What Happens if the "Make Allowance" Changes Proposed by IDFA are implemented?

The International Dairy Foods Association (IDFA) has suggested major changes to the pricing of producer milk.  The most impactful part is a major change in the "make allowances" in the Federal Order formulas.  The make allowances were changed three times in 2007 and 2008.  Those changes were analyzed in a post to this blog in August 2009.  The 2009 blog is worth reading. 

When the "make allowances" are increased it simply moves revenue from producers to processors.  Producers are already struggling with low prices.  This proposed change in the "make allowances" will further reduce producer revenue.  The IDFA proposed changes would be implemented over four years.  The impact would lower the Class III prices by $1.62 per cwt.  

The formulas for pricing producer milk are based on the wholesale prices of dairy commodities.  As an example, the formula for pricing butterfat is shown below.  The butterfat "make allowance" is currently $.1715 per pound.  The "make allowance" represents the price per pound to churn butterfat into butter.  As the "make allowance" increases, it reduces the price paid to producers for butterfat.  The producer is paid less for his butterfat, and processors get a larger margin for churning.

Butterfat Price = (Butter Price – 0.1715) x 1.211 

The proposed changes in "make allowances" are shown in Table I.

Table I - Proposed Make Allowance Changes to
Federal Order Formulas

The analysis in Table II uses the January 2024 wholesale values of commodities in the current column and lists the milk component values that would be calculated using the proposed "make allowance" changes listed in Table I

The value of milk protein paid to producers would decrease from $1.13 per pound to $.99 per pound, a 12% decrease (Table III).  The producer value of other solids would decrease by 50% and nonfat solids would decrease by 10%.  Butterfat would decrease by only 4% as churning is a small element in changing butterfat to butter.

Table II - Component Prices with proposed
Make Allowance Changes

Table III - Percent Change in Component Prices
with Proposed Make Allowance

Butterfat has made up most of the producer revenue in 2023.  Milk protein prices have fallen in 2023.  With the change in "make allowances", butterfat would be worth $2.85 per pound and protein would be worth $.99 per pound (Table II above).  Butterfat would then be worth 288% more than protein.  This would provide a major incentive for producers to increase butterfat with a minor incentive to increase milk protein needed for cheese making.

How would this change in "make allowances" impact the Class III milk price?  Class III milk is the majority of producer milk.  The data in Chart IV is calculated based on the Class III index published monthly by Agricultural Marketing Service (AMS).  The index is calculated using 3.1% protein in skim milk and 3.5% butterfat in total milk.  

The line titled "current component levels" uses 3.4% protein in skim milk and 4.1% butterfat in total milk.  The calculation is based on 2023 component levels, which best represents the current financial impact on producer payments.  By the fourth year, the price of Class III milk would be reduced by $1.62 per cwt.

Chart IV - Value of Class III milk per cwt.

Table V - Changes in Class III Milk Price

Who is the IDFA that is proposing the changes in make allowances?

The International Dairy Foods Association is located in Washington, D.C. and represents the nation's dairy manufacturing and marketing industry.  They do not represent producers.