Federal Milk Marketing Orders: An Overview

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 milk handlers, those who buy milk from producers, are required to pay at least the minimum price. Handlers are responsible for reporting milk receipts by end use to FMMO milk market administrators and maintaining 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 formulas to compute milk class and component values. Milk handlers pay 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 milk producers in a referendum. Congress may address issues related to the FMMO system through legislation. 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 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. A significant change to the FMMO system occurred when California milk producers approved a referendum to join the system in October 2018. U.S. dairy markets were severely disrupted by the Coronavirus Disease 2019 (COVID-19) in March 2020, when schools closed and food service demand for dairy products dropped as restaurants closed for in-person service. FMMO milk pricing turned volatile as strong increases in wholesale cheese demand, due to USDA COVID-19 food support programs, lifted Class III prices above Class I prices, leading to large deductions to uniform prices for milk producers in June 2020 through May 2021. Moreover, changes implemented through the 2018 farm bill (P.L. 115-334) to the Class I skim milk price formula resulted in lower revenue for FMMO milk producers. Milk industry stakeholders have called for a review of milk orders, particularly how Class I milk is priced. Proposed legislation would require USDA to hold an FMMO hearing to review pricing and other FMMO matters. Among other dairy issues, forward contracting for Class II, III, and IV milk was reauthorized in the 2018 farm bill, but restrictions on forward contracting of Class I milk remain. As concerns organic milk, the Organic Trade Association holds that FMMOs disadvantage organic milk producers because they are required to pay into FMMOs but do not receive benefits from the system.