Federal Milk Marketing Order Reform
Issue Overview
The U.S. dairy industry is changing rapidly, from consolidation among farmers, cooperatives and processors, to shifts in consumer preferences to a broader reach in global markets. The COVID-19 global pandemic highlighted the challenges with volatile milk prices and outdated milk pricing and pooling provisions. How should federal dairy policy and milk pricing provisions be improved to keep pace with these changes? If dairy policy is to evolve, dairy farmers need to be involved.
In January 2022, voting delegates to the American Farm Bureau Federation’s 103rd Annual Convention recommended to the AFBF board of directors that AFBF continue the Farm Bureau- and producer-led Dairy Working Group to explore options and additional recommendations for strengthening the dairy industry through the 2023 farm bill and modernizing the current Federal Milk Marketing Order (FMMO) system.
The AFBF board also supported the request of the 2021 Dairy Working Group and voting delegates to plan an AFBF-led industry-wide dairy conference to discuss dairy pricing and meaningful changes to the Federal Milk Marketing Order system, with dairy farmers being the majority of the participants.
New Farm Bureau Policies
- Give dairy farmers an opportunity to cast an individual and confidential ballot during the Federal Milk Marketing Order ballot casting process.
- Enhance price discovery by expanding mandatory price reporting to include the wholesales sales prices of more finished dairy products.
- Improve Federal Milk Marketing Orders by adopting more uniform milk pricing rules across the U.S.; enhance the ability of farmers and processors to share risk and processing costs through flexible make allowances; and improve efficiency through more robust performance standards and an elimination of transportation subsidies.
Final FMMO Working Group Report
Although Federal Milk Marketing Orders have been a pillar of the dairy industry for more than 80 years, outside of the 2018 farm bill, the program has not undergone substantial change in almost two decades.
Farm Bureau is concerned about the large imbalances in the pricing and pooling of milk – which have recently cost dairy farmers hundreds of millions of dollars. Our grassroots leaders believe independent producers and cooperative-member dairy farmers should have an opportunity to directly vote on FMMO issues as they impact milk prices and farm profitability. Other recommendations in the working group’s final report include expanding price discovery and examining alternative ways to price fluid milk and improve risk-sharing between farmers and processors.
Background Research
Background on how milk is priced
Milk prices in the U.S. are based on end-product pricing formulas that utilize wholesale commodities to determine the regulated value of milk. The milk check ultimately consists of a complex arrangement of end commodities, component values, classified pricing, milk pooling, pricing formulas and reblending. This article provides an overview of milk pricing in the U.S.
Background on cooperative bloc voting
Through a referendum process, producers are able to approve changes to the FMMO program. Currently, if the amended FMMO is not approved by two-thirds of the voting producers or two-thirds of the voting milk volume pooling on the order, the entire FMMO is terminated. This article provides an overview of producer voting during the referendum process.
Background on a 'No' vote terminating an FMMO
When voting on modifying an FMMO, there are two methods for ballots to be cast in a producer referendum process: individual ballots and bloc voting by cooperatives. This article reviews an alternative voting process used for promotion programs.
Background on National Dairy Product Sales Report
Under mandatory price reporting regulations, USDA collects and releases sales information for several products in the FMMO milk pricing formulas. Given that these commodity sales reports are the starting point for determining regulated milk prices, this article reviews the percentage of U.S. milk and dairy product production captured in USDA’s mandatory price reporting survey.
Background on Southeast milk production
Changes in milk production in the Southeast have been dramatically different compared to the U.S. as a whole in recent history. This article examines this dairy market and analyzes the factors that contribute to these changes.
Background on transportation credits
Due to more of our nation’s milk being produced in remote rural locations, the dairy industry faces increasing challenges transporting milk from where it is produced to many large cities. This article examines transportation credits, their role in balancing milk supplies and the challenges that come with them.
The Chicago Mercantile Exchange has electronic spot markets for butter, cheddar cheese, nonfat dry milk and dry whey. While not directly linked to USDA’s National Dairy Product Sales Report, CME settlement prices indirectly price all milk regulated on Federal Milk Marketing Orders. This background paper provides an overview of CME spot dairy markets, NDPSR price correlation, trading volume and volume of product physically traded as a proportion of U.S. dairy product and milk solids production.
Milk prices regulated by Federal Milk Marketing Orders are determined based on end-product pricing formulas. These end-product pricing formulas include a fixed deduction called a make allowance, i.e., a processing credit for turning raw milk into finished dairy commodities. This background paper reviews make allowances in the current FMMO pricing formulas.
Background on FMMO payment enforcement
Each respective Federal Milk Marketing Order requires that payments for milk be combined and paid to individual farmers (or cooperatives) based on a uniform or average price for all milk sold. Monthly prices for the four classes of milk are determined and announced to both buyers and sellers. This background paper reviews the payment frequency.
Each of the 11 Federal Milk Marketing Orders contain provisions allowing the movement of milk supplies from one order to another order. Under these provisions, this “diverted” milk is pooled and priced in the order in which it is shipped and processed. This paper reviews milk diversion provisions in each FMMO and attempts to describe how these federal order rules influence the movement of milk between orders or milk plants.
Background on Dairy Industry Advisory Committee
In March 2011, the DIAC, a USDA established committee made up of participants in the dairy industry, issued its final report to the Secretary. The report included recommendations on how USDA can best address issues related to price volatility and dairy farm profitability. This background paper reviews those recommendations.
As with many other agricultural products, export markets are very important for U.S. dairy products. In 2018, the U.S. exported nearly 16% of its dairy production on a total-milk-solids basis. This background paper examines the dairy trade landscape and the market shares in many key dairy import countries.
Background on international dairy pricing
Milk pricing regulations vary in major dairy exporting or producing regions such as the European Union, New Zealand, Australia and Canada. In these countries, milk pricing largely reflects the returns the co-op or processor expects to get from the marketplace based on its product mix. This background paper examines each country’s milk pricing system.
Background on Class I location adjustments
Class I location differentials are an element of the Class I beverage milk price formula. These differentials are fixed in value and increase regulated milk prices in areas with higher Class I differentials. Class I location differentials were last updated more than a decade ago, and were based on supply and demand conditions calibrated to 2008 milk marketing information. This background paper examines the background of these differentials, as well as weather the need, value, and frequency of updating location differentials should be considered.
Background on mandatory price reporting
Under mandatory price reporting regulations, USDA is required to collect and report sales and pricing information for various livestock and dairy products. In general, the purposes of the requirements are to provide timely and accurate market information, facilitate more informed marketing decisions, and to promote competition in the dairy and livestock product manufacturing industry. This background paper examines how mandatory price reporting works and the requirements for reporting products.
Background on pool qualifications
Federal Milk Marketing Order rules stipulate how producers, producer milk and handlers are qualified to participate in an order’s market-wide pool. Market-wide pooling allows dairy producers to share in the revenues derived from the sale of milk classified in different FMMO categories and priced within the federal order. The two FMMO provisions that qualify milk supplies for the market-wide pools are delivery day requirements, and supply plant shipping requirements. This paper reviews these provisions in each FMMO and attempts to describe how these rules influence the movement of milk between orders.
Background on dairy regulations in nutrition programs
Milk and other dairy products provide vital nutrition to consumers of all ages. In terms of farm bill spending, Title IV, the nutrition title, dominates, accounting for over 80% of the bill’s spending. Notably, while the bulk of dollars spent on nutrition move through the farm bill via programs like the Supplemental Nutrition Assistance Program (SNAP), funding for many of the programs with specific restrictions or focus on dairy does not. This paper provides background on the general status of dairy product regulation within the various other nutrition and food donation programs.
Background on DMC tier coverage levels and production history
The Dairy Margin Coverage (DMC) program provides payments to dairy farmers when the national average income-over-feed cost margin falls below a farmer-selected coverage level. This paper provides background on how tier level margin coverage and production history specifications have changed within the DMC program overtime.
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