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Controlled and non-controlled products: Not as simple as you think

Controlled and non-controlled products: Not as simple as you think

New requirement for controlled and non-controlled reporting
On August 11, the Pennsylvania Milk Marketing Board (PMMB) announced that beginning calendar year 2020, it will require cross-section processors to report their revenues and expenses as controlled and non-controlled. A controlled product simply means the price of the product sold in Pennsylvania is determined by the state.

The PMMB hasn’t required controlled and non-controlled reporting since 2007. The board reported that cross-section dealers lost nearly $37 million in 2019 and is requiring this additional information to determine if these financial losses are the result of controlled sales or non-controlled sales.

The PMMB has the authority to regulate the prices of controlled products only. If this new reporting reveals that cross-section processors are incurring losses on sales of price-controlled products, the board can adjust the monthly price calculation to improve profitability.

What’s next? Well, determining the sales of controlled products is not as simple and straight-forward as you might think.

Overview of controlled and non-controlled products
With two important exceptions discussed below, controlled products include Pennsylvania sales of these items (butterfat percentage in parenthesis):

  1. Class I Products
    1. Standard Milk (above 3.1%)
    2. Reduced Fat Milk (1.5% - 3.1%)
    3. Low fat Milk (0.5% - 1.5%)
    4. Nonfat Milk (Skim) (below 0.5%)
    5. Flavored Milk (above 3.1%)
    6. Flavored Reduced Fat Milk (0.5 – 3.1%)
    7. Nonfat Flavored Milk (0% - 0.5%)
    8. Buttermilk (any butterfat)
    9. Eggnog (any butterfat)
  2. Class II Products
    1. Half & Half (0% - 18%)
    2. Light Cream (18% - 30%)
    3. Medium Cream (30% - 36%)
    4. Heavy Cream (36% - 50%)
    5. Sour Cream (any butterfat)

All other items sold by licensed dairy processors in Pennsylvania are non-controlled. This includes a wide variety of items: juices, drinks, teas, yogurt, butter, cheese, eggs, dips, and many others. Non-controlled means that the PMMB does not set a minimum price for that item when it is sold in Pennsylvania.

Products on lists I) and II) sold in Pennsylvania are controlled regardless of whether they are from milk produced on organic farms or conventional farms. They remain controlled if they are lactose-reduced or lactose-free – and they continue to be controlled if they are conventionally pasteurized or processed to have extended shelf (ESL) (UHT) or are shelf-stable (aseptic).

Not sure if a product sold in Pennsylvania is controlled or non-controlled? The easiest way to check is to look at the monthly wholesale and retail minimum price announcement sheets published by the PMMB. If a product is sold in Pennsylvania and is listed on the monthly price sheet, then it is a controlled product.

All out-of-state sales by processors are non-controlled. When a gallon of fluid milk is delivered to a Pennsylvania address, it is a controlled sale. When that same gallon is delivered to an out-of-state location, it is a non-controlled sale. The PMMB can’t set a minimum price on any products sold by Pennsylvania dealers when they go into surrounding states. Likewise, when an out-of-state processor delivers products on lists I) and II) into Pennsylvania, they become controlled products. Because they are controlled, they can’t be sold below the PMMB published minimum prices.

In summary, other than the exceptions discussed below, if an item is sold in Pennsylvania and it is on lists I) or II) it’s a controlled sale. All products sold out-of-state are non-controlled.

And up until this point, it’s easy to determine which sales are controlled and which are non-controlled, but there are exceptions to the basic rule.

And that’s when it becomes not so simple.

Exceptions to the rule are…
There are two major exceptions to the simple definition of controlled and non-controlled: tolled sales and sales to federal entities.

Pennsylvania sales of items on lists 1) and II) are non-controlled if they are processed, packaged and delivered under a service contract. Service contracts are commonly called tolling arrangements. All Pennsylvania sales under tolling arrangements/service contracts are non-controlled.

The PMMB does not set the minimum prices for products sold under tolling contracts. Under a tolling contract, the customer pays for the milk and a fee for processing, packaging and delivery. The PMMB only determines that the fees charged under tolling contracts are not below cost. Pennsylvania sales of products on lists I) or II) are non-controlled if sold under tolling contracts.

Tolling contracts in Pennsylvania are used by large retailers to purchase packaged fluid milk and cream at prices that can be below the published PMMB minimum prices. These large retailers must hold milk dealers’ licenses to enter tolling contracts.

Pennsylvania sales of products on lists I) and II) are non-controlled if they are delivered to a federal entity. The PMMB cannot set minimum prices for products sold to the federal government. Examples include veterans’ hospitals, military bases and commissaries, and federal prisons. The fluid milk sales to the current Farmers to Families Food Box program are non-controlled because they are paid for by USDA. The Food Box distributions were authorized by the Families First Coronavirus Response Act in April 2020. USDA is purchasing up to $3 billion in dairy, meat products, fresh fruits and vegetables to distribute in family-sized boxes by food banks, community and faith-based organizations. The milk in these boxes is non-controlled since USDA is purchasing.

Summary
Controlled sales are Class I and II fluid milk and cream products delivered to Pennsylvania locations, with exceptions. These Class I and II products are listed on the PMMB monthly price list.

Non-controlled sales include:

  • All sales, in any location, of juices, drinks, teas, and all other products that are not on the PMMB monthly price lists.
  • Out-of-state sales of products on the PMMB monthly price list
  • Pennsylvania sales of products on the PMMB monthly price list under service contracts/tolling arrangements
  • Pennsylvania sales of products on the PMMB monthly price list to the United States Government and its various agencies and branches.

Talk to your Herbein dairy team consultant today if you have questions or need assistance with this requirement. For additional information contact the author at info@herbein.com.

Article contributed by Ron Mong.