I have traded pumpkins with several farmers and expected to level up. Instead, the farmer's trading meter reset back to zero, but the farmers stayed on level 2 and did not unlock the melon trade. Unfortuntately, the Farmers did reduce the value that a pumpkin is worth during a trade (as they would do if they HAD moved to level 3). This has happened to several farmers and may have occured with other villagers too, I just wasn't paying attention.

I have attached pictures of the trading windows of two Farmers in the hope that this provides proof of this issue. Expect level 2 shows a farmer that i have not traded with since the 1.16 update. Expected Level 3 shows a Farmer that I traded with after the 1.16 update. I expected this Farmer to reach Level 3. You will notice, that this Farmer will give me far less for a pumpkin that the Expected Level 2 Farmer.