1	"Proposed Merger of Federal Orders..." Proposed Merger of Federal Orders #5 and #7: Why or Why Not? C.W. “Bill” Herndon, Jr. Mississippi State University Southern Dairy Conference February 15, 2005
2	History of the Proposed Merger Last February, USDA/AMS and its Dairy Division held hearings in Atlanta to receive testimony for various proposals to revise or “redistrict” Federal Orders in Southeast Officially, a total of 9 proposals were offered Of which, 4 requested to alter the geographic size of the region’s FOs è #1, #3, #4, & #5 5 proposals called for changing producer-handler definitions and pooling participation provisions è #2, #6, #7, #8 and #9 Focus on reviewing the 4 proposals that call for revising the geographic size of FOs
3	History of the Proposed Merger Let’s look at Federal Milk Marketing Orders prior to when the 1996 Farm Bill called for reducing the number of FOs from 30+ down to a range of 10 to 14 FOs Note that the Southeast FO had already been created via merger of 3 FOs Recall the primary reasons for merging FOs were to: Transportation technologies caused milk to be shipped easily/normally between FOs USDA/AMS, Dairy Division administrative cost savings realized from fewer MMA offices
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5	Look at Existing Federal Orders
6	History of the Proposed Merger Note changes in Southeast via FO Reform: FO 7 expanded to include NW AR & South MO FO 5 merged with FO 46, expanded to include eastern TN & most of KY, 2 counties in SW WVA and west tip of VA FO 6 merged the 3 FOs in Florida USDA continuing to revise FOs to reflect changing industry structure
7	The Geographic Merger Proposals Of the 4 proposals calling for altering the size of the FO areas, only 2 of these differ significantly Proposals #1, #3, and #4 ask to merge FO 5 and FO 7 and are very similar Today, we will review these 3 plans as a single request è described as Proposal #1 Proposal #5 offers a more “radical” scheme that creates 2 additional FOs via “reapportioning” parts of 4 existing FOs
8	Proposals #1, #3 and #4: Similar but differs only with portion of VA Proposal #1 offered by Southern Marketing Agency (SMA) & asks to merge current FO 5 with FO 7 to form a new Southeast FO FO#5 now has 8 counties & 2 cities in west VA Proposal #3 offered by Southern Marketing Agency (SMA) & expands western VA area Increases to 33 counties & 16 cities è which is the western ½ of VA Proposal #4 offered by The Kroger Co. asks to include a different portion of western VA Increases to 10 counties & 4 cities in west VA
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10	Proposal #1: Zoom in …
11	Proposal #1: Compare FO 5 & FO 7 Comparing FO 5 & FO 7 for 2000-’04: Both FOs have similar milk class utilization rates FO 5 has ~5% higher Class I utilization rate FO 7 has ~ 10% higher Class III utilization rate Both FOs have similar pounds of milk marketed FO 5 markets about 6.5 Billion lbs of producer milk pooled on FO each year FO 7 pools almost 7.5 Billion lbs each year Both FOs have similar # of producers pooled FO 5 had about 3,200 producers in Dec. 2004 FO 7 pooled milk from 3,600 producers in Dec. 2004 Both FOs have similar Uniform/Blend Prices FO 5 average uniform price was $14.82/cwt. FO 7 5-year average blend was $14.63/cwt.
12	Proposal #1: Compare FO 5 & FO 7 Merger of current FO 5 & FO 7: Total producer milk pooled would increase to 13.9 billion lbs/year (avg of 2001-’04 data) FO 5 would represent about 46% of total FO 7 contributes 54% to combined marketings Class I utilization would be 65.5% FO 5 Class I utilization falls from 68.0% è down 2.5% FO 7 Class I use increases from 63.4% è up 2.1% Class III utilization would be 12.7% FO 5 Class III utilization rises from 7.4% è up 5.3% FO 7 Class III use drops from 17.3% è down 4.6% Average 5-Year Uniform Price would be $14.72 FO 5 avg. price falls from $14.82 è down 10¢/cwt. FO 7 avg. price rises from $14.63 è up 9¢/cwt.
13	Proposal #1: Why? Overlapping producer milk procurement Overlapping Class I route disposition Significant dairy industry structural change in FOs 5 & 7 è1996 vs. 2003 # of pool plant decreased by 25% # of dairy farmers fell by 34% Milk production down by 15% Much different dairy coop structure Differences in Blend Prices create usual price surfaces
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15	Proposal #1: Why? & Why Not? Why? And Why Not?: Essentially, the primary reason … is the SAME factor Why: Price differences between FOs are not warranted or necessary è because this area is ONE MARKET Why Not: Price differences between FOs are warranted and needed to move milk from surplus areas to deficit areas In fact, South GA has problems due to the price differences with FL & lack of differential with western part of FO 7
16	Proposal #5: Creates 2 New FOs Proposal #5 offered by Prairie Farms and Dean Foods requests a reapportioning of both FO 5 and FO 7 Create a new Mississippi Valley FO: All of AR, LA, MS, South MO and western 1/3 of TN Retains a much smaller area for Southeast FO All of AL, all but NW corner of GA & middle 1/3 of TN Create a new St. Louis/Southern IL FO: All of IL & St. Louis counties è taken from Central FO and Upper Midwest FO South IN and West KY è removed from FO 5 & FO 7
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20	Proposal #5: Why? Areas of St. Louis & S. IL do not have enough milk to meet Class I demand 50 weeks of the year Need additional price incentives to attract milk to St. Louis & S. IL Splitting FO 7 would create “added” Class I price differences btw East & West But also “reduce” Class I price difference btw. North and South è i.e. St. Louis/S. IL & MS Valley FOs Why: Improve incentives to move milk via altering Class I & Blend prices btw. regions
21	Proposal #5: Why Not? Creating the MS Valley Order would make movements of milk supplies inside & outside FO 7 less efficient … and more difficult Splitting FO 7 would add another layer of producer qualification requirements for outside marketing area milk supplies Another FO would likely negate the efficiency gains realized via consolidating milk supplies by cooperatives
22	Summary & Conclusions Proposal #1 was offered & supported by FO 5 & FO 7 cooperatives Proposal #5 designed & justified to improve milk movements in St. Louis & S. IL è“some” focus on Southeast Rumor is that a Preliminary Ruling on these Federal Order hearing will be announced “soon” è month or so??