Farm Prices

Federal Milk Marketing Orders

Farm prices are determined by the interaction of supply and demand and by the Federal Milk Marketing Order (FMMO) system. The FMMO was established in the 1930s with the basic objectives of benefiting both consumers and producers by stabilizing and maintaining orderly dairy market conditions, and assuring consumers of fresh wholesome milk. The dairy industry was much different in the 1930s with many small producers and processors. Farmers were faced with few markets for their highly perishable product. The FMMO was designed, at least in part, to counter unfair buying practices by processors. Most of the milk then was sold in local markets for fluid consumption. Over the years, advances in transportation and a shift to processed products have made dairy markets national and increasingly international.

The FMMO was designed for 1930s dairy farms and some argue it is obsolete, costly and hurts, rather than benefits, certain producers. A USDA Economic Research Service study concluded that the FMMO has caused modest increases in milk prices (about 1 percent) and farm income (about 3 percent). The Milk Income Loss Contract program pays farmers based on production. That program expands production and keeps prices lower. The authors conclude that eliminating that program might lead to a four percent increase in milk prices, on average over five years, compared to the increase of one percent under the program. They also suggest limited impacts on dairy farm profitability, although the programs have stabilized prices over time, limiting variability year-to-year.

There are now 11 different federal milk orders across the U.S., a reduction from the previous 31 orders. The reduction in the number of orders was mandated by the 1996 Farm Act, designed to limit government intervention in the dairy markets. Consolidation of the orders went into effect on January 1, 2000. Massachusetts farmers are within the Northeast Milk Marketing Order.

There are two fundamental concepts to the federal pricing system:

1. Classified Pricing – milk is placed in four classes:

• Class I – milk that is used for fluid products or beverages;

• Class II – milk used for fluid cream products, yogurt, and other perishable soft products (like ice cream, cottage cheese, etc.);

• Class III – milk that is used in cream cheese and “hard” manufactured cheeses (i.e., American, Italian, cheddar, etc.); and

• Class IV – milk that is used in butter and dried forms of milk.

2. Revenue Pooling – revenues of all producers in the market order are pooled. A “blend price” is then calculated by the market administrator each month and is used to pay the producers, or their cooperatives. The “blend price” is total revenues or receipts divided by the total quantity of milk sold in the market order.

Table 3 shows an example of how milk was pooled in May 2007 for the Northeast Marketing Area. The Class I price in Suffolk County, MA, ( Boston) was $19.17 per one-hundred pounds of milk for May 2007, up nearly one dollar from the previous month. The greatest proportion of producer’s milk, 44.6 percent, was sold as Class I milk in May 2007. (Distribution of Class I Prices for All Federal Milk Marketing Orders.) About 22 percent and 23 percent of Northeast producers’ milk went to manufacturing cream and other perishable soft products (Class II) and cheeses (Class III), respectively. The remaining 11 percent was sold for Class IV uses. While the actual use of milk from individual farms will differ from the percentages shown above, revenue pooling assures that all northeast dairy farmers are paid based on these pooled percentages. Under revenue pooling, the milk quantities sold in the four classes receive the class prices. Revenues from the four classes are summed and the total revenue is divided by the total amount of milk sold to determine the “blend price,” a quantity-weighted average price that producers receive for their milk. The blend price is also called the Statistical Uniform Price (SUP). The actual milk prices received by producers will depend upon their tests for the various components of milk, butterfat, protein and non-fat solids. A number of additional adjustments are made by the market administrator in determining the blend price; it is not exactly the quantity-weighted average of the prices above.

Northeast dairy farmers are currently faring a bit better than they did in 2006. Table 4 compares the class prices and distributions of milk among the different classes. Simple average class prices are shown for 2005 and 2006 and are compared to the May 2007 prices. Boston Class I prices have further increased in the past two months to $21.09 in June and $24.16 in July. Blend prices will be depend on the allocation of milk among the four classes, but we would expect substantial increases. The percentages of milk distributed among the four classes have remained fairly constant over time, although they can vary a bit during any one year. For example, 52.3 percent of Northeast producers’ milk was allocated to Class I in November 2006; in April of 2006, just 41.5 percent was allocated to Class I.

 

¹See: USDA Economic Effects of U.S. Dairy Policy and Alternative Approaches to Milk Pricing. Report to Congress. July 2004. (http://www.usda.gov/documents/NewsReleases/dairyreport1.pdf)

²The prices shown are for milk that is 3.5 percent butterfat, 2.99 percent protein and 5.69 percent other solids.