Although the milk check pays the bills on a dairy farm, many dairy farmers don’t fully understand fluid milk pricing. Brook Duer, attorney for the Penn State Center for Agricultural & Shale Law, agrees with farmers who say pricing is complicated.
Federal milk pricing is conducted through the operation of Federal Milk Marketing Orders (FMMOs). There are 11 FMMO areas in the U.S.; however, some areas have no FMMO in effect, including Maine and segments of New York, Virginia and Pennsylvania.
Today’s milk marketing regulations trace back to the Depression. “The country was more isolated, international trade wasn’t what it is now and food had to be produced here,” said Duer. “A government that fails to feed its people fails.”
One marketing challenge is that dairy farmers must hold a commodity that’s subject to spoilage. Dairy industry rules dictate that milk can be stored 72 hours prior to shipping.
“Not only is milk a highly perishable commodity,” said Duer, “[but] large processors are buying it from hundreds of dairy farmers and there isn’t equal bargaining power between the two.”
Duer said dairy cooperatives are much like a labor union for farmers. Co-ops represent hundreds of dairy farmers and do the work to secure milk markets.
“Cooperatives haul the milk from the farm to the plant,” he said. “The processor waits for the dairy farmer/cooperative truck to show up and unload.” Processing plants have become farther away from dairy farms, which adds more challenges.
The FMMO states that marketing orders contain provisions to “classify milk in accordance with the form or purpose it is used and fix, or provide a method for fixing, minimum prices for each such use classification which all handlers (milk processors) shall pay, and the time when they shall pay payments shall be made, for milk purchased from producers or associations of producers.” Duer said without the FMMO, there would be little to no governance for pricing.
“That’s why dairy farmers petitioned the government under the Ag Marketing Act of 1937,” said Duer. “In order to establish these marketing orders, which have the power of law, processors are required to comply with them. There’s more governmental weight behind some of the terms producers can now dictate because of the marketing order.”
Under the FMMO, payment for milk goes to the cooperative, not to individual dairy farmers, and individual dairy farmers are paid by their cooperative.
Milk is classified according to its final form. Class I is fluid milk, Class II is soft products (yogurt, ice cream, soft cheeses), Class III is hard cheese and Class IV is butter and powdered products. Class I has traditionally garnered top dollar.
Production differentials are a factor in pricing and refer to the level of work required to create milk products. Packaging milk for fluid sales requires less investment than is required to make cheese, yogurt, ice cream and other dairy products.
“There’s a production differential in costs, so the price paid takes that into account,” said Duer. “That’s why prices aren’t completely uniform. All handlers within a particular marketing order must pay the same amount for all the milk they purchase to make products such as butter, cheese or fluid milk or other products.”
He admitted that the FMMO can be confusing but urged farmers to focus on the objective of the order. “Class I milk is fluid drinking milk – the simplest to process and nets the highest price,” he said. “Milk is sold in 100-pound increments, and a hundredweight of milk sold for fluid packaging and sale is the most lucrative way to sell milk.” All other dairy products require time and money to produce and have a lower return.
The goal of the FMMO is to spread the benefit from the most lucrative milk sales (fluid Class I) across all producers. “Producers are not the ones who decide what milk will be used for,” said Duer. “That’s the processors’ prerogative.” He added that dairy farmers producers in regions that lack a fluid milk processor must sell milk for cheese or other dairy products.
“There’s a monthly system of ‘spreading it around’ so everyone whose milk is in the pool at the end of the computation, which takes several months, will receive one uniform price,” said Duer. “All Class I revenue is pooled with other revenues, and everyone who contributes to that gets a uniform price.”
Class I milk is mandatorily pooled unless certain criteria are met and a plant withdraws their milk from the pool. “Plants can also agree to pool Classes II through IV,” said Duer. “This is because there was a time when processors wanted to be a more attractive place to sell – it was more of a sellers’ market.”
In the past, processors had to entice farmers to sell their milk for “lesser” uses (such as butter). Agreeing as a processor to pool Class II revenue would enable them to pay people more for milk that would be used as powder or butter.
In the past, this agreement was needed by processors to keep their milk supplies stable and flowing. “That’s why Class I was always mandatory pooling and the other classes came into play because processors wanted that,” said Duer. “It helped them attract a milk supply.”
Because dairy farmers can’t wait for prices to be established, an initial advance price payment is required by the FMMO. A secondary process determines the final uniform price.
Duer listed some of what he refers to as the “headache-producing internal calculations” that establish Class I – IV prices: The AMS monthly announced prices as well as cheese, butter, dry whey and nonfat dry milk prices; the Class I differential, protein and butterfat prices; other solids prices; and nonfat solids prices are all involved in establishing the Class I price. Pooling allows farmers to receive the weighted average price.
There is ongoing FMMO reform, partially due to the dairy industry’s push to improve the pricing system. “The basic pooling concepts remain acceptable to most industry players,” said Duer, “but the calculations for aspects of the pricing system have produced results that no one is happy with.”
Find links to more information on current FMMOs at aglaw.psu.edu/research-by-topic/library-guide/dairy-and-dairy-products-law.
by Sally Colby
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