Mideast Federal Order Hearing Held on March 7, Wooster, Ohio

Dr. Cameron Thraen, Milk Marketing Specialist, Ohio State University,
Additional milk marketing information by Dr. Thraen

By now, anyone with an interest in the dairy industry here in Ohio, Michigan, Western Pennsylvania, Indiana, Northern Kentucky, parts of West Virginia, western New York, Wisconsin, Minnesota, Iowa, and a host of other states, knows that on Monday, March 7, an event of high importance kicked off in Wooster, Ohio, at the Schisler Conference Center on the campus of the Ohio Agricultural Research and Development Center (OARDC).

The opening day was long awaited for the Mideast Federal Order 33 hearing on depooling and repooling of milk on the Mideast Federal Order. This hearing was requested by the Ohio Dairy Producers Association and the Ohio Farmers Union. It followed directly on the heels of two identical hearings, one held this past December 2004 on behalf of the producers in the Central Federal Order 32 and the first, held at the request of the Midwest Federal Order 30 producers during August 2004.

I hope you were able to attend at least part of the hearing program. It was very informative and fascinating look into the inner workings of your Federal Milk Market Order. Normally, the hearing program starts off with a very useful, in not somewhat dry, presentation of facts and figures on the Mideast Federal Order. Not so for our hearing. On the first morning, there was a presentation from the Federal Order 33 Market Administrator office setting the stage for the remainder of the hearing session. Thereafter, the testimony followed on behalf of those dairy entities who submitted proposals to be considered for rewriting the Federal Order language. This process was one of direct interview by lawyers on behalf of the proposal writers and then cross examination by lawyers on behalf of those dairy entities opposed to a particular proposal or set of proposals.

Now, what is the central subject matter of this Federal Order hearing? To answer my question, I must provide a brief digression on Federal milk market orders. A central tenant of Federal Milk Market Orders, going all the way back to the enabling legislation of 1937 which codified what was already a practice in the then unregulated milk markets, is that consumers should and will pay more for milk (and all of its components) when used in fluid or semi fluid form. You know these as Class I and Class II products. This added market value was not left to the market to determine but was added directly into the pay price for raw milk used in these products. You know this as the Class I and Class II differentials. Milk producers whose milk went into this fluid market earned this added return in their milk checks. However, at the time that the first Federal Order was codified, it was recognized that this had the potential to cause a real problem for dairy producers. Those with fluid milk outlets received more for their milk than did their neighbors without access to the fluid milk market. In an attempt to avoid cut-throat competition for access to fluid milk markets and to rectify this equity of pay problem, the authors of the Federal Order language added the notion that all producers should share in this enhanced return by averaging or blending together the various pay prices for milk used in fluid and also manufacturing (cheese and butter) uses.

This solved one problem and created yet another problem. In a market with a high percentage of milk produced flowing into the fluid market, there was only a marginal amount of milk in the manufactured market to be considered and this was thought of as a reserve supply for the fluid market. As such, it made sense, or at minimum an argument could be put forward that it made sense, that producers of this reserve supply should be able to share in the higher returns from the fluid milk market as an incentive to be a reserve supply. But what about markets where the proportion of milk in the fluid market was small relative to milk used in the manufactured products? Surely, not all of this milk was needed as a reserve supply for the fluid market. Surely not all of this milk deserved to share in the added returns from the fluid milk market. To resolve this problem, a set of rules, i.e. performance rules, were designed and used to determine which producer's milk would or would not be eligible for this blending of the fluid market returns. This is known today as pooling or being on the market pool. Pool participation is mandatory for those supplying milk to fluid milk plants and voluntary for all others. Performance rules were and are somewhat broad in order to provide the needed flexibility for milk to flow between uses.

Now just what is the current Federal Order hearing, and the other two hearings as well, all about? This was a hearing to determine whether or not a language change is warranted as to who is entitled to share in the proceeds of the added market value built into milk used for Class I and Class II products, and what should be the rules by which entitlement to this added value is determined? Yes, there are other issues that came up during the two to three days of testimony, such as expanded transportation credits, some directly related and some only red herrings, but entitlement and performance was the focus of this particular hearing. Remember that your milk price in 2005 will be excellent by any standard.

Currently the cash markets are very robust for this time of year. Cheese on the Chicago Mercantile Exchange (CME) is resisting a fall below the $1.55/lb mark. Likewise, butter on the CME is staying above the $1.50/lb level. When world supplies of skim powder are in tight supply, there is upward movement in the nonfat dry milk commodity market. This strength at the commodity level has forged itself into the CME futures market for Class III. While the futures contract level for 2005 has retreated some from levels reached last fall, there still is a good premium in the market, especially for the March through August contracts. To receive weekly updates on my price forecasts or to receive a daily update on the premiums or discounts in the CME futures market, check out my website at http://aede.osu.edu/programs/ohiodairy/

Table 1. Dairy commodity price forecast 2005.

Table 2. Milk Component Value Forecast, 2005.

It is fair to ask what could alter my dairy product and milk price forecasts for 2005. Let's consider these factors as they may push prices up or down going into 2005. Feed prices are down and the milk-feed price ratio is at its highest point in the last three years. At this time, it appears that 2005 will be another very good year for milk prices and dairy farm income.

Price Enhancing Factors:

I think it sums up to this - continued lousy milk production weather in the West, Pacific Northwest, New Mexico, West Texas, and Idaho. As I have said many times before in this column, weather is the most effective supply management tool we have today. If the west continues to get soaked over and over again, look for the 2005 average Class III price to move up another $0.40 to 0.60/cwt.

Price Reducing Factors:

Here, I think that it all depends on the health of the general economy. If a weakness in consumer demand (due to escalating energy and utility prices and renewed weakness in the investment and employment markets) materializes, we could see prices for butter and cheese stay lower than forecasted. This would remove $0.20 to 0.30/cwt from my current forecast.

Remember, if you fill life's jar with sand, there will be no room for life's gem stones.

For a complete update on current market conditions, futures, and options markets, and policy issues of importance to Ohio and Federal Order 33 producers go to my web site, Ohio Dairy Web 2004, and click on Cam's Price Outlook.