USDA tilts prices for butter and powder

WASHINGTON – The USDA’s decision to adjust the butter/powder tilt was anticipated by the industry, but is getting varied reactions nonetheless.

The USDA announced May 31 that its Commodity Credit Corporation will increase the price it pays for butter by 19.99 cents to $0.8548 per pound, and decrease the price of nonfat dry milk by 10.32 cents to 90 cents per pound, effective immediately.

The cheese prices will not change.

Dairy Farmers of America quickly voiced “disappointment and frustration” with USDA’s action.

“The economics of USDA’s decision will be felt immediately by dairy farmers over the next few months,” said Gary Hanman, president of the milk marketing cooperative. “According to industry figures, dairy farmers in every state will lose revenue.”

The USDA said its decision to change the butter and nonfat dry milk prices was based on an accumulation of nonfat dry milk stocks in quantities well above USDA’s ability to use the product; the level of expenditures to USDA, and significant market distortions.

“The government was clearly stockpiling surplus powder and had no plans for its use,” said Ken Bailey, assistant professor of dairy markets and policy at Penn State University.

In fiscal year 2000, the USDA’s Commodity Credit Corporation purchased about 48 percent of domestic production of nonfat dry milk, Bailey said. And, as of April 1 of this year the CCC reportedly had 772 million pounds of nonfat dry milk on hand – equal to year’s worth of domestic use.

How it works.

The support price program works by offering to purchase surplus amounts of cheese, butter and nonfat dry milk at specified prices. These prices are computed in relation to the $9.90 support price for milk.

Bailey said the price support program has a direct impact on farm-gate milk prices. Last year, for example, cheese prices fell below the CCC purchase price for cheese. Yet few cheese plants in the West wanted to sell cheese to the government.

“Nonetheless, it did provide a psychological support to cheese,” Bailey said. “That, in turn, kept the Class III price of milk from free falling below $8.57 per hundredweight. That provided minimum support to all federal orders that had Class III sales.”

Adjustment necessary.

Bailey said the price support program had a high level of support for nonfat dry milk at $1.01 per pound, a level many in industry argued was “too high.”

“This distortion in prices resulted in very limited commercial use for nonfat dry milk,” Bailey said. “Imports of Milk Protein Concentrates, or MPCs, increased into the United States in reaction to the high price of nonfat dry milk.”

The high powder price also unintentionally raised the Class IV price of milk used for nonfat dry milk and butter production, and a higher Class IV price also raised the Class II and Class I prices. Thus producers in federal orders with significant sales of milk used for Class I, II and IV purposes (i.e. the Northeast and Southeast) received higher farm-gate milk prices.

“The farm price impact of this adjustment is not as clear as some might argue,” Bailey said. The National Milk Producers Federation released a report that states this move will lower the Class IV price by 90 cents per hundredweight and reduce dairy farm income nationwide by $818 million. This analysis assumes that nonfat dry milk prices will fall 10.3 cents per pound to 90 cents for the rest of the year.

“It is likely that this will not occur because the export market for powder is very tight right now,” Bailey said. “Europe has very limited supplies of powder due to the outbreak of foot and mouth disease. World prices for nonfat dry milk are close to $1 per pound. And, because of the price adjustment by USDA, U.S. prices are now very competitive in world markets.”

The 2001 Appropriations Bill extended the price support program through calendar year 2001 at the 2000 support price of $9.90 per hundredweight of milk with an annual average milk fat content of 3.67 percent.