price, but relatively weak Class IV price. If we were
still using the higher-of formula, the Class I price
would have spiked above $24/cwt twice during the
year, but because the new average-of formula was
in use, the Class I price did not reach above $20/
cwt. Dairy farmers are feeling short-changed by
the new formula and want to change it again. Some
are suggesting an adjustment that would try to
compensate farmers for past differences between
the different milk price formulas that would be
added (or subtracted) from the Class I milk price
and would be adjusted every two years.
Currently the vibe from processors is they are
not excited about changing the Class I price again.
They argue the change to the average-of formula
was based on 17 years of market prices and making
a change to the formula now based on six months
of prices during a pandemic is premature and
reactionary.
If the processors and farmers can agree on
a change to the formula, then the change would
likely be included in the 2022 Farm Bill. If they can't
agree on a change to the formula, and if the farmer
side wants to push forward with it, then it would
require opening an FMMO hearing with both sides
submitting proposals, evidence and likely testimony.
That process would likely stretch into 2022. It is
unlikely that we'll see a change in the Class I price
formula in the next year, but there may be intense
discussions about whether it ought to be changed
and how it should be changed.
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Dairy Processing - April 2021

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