Negative producer price differentials in Federal Milk Marketing Orders: Explanations, implications, and policy...

In Federal Milk Marketing Orders (FMMO), which use multiple component pricing schemas, farmers are paid for delivered quantity of butterfat, protein, and other solids, plus a producer price differential (PPD). The PPD captures the difference between the total handler obligations to the pool and the total component value of milk. In 2020, record negative PPD caused widespread frustration among dairy farmers. The primary objective of this research was to provide a comprehensive analysis of factors that affect PPD and to quantify their relative importance. We examined FMMO data from the past 10 yr including prices, utilizations, and tests. By decomposing the PPD, we were able to isolate the drivers of negative values. We found that long-term trends in usage, most importantly declining beverage milk and rising component tests, including both butterfat and protein, have substantially reduced PPD over the past decade. Class I milk pricing reform of 2018 exacerbated negative PPD in 2020, but we found that the PPD would have been negative even without that reform. The greatest contributor to recent negative PPD was the spread between cheese and milk powder prices, caused by shifts in demand due to the COVID-19 pandemic and USDA intervention cheese purchases. A range of policy modifications proposed to address negative PPD was evaluated.