Changes in Make Allowances: So What?

Dr. E. Bruce Godfrey
USU Extension Farm Management Specialist

Monitoring the impact of the decision to terminate order 135 nearly two years ago has been of personal interest and is also being viewed by others with interest. One might think that changes affecting the federal order system would have no impact in this area because milk handlers do not have to meet federal order provisions. However, as I have monitored the prices paid to dairymen in Utah it is clear that the formulas used to set prices under the federal order system continue to be used by most of the milk handlers in Utah and Idaho. Some processors in Idaho have shifted to prices that are only related to cheese prices, but most handlers in Utah continue to use federal order guidelines. Therefore, the announcement by USDA on December 29th of new make allowances is of more than just passing interest. The formulas for Class III and Class IV milk for all orders are to be adjusted to reflect these new prices. The USDA announcement states �Specifically, this decision adopts the following make allowances: cheese - $0.1682 per pound; butter - $0.1202 per pound; nonfat dry milk (NFDM) - $0.1570 per pound; and dry whey - $0.1956 per pound.� The net overall effect suggests that Class III prices will decline 25 cents and Class IV prices will decline by 17 cents. These changes are scheduled to become effective on February 1, 2006 and will likely be reflected in reduced paychecks received in mid-February relative to what would have been received using the former formulas. It will be interesting to see how many of the processors in Utah and Idaho use the new values or formulas because they are generally not required to do so. As a result, pay prices by handler could differ more than they have in the past if some processors adopt the new formulas and others do not.

Like any government action, the impact of these changes will not be distributed equally throughout the nation. Some areas will gain relative to others. Orders or areas that have low levels of Class I and II utilization (e.g., upper mid-west) will be hurt relative to regions having high Class I utilization (e.g., Florida) - at least in the short run. But, this differential will also provide handlers in low Class I utilization areas or orders with an additional incentive to pool milk on orders with higher Class I utilization. As a result, the long term impacts are not quite as clear.

Make allowances may also affect the Producer Price Differentials (PPD�s) that some processors in this area have retained. In areas not subject to federal order provisions, such as Utah and southern Idaho, PPD�s are derived by the individual handler, if they are used at all. Differences associated with these individual handler PPD�s have commonly been the major source of price variability faced by producers in this region [see the paper concerning order 135 by Godfrey, Stockton and Gray that is posted on the USU agribusiness web site (http://extension.usu.edu/agribusiness), and on the Ag Econ department web site at the University of Idaho (http://www.ag.uidaho.edu/aers)]. The role of processor derived PPD�s may be particularly important to producers who sell milk to large multi-state or multi-order cooperatives, such as DFA and Land O�Lakes, because these differential impacts between regions (or orders) can, but may not be, shared by all members of the coop. If the projected decline in Class III and Class IV prices are not shared (via PPD�s or other means), producers in one area will be harmed relative to producers in another area served by these types of coops.

The bottom line to the above is that the changes in make allowances suggested by USDA will likely result in lower prices for producers in areas such as Utah relative to producers in other areas in the short run, even if they are not associated with a federal milk marketing order. ©