Opinion ID: 787330
Heading Depth: 3
Heading Rank: 3

Heading: Price Inversions

Text: 13 As discussed, Class I prices are generally higher than Class III prices. Thus, the blend price usually falls above the Class III price, and Class III handlers typically are entitled to withdraw compensating payments from the settlement fund after paying producers the blend price. However, occasionally, periods of price inversion occur, 8 in which Class III prices exceed Class I prices. Price inversions occur in part because of differences in how and when classes of milk are priced. Class I milk prices are set prospectively while Class III and IV prices are set retrospectively, based on actual market prices during the pertinent time period. The USDA has explained: 14 Class price inversion occurs when a markets's [sic] regulated price for milk used in manufacturing exceeds the Class I (fluid) milk price in a given month, and causes serious competitive inequities among dairy farmers and regulated handlers. Advanced pricing of Class I milk actually causes this situation when manufactured product prices are increasing rapidly. 15 Milk in the New England and Other Marketing Areas, Dep't of Agric., 64 Fed.Reg. 16,026, 16,102 (Apr. 2, 1999). Thus, price inversions occur during times of increased demand for manufactured products, primarily cheese. 16 Under Order No. 30, Class III handlers are not required to participate in the regulatory pooling. They may either join the pool or remain outside the minimum price structure. (This is true to some extent under other milk-marketing orders as well.) When Class III handlers withdraw from the pool, or de-pool, they are not obligated to make compensating payments to the settlement fund. During times of price inversion, then, Class III handlers have an incentive to withdraw from the pool. The USDA has explained the effect of price inversions on the dairy industry: 17 In the past when price inversions have occurred, the industry has contended with them by taking a loss on the milk that had to be pooled because of commitments to the Class I market, and by choosing not to pool large volumes of milk that normally would have been associated with Federal milk order pools. When ... [price inversions occur], it places fluid milk processors and dairy farmers or cooperatives who service the Class I market at a competitive disadvantage relative to those who service the manufacturing milk market. 18 Milk used in Class I in Federal order markets must be pooled, but milk for manufacturing is pooled voluntarily and will not be pooled if the returns from manufacturing exceed the blend price of the marketwide pool. Thus, an inequitable situation has developed where milk for manufacturing is pooled only when associating it with a marketwide pool increases returns. 19 Id. When producers prefer to sell outside the pool due to higher manufacturing returns, Class I handlers may have to pay out-of-pocket premiums to attract their supply. 20 Thus, during times of price inversion, Class III handlers who de-pool may pay less than the Class III price. At the same time, Class I handlers inside the pool may be forced practically to pay more than the Class I price because of extra-regulatory premiums. In sum, the ability of Class III handlers to de-pool under Order No. 30 has negative economic consequences on Class I handlers who must remain within the pool. 21