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 products-

ice 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% = $ 1.20

Class II $11.00 X 0% = $ 0.00

Class III $10.00 X 90% = $ 9.00

Average milk value = $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 Number

of

Orders

Number

of

Handlers

% Class

I

% Grade

A milk

% All

milk

1950 39 1,101 58.9% 41% 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.

495

949

952

238

5,582

755447

588 2,878

3491,930

1,092

2,165

565

732

196375

404

191158

78

4,336

169

1,344

175275

2000 Per Capita Milk Production

154 574

418

247

393389

154

269147

92

148

908

628

255

4,578251

32

190

524

62

27

140

Per Capita Milk ProductionU.S. Average = 596 Lbs.

Less Than 300 Lbs. (22)

300 To 600 Lbs. (12)

Greater Than 600 Lbs. (14)

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 Federal Milk Marketing Orders

31 Orders 11 Orders

Federal Milk Marketing OrdersFederal Milk Marketing OrdersJanuary 1, 2000

Upper

Midwest

Pacific

Northwest

Arizona -

Las Vegas

Western

Southwest

Central

Florida

Northeast

Mideast

Southeast

Appalachian

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