New Class I Price Mover Costing Farmers Millions
The new Class I price mover—averaging Class III and IV prices and then adding 74₵/cwt—has cost dairy farmers hundreds of millions of dollars in fluid milk revenue over the past four months, according to analysis by the American Farm Bureau Federation.
The change to the new pricing formula was made in the 2018 Farm Bill to allow dairy farmers and fluid milk processors to better manage risk and forward price fluid milk. Previously, the Class I mover was the “higher of” either the Class III or IV price.
“The new Class I milk pricing rule went into effect May 2019, and for the most part, the two prices were similar, with an average difference of 9₵/cwt in the dairy farmers’ favor before COVID-19,” says John Newton, AFBF chief economist.
Problems started this past summer when cheese prices sky-rocketed due to government intervention in in Farm to Family Food Box program which ordered millions of pounds of cheese in a short amount of time. Some cooperatives had also instituted supply-reduction programs in spring due to milk surpluses brought on by restaurant, school and food service closures.
The combination of these factors sent Class III prices soaring, creating huge spreads between Class III and IV. The spread was $6.83/cwt in July, $10.96/cwt in August, $10.30/cwt in September and $3.56/cwt in October.
“As a direct result of no longer including the higher-of in the milk price formula, the Class I milk price never fully captured the rally in Class III milk prices,” says Newton.
The huge spreads also contributed to large negative Producer Price Differentials and depooling by cheese manufacturers. “Cumulatively, since the Class I milk price formula was modified, the pooled value of Class I milk is $403 million lower than it would have been under the higher-of formula eliminated in the 2018 formula,” he says.
The current Class I pricing rules are in place through April 2021. After that, they could be modified through amendments to the Federal Milk Marketing Orders.
You can read AFBF’s full analysis paper here.