The facts about the Federal Milk Marketing Orders

From Edge Dairy Farmer Cooperative

Federal Milk Marketing Orders (FMMOs) establish certain provisions under which dairy processors purchase fresh milk from dairy farmers supplying a marketing area. The Orders were established by the 1937 Agriculture Adjustment Act as a response to milk strikes, low dairy prices and lack of cooperation between market participants.

Edge asked Glen Rieck and Corey Freije from Federal Order 30  to help members better understand the Orders.

Q: What are the four classes of milk?

A: Class I is fluid milk; Class II is yogurt, ice cream and cream cheese; Class III is hard cheese; and Class IV is butter and nonfat dry milk. The classes are in decreasing degree of perishability and thus the lowest price class is where surplus milk can be processed into products that can be stored.

Q: Are all classes required to be pooled?

A: Only Class I processors are required to pool all the milk physically received at their plant. Processors primarily producing Class II, III and IV products choose whether to participate in the pool, and often do so when it is financially advantageous.

Q: Can you explain the flow of money within the Federal Orders to and from processors and for farmers?

A: Handlers who receive a payment from the pool then use that money to pay their farmers the Federal Orders minimum price on their pooled milk receipts. This pooling and distribution of market-wide revenues provide for all dairy farmers whose milk is pooled to receive the same minimum value regardless of how their milk is utilized.

Q: Can you explain the concepts of pooling and de-pooling milk in the Federal Orders?

A: Each month, all handlers must submit a report of receipts and utilization to their FMMO market administrator. The handler must report all milk received into a pool plant and has the option of reporting milk that it diverts to non-pool plants. In any given month, a handler can only pool 125 percent of milk pooled in the previous month, with some exceptions for new shipments to bottling plants and new milk on the Federal Order system.

These restrictions are intended to curb large swings in the amount of milk pooled from month to month. If a particular producer has not been pooled on any Federal Order for the previous six months, the farmer qualifies as a new producer on Federal Order 30.

Q: What’s causing negative producer price differentials?

A: Producers are paid an average minimum price for the milk associated with an FMMO. Payments to individual producers are first calculated by using Class III component values. That amount is then increased or decreased depending on whether the overall use value was higher or lower than the Class III value.

Since the Class III price has been historically high in 2020, the Class III component values have exceeded the overall use value of the milk, resulting in negative PPDs. Because much of Federal Order 30 utilization is Class III, many handlers have opted not to pool milk going to non-pool cheese plants in months where the Class III price has been the highest price. Consequently, the large volume of Class III milk not being pooled has magnified the negative PPDs.

Q: How is the Federal Order program funded?

A: Per statute and regulation, Federal Orders offices are funded by an administrative assessment that equips market administrators with the resources to confirm minimum payment for farmers, process the monthly pool calculations, perform audits to ascertain proper classification, verify accurate component testing for producer payment, and provide market information to the dairy industry along with other tasks.