Milk marketing orders have been in place since the 1930s to help regulate the availability of dairy products to consumers and milk prices to dairy farmers. Because milk market conditions have made headlines in recent months, it may be beneficial to get back to the basics of milk marketing.
In this month’s Jersey Jargon column, we’ll publish a Milk Marketing 101 of sorts, explaining the fundamentals of the Federal Milk Marketing Order system and how it impacts dairy producers.
Marketing Agreements and Orders
In the dairy industry, Federal Milk Marketing Orders (FMMOs) are designed to ensure dairy farmers receive a reasonable minimum price for their milk throughout the year and that consumers have an adequate supply of milk, without wild fluctuations in price during periods of heavy and light milk production.
In a simplified explanation, the Federal Order system does this by establishing certain provisions (prices, regulations, etc.) under which dairy processors—commonly called handlers—purchase fresh milk from dairy producers supplying a marketing area. A marketing area is generally defined as a geographic area where handlers compete for packaged fluid milk sales. There are currently 11 FMMOs in the U.S.
The Agriculture Marketing Agreement Act authorizes FMMOs and USDA amends and establishes them through a hearing process overseen by the Secretary of Agriculture. The hearing process enables the dairy industry to submit proposals to establish or amend Federal Order provisions.
This process allows the Federal Order system to be modified to meet the changing needs of the dairy industry. Establishing or amending a Federal Order requires approval of producers through a referendum process. A recent example of this came last year when California dairy producers voted to approve a FMMO for their state, overturning the previous state order administered by the California Department of Agriculture.
Milk Check Basics
Generally speaking, dairy producers are paid for their milk based on end use, volume of milk shipped and components, with deductions for hauling, milk marketing and administrative costs.
End use is determined to be one of four classes: Class I (fluid milk), Class II (cottage cheese, ice cream and yogurt), Class III (cheese and whey protein) and Class IV (nonfat dry milk and butter).
Milk price is also determined by the pricing structure of the Federal Order. Because more milk is now being used in manufacturing than bottling, and, because high-component milk yields more product, seven of the FMMOs now use multiple component pricing (MCP). This system bases price on volume of components rather than volume of fluid milk.
USDA releases FMMO prices for Class I, Class II, Class III and Class IV milk on a hundredweight basis each month, along with prices for individual components (milkfat, true protein and other solids and nonfat solids). In skim/fat pricing FMMOs, producers are paid based on the amount of skim and butterfat produced. In MCP orders, individual component yield is multiplied by the corresponding price per pound.
The amount of the milk check will be reduced for items such as hauling and milk marketing (National Dairy Checkoff). It will also be impacted (up or down) by the producer price differential (PPD), an adjustment that is roughly equivalent to the sum of the value of all pooled milk for all classes minus the value of cheese components. The milk check may also be adjusted for somatic cell count and other premiums from the dairy producer’s buyer.
Because not all milk is created equal, it is important that the marketplace compensate dairy producers for these differences. Provisions to FMMOs can be changed, representing opportunities and challenges for Jersey producers, whose numbers are growing, thanks to the efficiency of the Jersey and superiority of her milk.
Through contributions to Project Equity, including fees for REAP, Jersey producers fund National All-Jersey Inc. (NAJ), which is at the forefront of milk pricing issues and an advocate for fair milk pricing. NAJ worked closely with others to push for the adoption of an MCP FMMO for California and continues to press for adoption of multiple component pricing in the southeastern FMMOs.