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History, Function


The M-W was based entirely on a survey of milk plants. ... The Secretary will review the comments and issue a final decision which will ... – PowerPoint PPT presentation

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Title: History, Function

History, Function Future of Federal Milk
Marketing Orders
  • Bob Cropp
  • Dairy Marketing Policy Specialist
  • University of Wisconsin-Madison
  • April 2001

Dairy cooperatives initially attempted to improve
milk prices to dairy farmers.
  • 1810 first U.S. dairy cooperative
  • 1822 dairy cooperatives involved in
  • retail fluid milk distribution
  • wholesale milk distribution
  • bargaining
  • 1920 dairy cooperatives attempted to replace
    flat pricing with classified pricing and
  • Milk buyers had been refusing to pay one high
    flat price for all milk (milk in excess of fluid

Cooperative voluntary classified pricing and
pooling had only limited success.
  • Not all milk buyers participated.
  • There were advantages to milk buyers to stay
    outside of the voluntary arrangement.
  • Milk buyer that was 100 fluid could pay
    directly to farmers a higher price than the
    pooled (average) price and yet buy
  • milk cheaper.
  • Example
  • Fluid price 6.00 X 50 fluid
  • Surplus price 4.00 X 50 surplus 2.00
  • Average price paid to dairy
    farmer 5.00
  • Fluid Milk buyer outside could pay directly
    to farmers 5.50

Cooperative activity continued to grow
  • By 1935
  • 2,270 dairy cooperatives that represented 16
    of the dairy farmers but 45 of all milk marketed
    by farmers.
  • 110 dairy cooperatives were bottling milk,
    but represented just 5 of the fluid sales.
  • 87 bargaining cooperatives
  • Several cooperatives making butter and cheese

Federal legislation to assist dairy farmers with
milk pricing
  • Agricultural Adjustment Act of 1933
  • - Established program of licenses
  • - All milk dealers in a given market required
    to pay dairy farmers classified pricing and
  • 1935 Agricultural Act
  • - Set more specific terms and provisions and
    called the programs marketing orders rather
    than licenses

Agricultural Marketing Agreement Act of 1937
  • Refined the marketing order provisions that are
    used today.
  • This is enabling legislation---that is, dairy
    farmers may request and approve a federal milk
    marketing order orders are not mandatory they
    require dairy farmer (producer) approval.

Purposes of federal milk marketing orders (FMMOs)
  • To provide for orderly marketing
  • To assure reasonable prices to bother dairy
    farmers and to consumers
  • To assure an adequate supply of wholesome
    beverage milk to consumers

FMMOs continued
  • FMMOs price only Grade A milk
  • Procedure to get an FMMO
  • 1. Dairy farmers (producers), dairy cooperatives
    request the Secretary of Agriculture to hold a
    hearing to provide information for the need for
    an order.
  • 2. Upon evidence submitted at the hearing, the
    Secretary issues a recommended decision.
  • 3. Producers and milk plants (handlers) make
    submit comments
  • 4. Secretary issues a final decision
  • 5. Producer referendum --if two-thirds of dairy
    producers voting approve the final decision, the
    order becomes effective

Dairy cooperatives may bloc vote.
  • The board of directors of a dairy cooperative may
    decide on behalf of the entire dairy-farmer
    membership whether to cast a vote of approval.
  • If 500 members, the cooperative casts 500 yes or
    no votes.

FMMOs continued
  • Milk plants that handle Grade A milk for fluid
    (Class I) purposes are called Handlers.
  • Bottlers
  • Supply plants
  • Dairy cooperatives
  • Dairy farmers who markets their milk to a handler
    is called a Producer
  • Handlers are regulated, not dairy producers

FMMOs continued
  • Handlers are regulated by being required to pay
    at least minimum class prices into a pool.
  • Class prices are established by the FMMO
  • Initially three classes
  • 1. Class I beverage milk products
  • 2. Class II soft manufactured dairy
    products- ice cream, yogurt, evaporated
    condensed milk, cream products
  • 3. Class III cheese, butter and dry milk
  • Since the purpose of FMMOs is to assure consumers
    of beverage milk, Class I is the highest price.

How classified pricing and pooling works
  • Lets assume the following class prices and milk
  • Class I 12.00/Cwt. 50 6.00
  • Class II 11.00/Cwt. 10 1.00
  • Class III 10.00/Cwt. 40 4.00
  • Weighted average price 11.00
  • (blend price)
  • All milk handlers pay dairy producers at least
    this blend price of 11.00/Cwt. So all producers
    receive the same base blend price regardless of
    where they sell their milk.

Pooling( a producer settlement fund)
  • Lets assume two handlers in the market, Handler
    A, a bottler, and Handler B, a cheese plant
    (supply plant)
  • Handler A has
  • Class I 12.00 X 90 10.80
  • Class II 11.00 X 10 1.10
  • Class III 10.00 X 0 0.00
  • Average milk value 11.90
  • Handler A pays its producers the 11.00 blend
    price and pays INTO the pool the difference of
    11.90 - 11.00 or 0.90/Cwt. on all milk handled

Handler B has
  • Class I 12.00 X 10 1.20
  • Class II 11.00 X 0 0.00
  • Class III 10.00 X 90 9.00
  • Average milk value 10.20
  • Handler B pays its dairy producers the 11.00
    blend price a draws OUT of the pool the
    difference between 11.00 - 10.20 or 0.80

Dairy cooperatives are obligated to the pool
prices, but are not obligated to paying producers
the blend price.
  • Dairy cooperatives re-blend when paying their
    member producers.
  • Dairy cooperatives manufacture dairy products,
    sell raw milk to different handlers in different
    markets and take all milk revenues generated to
    divide among dairy producers.
  • Dairy cooperatives return at the end of the year
    profits earned to members--patronage refund

Each FMMO has a market area
  • The market area is the geographic area where milk
    is consumed not necessarily produced.
  • All handlers serving those same consumers ought
    to have the same raw milk cost.
  • Location of handler or producer does not
    determine which FMMO a handler is regulated
    under but rather where does the handlers Class
    I sales go.

Market area
  • Initially rather small geographic area
  • But as modern processing, packaging and
    transportation technologies developed packaged
    beverage milk products could be economically
    distributed in greater geographic areas.
  • The result, FMMOs were consolidated

History and Scope of Federal Milk Orders
Minimum class prices
  • Prior to 1960 the different FMMOs used different
    formulas for establishing minimum class prices.
  • By 1960, it was recognized that butter, cheese
    and dry milk powder were marketed nationally and
    that beverage milk products had a much larger
    geographic area of distribution.
  • Uniform class pricing formulas were established.

Uniform pricing formulas
  • The majority of milk in Minnesota and Wisconsin
    was used for butter, powder and cheese and
    accounted for a major share of national
  • The Minnesota-Wisconsin Price Series (M-W) was
    adopted as the base price for Class III in all
    FMMOs and as the mover of Class II and Class I
  • The M-W was the weighted average price paid by
    Minnesota and Wisconsin butter, milk powder and
    cheese plants for Grade B milk.

Class differentials
  • A differential was added to the M-W for the Class
    II price.
  • A differential that varied by FMMO was added to
    the M-W for the Class I price.
  • Eau Clare, Wisconsin was the starting point
    the Class I differential increased with distance
    from Eau Clare.
  • Wisconsin was considered as the major reserve
    of Grade A milk for Class I use.

The Class I differential reflected
  • The added cost to dairy producers to produce
    Grade A rather than Grade B milk
  • The transport cost of moving raw Grade A milk to
    the market.
  • A more inelastic price demand for Class I products

Connection between the federal dairy price
support program and federal orders
  • The federal dairy price support program
    implemented in 1950 supports the price of milk to
    dairy producers by setting a support price for
    milk used for manufactured dairy products.
  • The support price is converted into a price per
    pound of cheese, butter and nonfat dry milk.
  • If surplus milk is produced and commercial prices
    of cheese, butter and nonfat dry milk fall below
    the purchase prices, the CCC stands ready to
    purchase these products.
  • This CCC purchase activity supports the price of
    Grade B milk which supports the M-W price which
    supports the Class prices in FMMOs.

The M-W as the base price and mover came into
question in the 1980s.
  • The quantity of Grade B milk in Wisconsin and
    Minnesota was declining as dairy farmers
    converted to Grade A production.
  • Other regions of the country were producing
    significant shares of manufactured products--NE
    and West

However, no change until 1995.
  • A change in how the base price was determined was
    made. The M-W was based entirely on a survey of
    milk plants. A survey of plants for the previous
    month pay prices retained but this was adjusted
    based on what had happened to the price of
    cheese, butter and milk powder during the current
  • The M-W was changed to the Basic Formula Price

By 1990, the Upper Midwest began questioning the
increase in Class I differentials from Eau Clare,
  • Grade A milk production was increasing in the
    South, South West and West.
  • - Modern production technology was enabling
    these regions to build large dairy operations
    and produce milk at very competitive prices.
  • - Modern transportation enable the transport of
    raw Grade A milk greater distances to serve
    deficit Grade A milk areas.
  • - No longer was Wisconsin the sole area for
    reserve Grade A milk production.

(No Transcript)
The Secretary of Agriculture received a request
to hold a national hearing on Class I pricing.
  • A national hearing was held in 1990
  • The Upper Midwest was the only region that
    offered information on the out-dated Eau Clare,
    Wisconsin basing point for Class I differentials.
  • Result, no major changes in Class I differentials
  • Minnesota Milk Producers sued the Secretary of
    Agriculture for this decision charging that the
    1937 Act was not being implemented properly.
  • The lawsuit drew national attention to the
    problems of FMMOs, but any change was denied.

1996 Farm Bill included changes for FMMOs.
  • Directed the Secretary of Agriculture to
    consolidate the existing 33 federal orders to
    between 10 and 14 California could be included
    if dairy producer so requested.
  • The Secretary was authorized to visit the various
    pricing provisions of FMMOs.
  • Consolidation of orders and pricing changes were
    to be implemented on or before April 4, 1999.
  • A Northeast Dairy Compact was authorized for a
    period up until federal order reform was
    implemented ( on or before April 4, 1999)

The Secretary of Agriculture recommendations
  • Consolidate to 11 FMMOs.
  • Replace the BFP with multiple component pricing
  • Establish four classes of milk
  • Flatten the Class I differential pricing surface
  • Establish a separate mover of Class I

U.S. Congress intervened
  • Accepted the consolidation of orders, but
    reversed the flattening of Class I differentials.
  • Extended the Northeast Compact until September
    30, 2001.
  • Allowed implementation of federal order reform
    January 1, 2000, but instructed the Secretary to
    review the multiple component pricing formulas.

Secretary of Agriculture held a hearing May 2000
  • Secretary December 2000 issued a tentative
    decision that made some changes in the multiple
    component pricing formulas ask the cooperatives
    for approval and approval of dairy producers not
    associated with cooperatives.
  • Implementation of changes January 1, 2001, but
    industry had until February 5, 2001 to submit
  • The Secretary will review the comments and issue
    a final decision which will require producer
    approval for implementation.
  • A lawsuit challenged a change in calculating the
    value of butterfat in Class III (cheese) the
    result is an injunction against implementation of
    that change.

Federal Milk Marketing Orders
Federal Milk Marketing Orders
(No Transcript)
Classes of milk
  • Class I Milk used for beverage milk products.
  • Class II Milk used for soft manufactured
    products, ice cream, cream products, yogurt,
    condensed milk
  • Class III Milk used for cheese
  • Class IV Milk used for butter and dry milk

The Class III price
  • Butterfat price per pound
  • (NASS monthly AA butter price - 0.115)/0.82
  • NASS is the USDA National Agricultural
    Statistical Reporting Service survey of selling
    prices of manufacturing plants.
  • 0.115 is the make allowance
  • 0.82, is the yield factor for butter

Class III continued
  • Other solids price per pound
  • (NASS monthly dry whey price - 0.14)/0.968
  • 0.14 is make allowance
  • 0.968 is the yield factor of dry whey

Class III price continued
  • Protein price per pound
  • (NASS monthly cheese price - 0.165) X 1.405
  • (NASS monthly cheese price - 0.165) X 1.582 -
    butterfat price X 1.28
  • The first line represents the net value of
    protein in cheese.
  • 0.165 is make allowance 1.405 is yield of
    cheese per pound of protein
  • The second line accounts for the value of
    butterfat in cheese in excess of its value in

Class III continued
  • Class III skim milk value per hundredweight
  • 3.1 X protein price 5.9 X other solids price
  • Class III price per hundredweight
  • 3.5 X butterfat price X 0.965 X Class III skim
    milk price

Class IV price
  • Butterfat price per pound
  • The same as Class III butterfat price
  • Nonfat solids price per pound
  • (NASS monthly nonfat dry milk price - 0.14)
  • 0.14 ism the make allowance

Class IV continued
  • Skim milk price per hundredweight
  • 9.0 X nonfat solids price
  • Class IV price per hundredweight
  • 3.5 X butterfat price 0.965 X skim milk price

Class II price
  • An advanced Class IV skim milk price is
    determined (example, the April Class II price is
    announced on or before March 23rd.)
  • To this advanced Class IV price a 0.70 per
    hundredweight differential is added.
  • Class II butterfat price
  • The Class IV butterfat price 0.007
  • Class II price per hundredweight
  • 0.965 X Class II advanced skim milk price 3.5
    X butterfat price.

Class I price
  • Base price
  • The higher of an advanced Class III or Class
    IV per hundredweight price.
  • The skim milk and butterfat values of the
    higher of are used.
  • Class I differential is added to the base price
  • This differential varies for each county in the
    U.S. and ranges from 1.60 per hundredweight to
    4.30 per hundredweight. The appropriate
    differential is where the milk plant is located

(No Transcript)
How dairy producers are paid
  • Seven of the eleven orders pay dairy producers on
    a milk component basis.
  • Four orders that are primarily Class I markets
    pay producers under a butterfat and skim milk

How producers are paid under orders with multiple
component pricing
  • All producers receive the following in their
    monthly milk check
  • Butterfat price X pounds of butterfat marketed
  • Protein price X pounds of protein marketed
  • Other solids X pounds of other solids marketed
  • Producer price differential X total
    hundredweight's of milk marketed
  • Somatic cell adjustment X total
    hundredweight's of milk marketed
  • Federal order portion of the producers milk
  • Milk plants may pay dairy producers more than the
    federal order price.

The Producer Price Differential (PPD)
  • The PPD represents the value of total market
    utilization in Class I, Class II, and Class IV
    relative to Class III value.
  • Example
  • (Class I 15.00 - Class III 11.00) X 40 Class
    I 1.60
  • (Class II 11.90 - Class III 11.00) X 10
    Class II 0.09
  • (Class IV 11.20 - Class III 11.00)X 15 Class
    IV 0.02
  • PPD 1.71
  • The PPD can also be easily calculate by Blend
    Price minus Class III price.

Somatic cell adjustment
  • SCC is an adjustment for milk somatic cell count
    relative to a base of 350,000.
  • A rate per 1,000 cell count above and below the
    base is specified each month by
  • NASS monthly cheese price used in the Class III
    protein formula X 0.0005

Future of Federal Milk Marketing Orders
  • FMMOs are difficult to change because
  • 1. Only producers within an order can vote on
    their order.
  • 2. U.S. Congress votes based on people not cows
    or milk volume. Congress over rules the
    Secretarys decision.
  • 3. Legal--different interpretations of 1937 Act
    also politics
  • So it appears that FMMOs will stay for sometime.

Remaining Federal Order Issues
  • The higher of mover for Class I
  • Isolates Class I prices from cheese prices.
  • Milk supply/demand adjustments fall heavily
    upon Class III markets.
  • Pooling
  • Milk can be pooled in any order regardless of
    need for milk
  • Milk in California is pooled in the Upper
    Midwest order
  • Butter/powder tilt
  • A price support issue but impacts the Class IV
    price mover
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