cows in field

Petitions Sent to USDA Requesting End of Producer-Handler Exemption

By Kathie Arnold

Added March 6, 2009. Producer-handlers, those vertically integrated businesses that produce and process milk, have been exempt in most Federal Milk Marketing Orders (FMMO) from paying pooling costs that other handlers have been required to pay. This exemption was put in place some 70 years ago to reduce the administrative / paperwork burden as producer-handlers were numerous at the time of the adoption of the FMMO system yet each was processing only a small volume of milk. That situation has changed over the years with some of today’s producer-handlers milking many thousands of cows and shipping milk across the country with the significant economic advantage of not having to pay the pooling costs that other processors are subject to. For January, 2009, the pooling cost would have been $4.85/cwt of fluid utilized milk, and most producer-handlers sell all their milk on the fluid market. Efforts are currently underway to rescind that exemption.

Petitions were submitted to USDA on January 30, 2009 by the National Milk Producers Federation (NMPF) and the International Dairy Foods Association (IDFA) requesting that USDA initiate the process to amend all Federal Orders, proposing that the producer-handler exemption be eliminated while at the same time increasing the small plant exemption amount to 450,000 pounds of milk per month. This proposal would allow small producer-handlers and small processors to continue to be exempt by falling under the small plant exemption but it would mean that large producer-handlers would have to pay FMMO pooling costs.

Class I—beverage milk products
Class II—soft manufactured products: ice cream, yogurt, cream products, condensed milk
Class III—cheese
Class IV—butter & dry milk products

Pooling costs result from the requirement that producers of conventional milk receive a uniform blend price—the weighted average of the price of all four classes of milk in each order. To explain by way of example using the announced class prices and milk utilization from the Northeast Federal Marketing Order #1 for January 2009, 44.2% of the milk in Order #1 was used as class I milk and the announced class I price was $18.99/cwt. The class I contribution to the blend price in Order 1 is calculated as being $8.39 (the % times the price or in this case .442 X $18.99 = $8.39). Class II milk was 18% of the utilization and the price was $10.41/cwt so class II’s contribution was $1.87 (.18 X $10.41). Class III’s usage was 22.2% at $10.78, its contribution was $2.39, and class IV’s utilization was 15.6% at $9.59, and its contribution was $1.49. These four prices are added together to make the blend price. In this example, the blend price to the farmers therefore is $14.14 ($8.39 + 1.87 + 2.39 + 1.49 = $14.14).

The pooling cost comes from the fact that the handler who is utilizing class I milk (fluid milk) pays their producers the $14.14 blend price but then they are required to pay into the pool the $4.85 difference between the blend price they paid their producers and the class I price of the milk ($18.99 - $14.14 = $4.85). The processors of all the other classes of milk whose announced price is less than the blend price would draw dollars from the pool to enable them to pay their producers the blend price—in this example the class II processors would pull $3.73/cwt, class III would pull $.3.36 and the class IV would pull $4.55/cwt.

Therefore, any large producer handler bringing fluid milk into the Northeast Order currently has the economic advantage of not being required to pay the $4.85 differential into the pool for January 2009 milk that all the non producer-handler fluid processors are required to pay. Quite an economic advantage for sure!

The IDFA and NMPF petitions to amend the Federal Orders in regards to the producer handler exemption are supported by NODPA, for this issue affects the organic dairy industry as well as conventional. The effect on the organic market was first identified by the New York Organic Dairy Task Force in July of 2007, who then worked with representatives from NODPA on this issue. This included a trip by me to Washington DC last fall where I met with Dana Coale, AMS’ Deputy Administrator for Dairy Programs; John Mengel, Chief Economist; and Jack Rower, Marketing Specialist with AMS, to discuss the issue and the FMMO amendment process.

On the organic side, the largest example is Aurora Organic Dairy with 12,000 or more cows, headquartered in Platteville, CO. They are a producer-handler so all their fluid milk being brought into the Northeast, and on store shelves as private label brands of organic milk, competing with local Northeast produced organic milk, has the competitive advantage of not having paid the pooling costs while all the other major brands had to bear that cost.

The proposal submitted by NMPF and IDFA would still allow the exemption of small producer-handlers via raising the amount of production for exempt plants to 450.000 pounds of production per month. That would allow a farm producing 15,000 pounds of milk per cow per year to have about 350 cows and still be exempt from pool requirements. It would also allow a number of small operations to process their milk together and still fall under the small plant exemption, which is not possible with the producer handler exemption.

USDA’s Agricultural Marketing Service (AMS) has 30 days from the time of receipt of the petitions to make a decision if they will call a hearing on the matter. If so, the hearing must be held within 120 days. Then the process requires a 60 day period in which farmers can comment, 90 days can be taken for AMS to come to a recommendation, followed by another comment period of 30 days, and then 60 days to a final rule. This expedited procedure, enabled by the recent Farm Bill, means that if AMS calls a hearing, a recommendation would be out by early 2010.