Dairy Excel: Balancing act: Depooling zaps F.O. 33 farmers

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Dairy farmers whose milk is pooled on Federal Order 33 continue to lose money to plants pooling and depooling milk in this federal order.

Data recently made public by the Federal Order 33 market administrator’s office shines a bright light on the financial cost of depooling in the Mideast federal order – and the cost of not taking action.

A short refresher. Milk not destined for a bottling plant is pooled on a voluntary basis. That means 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 that exceeds the uniform price signals reduced pooling of that class.

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 July through October.

What was the cost of this collective decision to not participate in the market pool? A significant $7.4 million. If your milk was pooled during this period, you lost an average of 18 cents per hundredweight on your total shipment for these four months.

Cost soars in 2004. Milk depooled from Class III during April and May 2004 totaled 1.3 billion pounds. The cost to producers who remained pooled on the Mideast federal order was a staggering $21.3 million.

How does this affect your bottom line? Take your total milk shipment for April and May and multiply it 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.

Don’t we all gain? Let’s consider three types of plants pooling milk on the Mideast order.

The first is a small supply plant with a 35 percent Class III utilization and a location differential of a +10 cents.

The second is a large volume supply plant with a 35 percent Class III utilization and a location differential of zero.

The third is a manufacturing plant with an 85 percent Class III utilization and a location differential in the Mideast order of a -25 cents from the base zone.

The Class III price for April is $19.66. The uniform or blend price is $15.88. The gain-loss calculations by depooling for each of the three types of plants is shown in the Table A.

At first glance. Looking at the numbers in Table A, it appears 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.

Gain is earned, however, only on Class III milk. When weighted by the Class III percent, 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.

Larger impact. If this were the end of the story, 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. The last row in the table shows the net price impact on producers.

The negative impact of the producer price differential 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 per hundredweight. Some 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.

Huge ebb and flow. 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 percent 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 producer price differential.

Federal orders are about ensuring orderly marketing and this is not orderly marketing.

Do something about it. You cannot 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.

Major cooperatives representing membership in the Upper Midwest Federal Order 30 are requesting 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.

Balancing act. Doing nothing in the Mideast order will make the Mideast Order the balancing pool for others.

Distant milk will flow into the Mideast order in an ever-growing volume, reducing the average producer price differential 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.

Federal order provisions spell out clearly what can be done about this and how to go about initiating the process to get necessary modifications to the Mideast Federal Order.

A request for a hearing can come from any single individual or group affected by this situation. (See related information.)

Dairy cooperatives have taken a leadership role in federal orders 30 and 32, and perhaps they will do so on behalf of the dairy producers in the Mideast Order. To date, however, they have not taken any formal action on the pooling-repooling issue in our Federal Order 33.

Call to action. A request for a hearing can come from any single individual or group affected by this situation.

Contact the USDA Agricultural Marketing Service. All that is required is a formal request to end this practice of disorderly marketing, to amend the order language for the purpose of tightening pooling-repooling provisions, and to limit the economic damage being caused the current order provision.



      Send your written request to:

            Deputy Administrator

            Stop 0225, Room 2968-S

            USDA, AMS, Dairy

            1400 Independence Avenue S.W.

            Washington, DC 20250-0225.

For a complete explanation, visit the Ohio Dairy Web 2004 Web site: http://aede.osu.edu/programs/ohiodairy.

(The author is a dairy marketing and policy state specialist with Ohio State University Extension. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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