April 12, 1998

USDA’S MAKE ALLOWANCE PROPOSAL IGNORED IN MILK PRICE DEBATE, DAIRY BOARD CLAIMS

Amid swirling opinions over federal milk pricing proposals, the change that would damage farmers’ income the most is being ignored, says the Minnesota Dairy Producers Board. Debate over regional price differentials and marketing orders is diverting attention from USDA’s "make allowance" proposal which would have dairy farmers paying processors to manufacture their milk into dairy products, the board claimed. By far, this is the greatest danger to how farmers’ milk would be priced in the new federal system, the board charged, and would violate the free market by having a government-set fee, rather than supply and demand, determining farmers’ pay price. Other dairy groups in the country, such as dairy producers from New Mexico, also oppose a government-set make allowance, according to the board, which makes this a national farmers’ issue.

The "make allowance" is an odd pricing practice used in California where the farmers pay the dairy processors a fee set by the California Department of Food and Agriculture (CDFA) to manufacture their milk into dairy products, the board explained. This fee subsidizes the processing of surplus milk to guarantee continued financing for the processors even if there’s overproduction by the producers. The board warns that farmers everywhere would be subjected to the same kind of biased price manipulation if the USDA incorporates the California-style make allowance into the Basic Formula Price (BFP) of the revised federal system.

And the cost to dairy farmers would be tremendous. A Minnesota farmer milking 50 cows which produce 2500 lbs. of milk per day would pay $11,588.75 per year to the processor for making that milk into cheese, according to USDA’s proposed $1.27 hundredweight make allowance cited by its Upper Midwest Marketing Area office in Minneapolis. That’s why more than 50% of California dairy farmers had negative net incomes in five of the last six years, according to a CDFA survey, with the highest number at 67% in 1997. The farmers’ income is siphoned off by California plants to finance their processing costs compared to plants elsewhere in the nation. If, for example, a California plant and a Minnesota plant each processes 3 million pounds of milk per day, the California plant makes $3.8 million more per year from their farmer-paid make allowance than the Minnesota plant, the board explained. This is due to the California processors getting a make allowance of $.35 more per hundredweight to process butter, powdered milk, and cheese than what non-California processors get, according to CDFA data cited by the board. Other years had an even wider spread.

In other words, California farmers are receiving some of the lowest milk prices in the nation in order to finance their processors with a more expensive make allowance, the board said, citing comments on the California system made by University of Wisconsin dairy economist Bob Cropp. This allows California plants to expand their capacity to process all milk produced by farmers regardless of market demand, thus creating overproduction, the board explained. This incentive of higher guaranteed make allowances is inducing larger processors to relocate to California. The surplus powdered milk that’s processed is easily transported across the nation which undercuts price everywhere.

But not all processing can move to California, so expanding the California-style make allowance through a revised federal system to satisfy all processors nationally isn’t the answer, the board warns, because overproduction would spread everywhere to create a national disaster. "The more milk that the plants process, the more make allowance

money they are guaranteed which perpetuates a vicious cycle of overproduction and lower prices for farmers, said board president Jeff Kunstleben. "Also, as prices drop for farmers, they have a history of remaining high for consumers which is unjust. As one farmer said, it doesn’t matter if the processor pays me $5 or $15 (hundredweight) for my milk, his cut is always the same while the consumers keep paying more," Kunstleben said.

"The California-style system has its make allowance set by plant manufacturing costof-production studies conducted by the CDFA rather than by market demands. Would USDA assume a similar role and dictate a national make allowance like California’s"? Kunstleben asked. "The federal make allowance would be based on what processors say the prices are for cheese, powdered milk, and butter in National Agricultural Statistics Surveys. But since these aren’t audited, how accurate are these price quotes?" he questioned. To prevent such an artificial and biased system from happening nationally, the board said USDA must scrap the California-style make allowance idea and maintain the current competitive make allowance in the federal system where the processors cover their processing costs based on market prices rather than artificially set prices.

The law of supply and demand is the best guarantee against overproduction and protection for fair milk prices for farmers which would be destroyed by the California-style make allowance, the board advises.

Farmers and their organizations have until April 30 to comment on the danger of the California-style make allowance proposal to U.S. Secretary of Agriculture Dan Glickman and Congressmen Collin Peterson and David Minge.

CONTACT PERSON: Jeff Kunstleben, Albany, Minnesota, (320) 845-4336