OTTAWA, Ohio – Ohio Dairy Producers has requested a Federal Order 33 hearing to address the negative affects that “depooling” has had on producer prices.
“Our membership has become increasingly concerned over the negative impact “depooling” has had on Producer Price Differentials,” said Tim Demland, Ohio Dairy Producers executive director, in a letter requesting a hearing.
Demland said current federal order language provides handlers an almost “unfettered option to receive the rewards of a balanced market without sharing in its full cost.”
“This cost is then passed on to producers in the form of lower PPDs who remain within the market system.”
Background. Over the last several years, dairy producers in Federal Marketing Order 33, or the Mideast marketing order, have experienced extreme price swings.
One challenge comes from increasingly violent swings in the price for milk producers receive, Demland said. Another factor that magnifies price volatility in the federal order system is “depooling.”
In other words, when handlers qualify to receive money from the order, they stay in the pool but when they are required to contribute they choose to vacate, pulling their milk from the pool instead, Demland explained.
“It’s kind of like kids on a playground. Some play as long as they’re winning, but when they start to lose they take their ball and go home.”
Why pool? Federal order pools were established in an attempt to provide a stable pool of milk for Class I (fluid milk) handlers and in effect create a more stable market for producers.
Demland said current rules are sufficient when fluid milk markets are paying the most for milk, but volatility sometimes spikes Class III (butter/cheese) markets above the Class I price.
This creates a situation that forces Class III marketers to pay into the pool if they remain. In response, many milk handlers choose to “depool” milk to save money and when the prices reverse they “re-pool” again to reap the benefits of the pool.
This legal loophole allows many Class III milk marketers the best of both worlds and forces dairy producers to absorb the markets deficiency through accentuated negative Producer Price Differentials.
Let’s talk dollars. In F.O. 33, according to statistics provided from the Mideast Market Administrator, “depooling” reduced the Producer Price Differential received by producers by $1.66 per hundredweight in April and 74 cents in May 2004.
Ohio State University Extension’s State Specialist for Dairy Markets and Policy, Cameron Thraen, has estimated that 1.87 billion pounds were taken out of F.O. 33 costing producers on the pool $7.4 million in 2003, and 1.3 billion pounds in April and May 2004, at an estimated cost of $21.3 million dollars to pooled producers.
“Currently, Orders 30 and 32 are both considering proposals attempting to limit market depooling,” Thraen said.
“Their correction may lead to larger problems for Order 33 as it will become the balancing pool for others if nothing is done to change the current Order 33 language as well.”
Thraen said distant milk could flow into the Mideast order in an ever-growing volume, reducing the average PPD when the Class III price is below the uniform price.
Proposal. To limit excessive “depooling,” the Ohio Dairy Producers board is proposing two alternatives. The first limits the amount of milk pooled each month to 115 percent of what was pooled the previous month or a second alternative will require producers to be committed to the pool for a full year.”
“Both of these alternatives will decrease the incentives to depool large volumes of milk one month and then put it right back in when prices bounce back by lengthening the amount of time that it takes to bring milk back into the pool,” Demland said.
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