History, Function & Future of
Federal Milk Marketing Orders
Bob Cropp
Dairy Marketing & Policy Specialist
University of Wisconsin-Madison
April 2001
Dairy cooperatives initially attempted to
improve milk prices to dairy farmers.
• 1810 first U.S. dairy cooperative
• 1822 dairy cooperatives involved in:
* retail fluid milk distribution
* wholesale milk distribution
* bargaining
• 1920 dairy cooperatives attempted to replace “flat
pricing” with “classified pricing” and “pooling”.
* Milk buyers had been refusing to pay one high flat
price for all milk (milk in excess of fluid needs)
Cooperative voluntary classified pricing and
pooling had only limited success.
• Not all milk buyers participated.
• There were advantages to milk buyers to stay
outside of the voluntary arrangement.
* Milk buyer that was 100% fluid could pay “directly” to
farmers a higher price than the pooled (average) price and yet buy
milk cheaper.
* Example
Fluid price = $6.00 X 50% fluid
= $3.00
Surplus price = $4.00 X 50% surplus = $2.00
Average price paid to dairy farmer = $5.00
Fluid Milk buyer “outside” could pay directly to farmers $5.50
Cooperative activity continued to grow:
• By 1935:
* 2,270 dairy cooperatives that represented 16% of
the dairy farmers but 45% of all milk marketed by farmers.
* 110 dairy cooperatives were bottling milk, but
represented just 5% of the fluid sales.
* 87 bargaining cooperatives
* Several cooperatives making butter and cheese
Federal legislation to assist dairy farmers
with milk pricing:
• Agricultural Adjustment Act of 1933:
- Established program of licenses
- All milk dealers in a given market required to pay
dairy farmers classified pricing and pooling
• 1935 Agricultural Act:
- Set more specific terms and provisions and called the
programs “marketing orders” rather than licenses
Agricultural Marketing Agreement Act of
1937
• Refined the marketing order provisions that are
used today.
• This is enabling legislation---that is, dairy
farmers may request and approve a federal milk
marketing order; orders are not mandatory; they
require dairy farmer (producer) approval.
Purposes of federal milk marketing orders
(FMMOs)
• To provide for orderly marketing
• To assure reasonable prices to bother dairy
farmers and to consumers
• To assure an adequate supply of wholesome
beverage milk to consumers
FMMOs continued:
• FMMOs price only Grade A milk
• Procedure to get an FMMO:
1. Dairy farmers (producers), dairy cooperatives request the Secretary
of Agriculture to hold a hearing to provide information for the need for
an order.
2. Upon evidence submitted at the hearing, the Secretary issues a
recommended decision.
3. Producers and milk plants (handlers) make submit comments
4. Secretary issues a final decision
5. Producer referendum --if two-thirds of dairy producers voting
approve the final decision, the order becomes effective
Dairy cooperatives may “bloc vote”.
• The board of directors of a dairy cooperative may
decide on behalf of the entire dairy-farmer
membership whether to cast a vote of approval.
• If 500 members, the cooperative casts 500 yes or
no votes.
FMMOs continued:
• Milk plants that handle Grade A milk for fluid
(Class I) purposes are called “Handlers”.
* Bottlers
* Supply plants
* Dairy cooperatives
• Dairy farmers who markets their milk to a handler
is called a “Producer”
• Handlers are regulated, not dairy producers
FMMOs continued:
• Handlers are regulated by being required to pay at
least minimum class prices into a pool.
• Class prices are established by the FMMO
• Initially three classes:
1. Class I beverage milk products
2. Class II soft manufactured dairy productsice cream, yogurt, evaporated & condensed
milk, cream products
3. Class III cheese, butter and dry milk
powder
• Since the purpose of FMMOs is to assure
consumers of beverage milk, Class I is the highest
price.
How classified pricing and pooling works:
• Let’s assume the following class prices and milk
utilization:
Class I $12.00/Cwt. 50% = $6.00
Class II $11.00/Cwt. 10% = $1.00
Class III $10.00/Cwt. 40% = $4.00
Weighted average price = $11.00
(blend price)
All milk handlers pay dairy producers at least this blend
price of $11.00/Cwt. So all producers receive the same
base blend price regardless of where they sell their milk.
Pooling:( a producer settlement fund)
• Lets assume two handlers in the market, Handler
A, a bottler, and Handler B, a cheese plant (supply
plant)
Handler A has:
Class I $12.00 X 90% = $10.80
Class II $11.00 X 10% = $ 1.10
Class III $10.00 X 0% = $ 0.00
Average milk value = $11.90
Handler A pays its producers the $11.00 blend price
and pays INTO the pool the difference of $11.90 - $11.00
or $0.90/Cwt. on all milk handled
Handler B has:
Class I
$12.00 X 10%
Class II $11.00 X 0%
Class III $10.00 X 90%
Average milk value
= $ 1.20
= $ 0.00
= $ 9.00
= $10.20
Handler B pays its dairy producers the $11.00 blend price
a draws OUT of the pool the difference between $11.00 $10.20 or $0.80
Dairy cooperatives are obligated to the pool prices,
but are not obligated to paying producers the blend
price.
• Dairy cooperatives re-blend when paying their
member producers.
• Dairy cooperatives manufacture dairy products,
sell raw milk to different handlers in different
markets and take all milk revenues generated to
divide among dairy producers.
• Dairy cooperatives return at the end of the year
profits earned to members--patronage refund
Each FMMO has a “market area”:
• The market area is the geographic area where
milk is consumed; not necessarily produced.
• All handlers serving those same consumers ought
to have the same raw milk cost.
• Location of handler or producer does not
determine which FMMO a handler is regulated
under; but rather where does the handler’s Class I
sales go.
Market area:
• Initially rather small geographic area
• But as modern processing, packaging and
transportation technologies developed packaged
beverage milk products could be economically
distributed in greater geographic areas.
• The result, FMMOs were consolidated
History and Scope of Federal Milk Orders
Year
1950
Number Number % Class % Grade
of
of
I
A milk
Orders Handlers
39
1,101
58.9%
41%
% All
milk
25%
1960
80
2,259
64.2%
51%
43%
1970
62
1,588
61.5%
79%
59%
1980
47
1,091
48.9%
80%
67%
1990
42
753
42.8%
77%
70%
2000
11
240
42.0%
74%
72%
Minimum class prices:
• Prior to 1960 the different FMMOs used different
formulas for establishing minimum class prices.
• By 1960, it was recognized that butter, cheese and
dry milk powder were marketed nationally and
that beverage milk products had a much larger
geographic area of distribution.
• Uniform class pricing formulas were established.
Uniform pricing formulas:
• The majority of milk in Minnesota and Wisconsin
was used for butter, powder and cheese and
accounted for a major share of national
production.
• The Minnesota-Wisconsin Price Series (M-W) was
adopted as the base price for Class III in all
FMMOs and as the “mover” of Class II and Class
I prices.
The M-W was the weighted average price paid
by Minnesota and Wisconsin butter, milk powder and
cheese plants for Grade B milk.
Class differentials:
• A differential was added to the M-W for the Class
II price.
• A differential that varied by FMMO was added to
the M-W for the Class I price.
Eau Clare, Wisconsin was the starting point; the Class
I differential increased with distance from Eau Clare.
Wisconsin was considered as the major reserve of
Grade A milk for Class I use.
The Class I differential reflected:
• The added cost to dairy producers to
produce Grade A rather than Grade B milk
• The transport cost of moving raw Grade A
milk to the market.
• A more inelastic price demand for Class I
products
Connection between the federal dairy price support
program and federal orders:
• The federal dairy price support program implemented in 1950
supports the price of milk to dairy producers by setting a support price
for milk used for manufactured dairy products.
• The support price is converted into a price per pound of cheese, butter
and nonfat dry milk.
• If surplus milk is produced and commercial prices of cheese, butter
and nonfat dry milk fall below the purchase prices, the CCC stands
ready to purchase these products.
• This CCC purchase activity supports the price of Grade B milk which
supports the M-W price which supports the Class prices in FMMOs.
The M-W as the base price and mover came
into question in the 1980s.
• The quantity of Grade B milk in Wisconsin
and Minnesota was declining as dairy
farmers converted to Grade A production.
• Other regions of the country were
producing significant shares of
manufactured products--NE and West
However, no change until 1995.
• A change in how the base price was determined
was made. The M-W was based entirely on a
survey of milk plants. A survey of plants for the
previous month pay prices retained but this was
adjusted based on what had happened to the price
of cheese, butter and milk powder during the
current month.
• The M-W was changed to the Basic Formula Price
(BFP)
By 1990, the Upper Midwest began questioning the increase
in Class I differentials from Eau Clare, Wisconsin
• Grade A milk production was increasing in the
South, South West and West.
- Modern production technology was enabling these regions to
build large dairy operations and produce milk at very
competitive prices.
- Modern transportation enable the transport of raw Grade A
milk greater distances to serve deficit Grade A milk areas.
- No longer was Wisconsin the sole area for reserve Grade A
milk production.
2000 Per Capita Milk Production
1,092
349
949
1,930
5,582
524
154
755
1,344
169 389
447
565
404
952
375
588
628
574
732
238
196
908
393
418
269
148
92
158
191 78
32
190
147
247
2,878
275
175
Per Capita Milk Production
U.S. Average = 596 Lbs.
Less Than 300 Lbs. (22)
300 To 600 Lbs.
(12)
Greater Than 600 Lbs. (14)
251
4,336
2,165
495
4,578
154
255
62
27
140
The Secretary of Agriculture received a request to
hold a national hearing on Class I pricing.
• A national hearing was held in 1990
• The Upper Midwest was the only region that offered
information on the out-dated Eau Clare, Wisconsin basing
point for Class I differentials.
• Result, no major changes in Class I differentials
• Minnesota Milk Producers sued the Secretary of
Agriculture for this decision charging that the 1937 Act
was not being implemented properly.
• The lawsuit drew national attention to the problems of
FMMOs, but any change was denied.
1996 Farm Bill included changes for FMMOs.
• Directed the Secretary of Agriculture to consolidate the
existing 33 federal orders to between 10 and 14;
California could be included if dairy producer so
requested.
• The Secretary was authorized to visit the various pricing
provisions of FMMOs.
• Consolidation of orders and pricing changes were to be
implemented on or before April 4, 1999.
• A Northeast Dairy Compact was authorized for a period
up until federal order reform was implemented ( on or
before April 4, 1999)
The Secretary of Agriculture recommendations:
• Consolidate to 11 FMMOs.
• Replace the BFP with multiple component pricing
formulas
• Establish four classes of milk
• Flatten the Class I differential pricing surface
• Establish a separate mover of Class I
U.S. Congress intervened:
• Accepted the consolidation of orders, but reversed
the flattening of Class I differentials.
• Extended the Northeast Compact until September
30, 2001.
• Allowed implementation of federal order reform
January 1, 2000, but instructed the Secretary to
review the multiple component pricing formulas.
Secretary of Agriculture held a hearing May 2000
• Secretary December 2000 issued a tentative decision that
made some changes in the multiple component pricing
formulas; ask the cooperatives for approval and approval
of dairy producers not associated with cooperatives.
• Implementation of changes January 1, 2001, but industry
had until February 5, 2001 to submit comments.
• The Secretary will review the comments and issue a final
decision which will require producer approval for
implementation.
• A lawsuit challenged a change in calculating the value of
butterfat in Class III (cheese); the result is an injunction
against implementation of that change.
Federal Milk Marketing Orders
31 Orders
11 Orders
Federal Milk Marketing Orders
January 1, 2000
Pacific
Northwest
Upper
Midwest
Western
Northeast
Mideast
Central
Arizona Las Vegas
Appalachian
Southeast
Southwest
Florida
Classes of milk:
• Class I: Milk used for beverage milk products.
• Class II: Milk used for soft manufactured products, ice
cream, cream products, yogurt, condensed milk
• Class III: Milk used for cheese
• Class IV: Milk used for butter and dry milk products
The Class III price:
• Butterfat price per pound:
(NASS monthly AA butter price - 0.115)/0.82
NASS is the USDA National Agricultural Statistical
Reporting Service survey of selling prices of
manufacturing plants.
0.115 is the “make allowance”
0.82, is the yield factor for butter
Class III continued:
• Other solids price per pound:
(NASS monthly dry whey price - 0.14)/0.968
0.14 is make allowance
0.968 is the yield factor of dry whey
Class III price continued:
• Protein price per pound:
(NASS monthly cheese price - 0.165) X 1.405 +
{[(NASS monthly cheese price - 0.165) X 1.582] - butterfat
price} X 1.28
The first line represents the net value of protein in cheese.
0.165 is make allowance; 1.405 is yield of cheese per pound of
protein
The second line accounts for the value of butterfat in cheese in excess
of its value in butter.
Class III continued:
• Class III skim milk value per hundredweight:
3.1 X protein price + 5.9 X other solids price
• Class III price per hundredweight:
3.5 X butterfat price X 0.965 X Class III skim milk price
Class IV price:
• Butterfat price per pound:
The same as Class III butterfat price
• Nonfat solids price per pound:
(NASS monthly nonfat dry milk price - 0.14)
0.14 ism the make allowance
Class IV continued:
• Skim milk price per hundredweight:
9.0 X nonfat solids price
• Class IV price per hundredweight:
3.5 X butterfat price + 0.965 X skim milk price
Class II price:
• An advanced Class IV skim milk price is determined
(example, the April Class II price is announced on or before March
23rd.)
• To this advanced Class IV price a $0.70 per hundredweight
differential is added.
• Class II butterfat price:
The Class IV butterfat price + $0.007
• Class II price per hundredweight:
0.965 X Class II advanced skim milk price + 3.5 X
butterfat price.
Class I price:
• Base price:
The “higher of” an advanced Class III or Class IV per
hundredweight price.
The skim milk and butterfat values of the “higher of” are
used.
• Class I differential is added to the base price:
This differential varies for each county in the U.S. and
ranges from $1.60 per hundredweight to $4.30 per
hundredweight. The appropriate differential is where the
milk plant is located
How dairy producers are paid:
• Seven of the eleven orders pay dairy producers on
a milk component basis.
• Four orders that are primarily Class I markets pay
producers under a butterfat and skim milk basis.
How producers are paid under orders with multiple
component pricing:
• All producers receive the following in their monthly milk
check:
+
+
+
+
=
Butterfat price X pounds of butterfat marketed
Protein price X pounds of protein marketed
Other solids X pounds of other solids marketed
Producer price differential X total hundredweight's of milk marketed
Somatic cell adjustment X total hundredweight's of milk marketed
Federal order portion of the producer’s milk check
Milk plants may pay dairy producers more than the federal order price.
The Producer Price Differential: (PPD)
• The PPD represents the value of total market utilization in
Class I, Class II, and Class IV relative to Class III value.
• Example:
(Class I $15.00 - Class III $11.00) X 40% Class I = $1.60
(Class II $11.90 - Class III $11.00) X 10% Class II = $0.09
(Class IV $11.20 - Class III $11.00)X 15% Class IV = $0.02
PPD = $1.71
• The PPD can also be easily calculate by Blend Price minus Class III
price.
Somatic cell adjustment:
• SCC is an adjustment for milk somatic cell count
relative to a base of 350,000.
• A rate per 1,000 cell count above and below the
base is specified each month by:
NASS monthly cheese price used in the Class III protein
formula X 0.0005
Future of Federal Milk Marketing Orders
• FMMOs are difficult to change because:
1. Only producers within an order can vote on their order.
2. U.S. Congress votes based on people not cows or milk
volume. Congress over rules the Secretary’s decision.
3. Legal--different interpretations of 1937 Act; also politics
• So it appears that FMMOs will stay for sometime.
Remaining Federal Order Issues:
• The higher of mover for Class I
Isolates Class I prices from cheese prices.
Milk supply/demand adjustments fall heavily upon
Class III markets.
• Pooling
Milk can be pooled in any order regardless of need for milk
Milk in California is pooled in the Upper Midwest order
• Butter/powder tilt
A price support issue but impacts the Class IV price & mover