Federal Milk Marketing Orders: An Overview

Summary

Federal Milk Marketing Orders (FMMOs) are geographically defined fluid-milk demand areas. Under FMMO law and regulations, the U.S. Department of Agriculture (USDA) establishes a minimum milk price, and those who buy milk from producers, known as handlers, are required to pay milk producers no less than this established price. Handlers are responsible for reporting milk receipts by end use to FMMO milk market administrators and maintain adequate records so that administrators may audit and verify the accuracy of the reported uses.

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 use), Class II (soft products such as ice cream), Class III (cheese), and Class IV (butter and milk powder). Milk handlers report all milk receipts by end use, and the FMMO values this “pool” of milk receipts through fixed minimum-price formulas to compute the four class prices. Milk handlers pay milk producers at least the weighted-average price of all class uses—known as a “uniform” price or “blend” price.

The main objectives of FMMOs are to (1) promote orderly marketing conditions in fluid milk markets, (2) improve the income situation of dairy farmers, (3) supervise the terms of trade in milk markets in such a manner as to achieve more equality of bargaining between milk producers and milk processors, and (4) assure consumers of adequate supplies of good quality milk at reasonable prices.

FMMOs are permanently authorized in the Agricultural Marketing Agreement Act of 1937, as amended, and not subject to reauthorization. FMMOs are established and amended through a formal public-hearing process that allows interested parties to present evidence regarding marketing and economic conditions in support of, or in opposition to, instituting or amending an order. Most FMMO changes are made administratively by USDA through the rulemaking process, which must then be approved by farmers in a referendum. Legislation can also address issues related to the FMMO system.

The most recent major national revision to FMMOs occurred as part of the 1996 farm bill (P.L. 104-127). It reduced the number of orders from 31 to 11 (now 10 since 2004) and made changes to classified pricing, order provisions, terminology, and classification of milk by end use. The 1996 farm bill provisions went into effect on January 1, 2000. FMMOs continue to operate under those reforms, although there have been some changes in the operations of orders brought about through FMMO hearings and rulemaking since then.

Several dairy issues have attracted stakeholder attention. Milk industry stakeholders have proposed two changes to how milk is priced. Milk handlers may forward contract milk purchases used to manufacture dairy products. Milk processors, who would like to use forward contracts as a risk management tool, have asked Congress to expand forward contracting rules to fluid milk. Also, both milk processors and producers have proposed that USDA change the method used to calculate the Class I milk price. Some stakeholders believe that altering the Class I milk formula could improve their ability to manage price risk.

In addition to these pricing issues, California milk producers petitioned USDA to establish a California federal order, which would bring an additional 20% of national milk production under federal regulations. Lastly, the Organic Trade Association (OTA) petitioned USDA to alter FMMO pricing requirements for organic milk handlers. Organic milk handlers are required to pool organic milk under FMMO regulations, but OTA argues that classified pricing and pooling disfavor organic handlers.