Depooling: A call to action

Dr. Cameron Thraen, Milk Marketing Specialist, Ohio State University

Data recently made public by the Federal Order 33 Market Administrator Office shines a very bright light on the financial cost of depooling in our Mideast Federal Order, and the cost of not taking action. First a short refresher. Milk not destined for a bottling plant is pooled on a voluntary basis. That means that milk used in all but Class I can be depooled. Depooling occurs when a buyer decides not to participate in the market pool. This decision is made at the end of each month, after all class prices are known. The decision not to participate in the market pool is determined by the relative position of the Class prices to the Uniform price (utilization weighted average of Class I through Class IV prices). A Class II, III, or IV price which exceeds the Uniform price signals reduced pooling of that class. For a more complete explanation go to my Ohio Dairy Web 2004 web site: http://aede.osu.edu/programs/ohiodairy.

Losses Begin in 2003

According to detailed data compiled by the Mideast Federal Order 33, the total volume of milk depooled during 2003 was 1.87 billion pounds. Ninety three percent of this total was Class III milk removed from the market pool during the months of July through October. And what was the cost of this collective decision to not participate in the market pool? A significant $7.4 million dollars! If your milk was pooled during this period you lost an average of $0.18/cwt on your total shipment for these four months.

Cost Soars in 2004!

Milk depooled from Class III during April and May totaled 1.3 billion pounds. The cost to producers who remained pooled on the Mideast Federal Order was a staggering $21.3 million dollars. Yes, that is right, go back and read that number again. How does this
affect your bottom line? Take your total hundredweight of milk shipment for April and May and multiply by a $1.19 and that is what you lost as a direct result of the collective decision to depool milk on the Mideast Order during these two months.

Now, I am sure you have heard the argument that these are not really dollars lost to producers in the Federal Order, but instead are collected primarily by cooperatives to be paid out to producer members at a later date. Therefore, there is no need for alarm or concern. Let's look at the facts at this point. The following is a hypothetical example designed to mirror what is very likely going on in the Midwest Order.

Yes, but we all gaindon't we?

First, consider three different types of plants pooling milk on the Mideast Order. The first is a small supply plant with a 35% Class III utilization and a location differential of a plus $0.10. The second is a large volume supply plant with a 35% Class III utilization and a location differential of zero. The third is a manufacturing plant with an 85% Class III utilization and a location differential in the Mideast Order of a minus $0.25/cwt from the base zone. The Class III price for April is $19.66/cwt. The Uniform or Blend price is $15.88/cwt. The gain-loss calculations by depooling for each of the three types of plants are shown in the following table.

¹Dollars gained are weighted by the plant's Class III percentage.

Looking at these numbers, it appears that the decision to not pool is the right one based on the dollars earned by receiving the Class III price and paying out only the adjusted Uniform price. However, gain is earned only on the milk that is Class III. When weighted by the Class III percentage the apparent gain is reduced significantly for both the small and large supply plants. The manufacturing plant still gains considerably, even with the large negative location differential.

If this were the end of the story, then perhaps the argument is correct that these dollars will eventually be paid back to cooperative members supplying milk to these plants. Unfortunately, this is not the end. Remember the depooling of such a large amount of milk has reduced all producers Uniform pay price by an additional $1.66/cwt. The last row in the table shows the net price impact on producers. The negative impact of the Producer Price Differential (PPD) swamps the gain from depooling, and all producers are worse off. The only real winner is the manufacturing plant pooling and depooling distant milk on the Mideast Order. This manufacturing plant earns a positive $1.765/cwt. Some or all of this gain may flow back to producers provided the manufacturing plant is supplied by a cooperative. If the plant's milk is supplied from independent producers, then the distribution of this gain is determined by the plant owners.

Looking at the Federal Order data, one does not have to speculate as to why milk pooled on the Mideast Order, coming from Wisconsin, Minnesota, and Iowa dropped 93% from 318 million pounds in January to 22 million pounds in April. And you can bet the cow that it will come right back again now that the Class III price is under the Uniform price, earning a positive PPD. Federal orders are about ensuring orderly marketing and this is not orderly marketing!

What can you do about this situation?

What you cannot do is sit on your hands while those in surrounding Federal Orders actively move to adopt language that will severely limit the ability to freely move milk onto and out of the order. The major cooperatives representing membership in the Upper Midwest Federal Order 30 are requesting just such a change for Federal Order 30. Recently Dairy Farmers of America and Prairie Farms Dairy, Inc. have requested a change in the pooling provisions for the Central Federal Order 32.

Doing nothing in the Midwest Order will make the Midwest Order the balancing pool for others. Distant milk will flow into the Mideast Order in an ever growing volume, reducing the average PPD when the Class III price is below the Uniform price. During periods of price volatility, and it appears that this is becoming more likely, this large volume of milk will just as quickly be depooled, imposing yet another price penalty on our producers.

The Federal Order language spells out clearly what can be done about this and how to go about making necessary modifications to the Mideast Federal Order. Dairy cooperatives
have taken a leadership role in Federal Orders 30 and 32, but they have not done so to date in the Mideast Order. "Why not" is a good question. Be reminded that Federal milk marketing orders belong to the producers of the order and an individual producer can get the ball rolling. The best recourse at this point is to contact the USDA. All that is required is a formal request to amend the order language for the purpose of tightening up on depooling and limiting the economic damage being caused the current relaxed order provision. Fancy language is not required. Send your written request to Deputy Administrator: Stop 0225, Room 2968-S; USDA, AMS, Dairy; 1400 Independence Avenue, SW; Washington, DC 20250-0225.