From the Fields: Milk Pricing Through the FMMO
Jeff Wilke
By Jeff Wilke, Bank First
In the early 1900s, chaotic fluid-milk pricing, dealers who squeezed dairy farmers on prices, and overall unfavorable economic conditions left farmers with low prices and chaotic markets. To combat this, the federal government established the Federal Milk Marketing Order (FMMO) system in the 1930s.
FMMOs establish provisions under which dairy processors (milk handlers) buy fresh milk from dairy farmers who supply a marketing area (there are 11 marketing order geographic areas in the U.S.) Under FMMO regulations, the USDA establishes a minimum milk price, and dairy processors are required to pay at least this minimum price to producers.
The two main features of the FMMO system are classified pricing and pooling of milk. The FMMO system recognizes four different classes of milk: Class I (fluid milk), Class II (soft products such as yogurt and ice cream), Class III (cheese — what most of Wisconsin milk is processed for), and Class IV (butter and milk powder). Milk handlers report all milk receipts by end use. The FMMO then values this “pool” of milk receipts through formulas to compute milk class and milk component (butterfat, protein, and other solids in milk) values. Milk handlers pay producers at least the weighted-average of all class uses, known as a “uniform” or “blended” price.
Class I fluid milk usually receives the highest minimum price under the FMMO system. This helps to encourage the movement of milk from milk-surplus areas into milk-deficit areas, and ensures a sufficient supply of fluid milk to meet heavy demand (i.e. — during the school year). By pricing surplus milk (milk in excess of fluid needs) at a lower price than fluid milk, classified pricing prevents such supplies from depressing the price of milk to dairy farmers to the point where the supply may become endangered. The minimum prices aim to protect milk producers from severe price reductions that might occur during times of milk surplus.
FMMO pricing formulas have not been significantly updated since they were first implemented in 2000. But with significant industry changes occurring since 2000 — milk composition, product manufacturing costs, costs of transporting milk, plant closures, and shifts in milk production areas — proposals are being reviewed to help modernize the FMMO system for today’s dairy industry. 38 proposals by 12 different industry organizations have been submitted to the USDA as of the June 14 deadline. As of the writing of this article, the USDA is deciding on whether to hold a FMMO hearing for the proposed changes. If there is a hearing, it will start on August 23.
Wilke is vice president – business and agricultural banker at Bank First in Denmark. Wilke also serves as the 2023–2024 vice chair of the WBA Agricultural Bankers Section Board of Directors.
