History, Function

1
History, Function Future of Federal Milk
Marketing Orders

• Bob Cropp
• Dairy Marketing Policy Specialist
• University of Wisconsin-Madison
• April 2001

2
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
  pooling.
• Milk buyers had been refusing to pay one high
  flat price for all milk (milk in excess of fluid
  needs)

3
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
  3.00
• 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

4
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

5
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
  pooling
• 1935 Agricultural Act
• - Set more specific terms and provisions and
  called the programs marketing orders rather
  than licenses

6
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.

7
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

8
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

9
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.

10
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

11
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
  powder
• Since the purpose of FMMOs is to assure consumers
  of beverage milk, Class I is the highest price.

12
How classified pricing and pooling works

• Lets assume the following class prices and milk
  utilization
• 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.

13
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
  

14
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

15
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

16
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.

17
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

18
History and Scope of Federal Milk Orders
19
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.

20
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
  production.
• 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
  prices.
• The M-W was the weighted average price paid by
  Minnesota and Wisconsin butter, milk powder and
  cheese plants for Grade B milk.

21
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.

22
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

23
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.

24
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

25
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
  month.
• The M-W was changed to the Basic Formula Price
  (BFP)

26
By 1990, the Upper Midwest began questioning the
increase in Class I differentials from Eau Clare,
Wisconsin

• 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.

27
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28
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.

29
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)

30
The Secretary of Agriculture recommendations

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

31
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.

32
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
  comments.
• 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.

33
Federal Milk Marketing Orders
Federal Milk Marketing Orders
34
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35
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
  products

36
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

37
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

38
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
  butter.

39
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

40
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

41
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

42
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.

43
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

44
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45
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
  basis.

46
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
  check
• Milk plants may pay dairy producers more than the
  federal order price.

47
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.

48
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

49
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.

50
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