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October 29, 2020

NMPF to Examine Potential Changes to Class I Skim Price Mover

 |  By: Jim Dickrell

The extreme run-up in cheese prices, and thus the Class III price mover this past summer, has resulted in a $400 million loss on milk pooled on Federal Milk Marketing Orders between July and October.

In the 2018 farm bill, the National Milk Producers Federation (NMPF) and the International Dairy Foods Association had agreed to change how the Class I skim price mover was calculated. Previously, the mover was the “higher of” the Class III or IV price. That was changed to taking the average of Class III and IV prices, and adding 74₵/cwt. The change was made effective May 2019.

The change was made to allow fluid processors and dairy farmers who sold into Class I markets to better hedge and forward contract milk.

For the first 12 months, the change resulted in about a 2₵/cwt advantage for dairy farmers. That 2₵ difference resulted in about $39 million on farmers’ milk checks.

But then cheese prices shot up this summer, largely due to the United States Department of Agriculture’s Farmers to Families Food Box program. While the overall effect of the program was higher milk prices, the Class I mover did not keep pace, resulting in a loss of $1.07/cwt on average in milk checks—or $400 million in total.

Consequently, there were 10 times the losses in just the last 4 months compared to the gains made in the previous 12.

“NMPF is convening its Economic Policy Committee to examine alternatives or modifications [to the pricing formula] to prevent this sort of thing from happening in the future,” says Peter Vitaliano, NMPF vice president of economic policy and market research.

Vitaliano made his comments on a 40-minute podcast presented this week at NMPF’s virtual annual meeting. You can listen to the podcast here. His comments on the Class I price mover starts at about 23 minutes into the presentation.

This negative price relationship is expected to continue for the rest of the year. The break-point for a lower Class I price mover under the current calculation method versus the “higher of” method is $1.48 difference between Class III and IV. Projected prices for the rest of the year show a difference of $6.60 for November and $4.48 in November.

These prices also suggest negative Producer Price Differentials through the rest of the year as well.