DENVER – New research from CoBank highlights a prevailing sentiment within the United States dairy industry that the Federal Milk Marketing Orders (FMMOs) need reform.
FMMOs establish prices that processors pay for farm milk. The make allowances – an estimate of dairy processors’ cost of converting milk into dairy products – currently in place do not reflect accurate manufacturing costs, the brief from CoBank’s Knowledge Exchange shows.
“Inadequate make allowances may lead to underinvestment in dairy processing facilities or result in over investment in low-cost plants,” said Tanner Ehmke, lead dairy economist for CoBank. “Ultimately, that could result in limited market access for US dairy products and allow international export competitors to meet the rising global demand for high-value dairy products.”
The research noted that make allowances have not been updated since 2008 and were based on data from as long ago as 2006. The 2023 Farm Bill could change FMMOs to reflect current market conditions. The CoBank brief cited US Bureau of Labor Statistics data that shows industrial electric power prices rose 64% between 2006 and 2022. It also pointed out industrial natural gas prices fell 11% but were highly volatile and labor costs in dairy product manufacturing increased by 48% per unit of production from 2006 to 2021.
“Cost structures among dairy processors or handlers will continue to change, requiring more frequent adjustments to make allowances over time,” Ehmke said. “And while updating make allowances does not guarantee more investment in new processing assets with every handler, failing to update them may result in lost market access and diminished growth opportunities for the US dairy industry long term.”
He reported one effect of increasing make allowances would be to lower prices paid to farmers, and alluded to how reducing the industry’s vulnerability to international competitors and export market access offers long-term benefits.
The full brief can be found online at the CoBank website.