Economist Marin Bozic breaks down milk pricing reform at Edge event

 Need for more transparency and flexibility are themes 

By Travis Senn
Edge Dairy Farmer Cooperative

MADISON, Wis. — In the wake of the 2018 Farm Bill, one of the most talked about issues among dairy farmers has been milk pricing and possible reform. In a presentation at World Dairy Expo hosted by Edge Dairy Farmer Cooperative, nationally recognized economist Dr. Marin Bozic detailed some history about the Federal Milk Marketing Orders (FMMOs) system and explored the possibility of milk pricing reform, including a proposal called Class III Plus developed partly by Edge.

Among the highlights of Dr. Bozic’s talk was an increased emphasis on recognizing the source of the problem. The initial driving force behind FMMOs was ensuring a uniform price and preventing processors from pitting producers against one another in a bidding war. Bozic said that while fluid milk was the largest utilized commodity when the FMMOs were created, the markets are far different today. In 2019, just 28.4 percent of milk went to Class I or beverage products, as competition for customers’ attention in the beverage space today has heated up tremendously.

While there are certain areas of the country that are still high in Class I utilization — such as the Northeast and Southeast — Bozic said the needs of the market are far different in most areas than they were when the system was created.

Flash back to 2020 and headlines about negative producer price differentials (PPDs) abounded. Based upon research by Bozic and Dr. Chris Wolf, higher Class I usage tends to result in a higher PPD. However, if the spread between Class III (cheese) and Class IV (butter/powder) prices climbs too high, as was the case in 2020, it often results in a negative PPD. In fact, Bozic said the vast majority of those negative PPDs in 2020 came from that spread rather than Class I reform.

In his presentation, Bozic said PPDs over the last few years have been trending downward, following the trend of lower Class I usage. Bozic predicted it won’t be long before the costs of maintaining some federal orders outweighs the benefits of pooling or PPDs.

Bozic also noted the growing export markets, with an increasing amount of U.S. milk solids sold through exports, even outweighing the milk solids sold for Class I usage. This led him to ask the question — does the focus need to shift away from Class I in certain federal orders?

Generally speaking, Class III prices have historically been higher than Class IV prices, with some exceptions throughout the years, which leads to Class IV products drawing more from federal order pools than Class III products. Due to the current system, Bozic argues that processors are not incentivized to allocate milk to its highest value use but rather its lowest risk use. By incentivizing a shift to higher-value or value-added products, the spread between class prices might lessen, creating a more balanced and predictable market.

Class III Plus, among other things, would tie the price of Class I to the Class III price plus an adjuster and do away with so-called advanced pricing. Because of Class III’s higher value, Bozic said, the proposal would ensure that Class I remains the highest-valued milk.

Overall, Bozic argued, the current system is far too rigid, and a need for more flexible pricing mechanisms is paramount.

Beyond a call for more flexibility, Bozic endorsed much more transparency to curb the market power of milk buyers. He insisted that processors should be required to report how much milk is de-pooled so farmers know just how much of a PPD they should actually encounter. In the current system, many processors do not always pay out the full difference of pooled vs. de-pooled milk to the farms. Establishing more transparency within the system, Bozic said, will make it less complicated and may help protect market access for smaller farms.