The dust is still settling from the Presidential election, but if you are a dairy farmer, you have another weighty vote to cast. The proposed changes to the Federal Milk Marketing Order (FMMO), announced on November 12, 2024, are now up for consideration. All active dairy producers who had milk pooled on an FMMO this month are eligible to cast their vote until December 31st.
What do these potential changes mean for the dairy industry? How should you navigate these changes on your own farm?
In this blog, Will Babler, from Atten Babler and Pinion Risk Management, provides insights into these changes and offers guidance on navigating risk management amid the uncertainties.
Understanding Proposed FMMO Changes: Implications and Timing
With make allowances last adjusted in 2008, rising processing costs, and milk price volatility, these FMMO changes are intended to modernize formulas and create greater market stability.
The key updates include:
- Increased make allowances,
- Adjustments to component pricing, and
- A shift in the class one mover calculation
These adjustments could potentially reduce producer pay prices by $0.77 to $1.00 per hundredweight, raising critical questions about profitability and risk management.
“The market is telling us that we’re probably not going to see a change in Q1, but we’re almost certain to see it in Q3 and Q4,” advises Babler.
Insights from the futures markets align with this prediction, suggesting that while amendments are unlikely in Q1 of 2025, there is a high likelihood of implementation by Q3.
Managing Uncertainty in DRP and FMMO for the Greatest Reward
In times of uncertainty, the most resilient dairy producers employ risk management tools in areas that are out of their direct control, like FMMO policy changes and market fluctuations. This allows them to focus on efficiency, innovation and growth, operational areas that are within their control. Here Babler outlines two risk management areas where you should not be sitting idle right now:
- Class vs. component pricing in DRP: With the temporary unavailability of component-based coverage for Dairy Revenue Protection (DRP) users, we recommend using scaled-up class DRP as a temporary solution. Some producers prefer component pricing, but Class DRP, when adjusted appropriately, can also be effective.
“Don’t miss out on capturing opportunity while waiting on Component DRP,” warns Babler. “If we sit on the sidelines while we wait for a component tool to show up, we might be caught out in the cold if the market takes a turn for the worse.”
- Margin modeling techniques: By implementing margin modeling, you can assess the effects of FMMO changes on your pay prices and overall dairy margins. The key variables to consider are milk revenue (the largest driver in dairy margins), processor deductions and break-even calculations. Having a view on the aggregate impact of FMMO changes and potential deduction changes is important in evaluating forward margins and hedging strategies.
Additionally, producers should be wary of the potential “double dip” effect, where processors might benefit from increased allowances while retaining previous deductions. It’s crucial for producers to push for transparency and fairness in the implementation of these adjustments.
Your Role in Navigating Risk Management Amid Uncertainty
- Understand the nuances. Grasp the full implications of proposed FMMO changes, including their effects on pay price and risk management tools so you can make informed risk management decisions.
- Stay consistent yet adaptable. Don’t let these changes derail you – maintain your core risk management plan but remain flexible to quickly adapt to changes in the market and regulatory landscape.
- Engage in advocacy. Your voice matters and can make a difference in how the changes unfold. Producers should advocate for fair adjustments in processor deductions to avoid excessive negative financial impact.
Immediate Actions for Dairy Producers
Now, more than ever, it’s important for dairy producers to stay informed, to act consistently and to engage in industry dialogues. With strong forward margins, now is a critical time to act on risk management strategies and prepare for the changes ahead. By understanding the nuances of the FMMO proposals and leveraging available tools, you can protect your margins and navigate this complex regulatory shift with confidence.
Additional Resources
For a more comprehensive review of this topic, including strategies to effectively navigate these changes, watch the Dairy Signal webinar featuring Will Babler titled, “Risk Management Amid Milk Marketing Order Changes”.
Reach out to a Pinion Risk Management advisor with any questions surrounding the FMMO adjustments and to explore risk management strategies that help minimize your risk and maximize your opportunities.
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