Milk Price Modernization Proposals

Jason Hartschuh, Field Specialist, Dairy Management and Precision Livestock, Ohio State University Extension

Over the past year, there has been a lot of discussion about how to modernize milk prices through the Federal Order system to recognize industry changes since the last major update in 2000 and correct a change made in the 2018 farm bill that greatly affects Class I milk price. The major change in 2000 that affects the pay calculation was a switch from milk prices being based on competitive pay prices for Grade B milk in Minnesota and Wisconsin to the current system that bases raw milk class prices on survey data from select wholesale processed products. The Federal Order system was created in the 1930’s to establish orderly milk markets and return market power to the producers. The market disorder was caused by the perishable nature of fluid milk, the seasonal variability in production that didn’t match the fluctuation in consumer consumption, and the multiple uses of milk. Today, these challenges still exist with the Federal Order working to ensure consumers have an adequate supply of fresh fluid milk. Also, it works to assist dairy farmers in developing stable and reliable milk markets, along with promoting and maintaining orderly milk marketing conditions.     

National Milk Producers Federation (NMPF) submitted the most comprehensive Federal Order hearing request on May 1st with 5 areas of proposed amendments. While in late March, the Wisconsin Cheese Makers Association and the International Dairy Foods Association each submitted a petition for a hearing to amend the Federal Order but only focuses on their processor’s concerns over the make allowance. The other four areas that NMPF is requesting amendments to that we will discuss in future weeks are: 1) returning to the higher of Class I mover, 2) discontinuing the use of barrel cheese in the protein component price formula, 3) update the milk component factors for protein, other solids, and nonfat solids in the skim milk price formula for Class III and Class IV, and 4) update the Class I differential pricing surface throughout the United States. The additional four areas proposed by NMPF should have a positive effect on dairy producers’ bottom line and counter the decrease in milk price caused by the updated make allowance discussed below. 

Federal Orders establish minimum prices for raw milk but do not establish minimum retail prices. They also do not guarantee dairy farmers a milk market or a profitable milk price. Through make allowances, they do establish the amount of make a processor will retain from the wholesale price of select products on which milk prices are based. Since the last major Federal Order reform in 2000, milk prices are based on a voluntary survey of dairy product manufacturers that sell bulk wholesale butter, nonfat dry milk, dry whey, and cheddar cheese in 40-lb blocks and 500-lb barrels. This information is used to calculate the prices of butter fat, protein, and other solids. These formulas also have a yield factor which is the amount of cheese made from a pound of protein or butter made from a pound of butterfat.

Make Allowance Change

The proposed make allowance changes are based on a voluntary survey in the upper Midwest that had low participation rates with only a third of processors providing data. The voluntary data was also not audited for accuracy. A study from California found that current manufacturing costs compared to current make allowances are 51% higher for cheddar cheese, 49% higher for dry whey, 39% for butter, and 59% higher for nonfat dry milk. These cost increases come from many areas with increases since 2019 of wages-20.2%, health policy premiums-20.9%, electricity-14.1%, natural gas-68.9%, cultures-15.8%, sale-18.8%, cardboard packaging-25.8%, and plastic packaging-36%.

Make allowance changes:


Current Make Allowance ($/lb)

NMPF Proposed
Make Allowance ($/lb)




Nonfat solids






Other solids



Hearing requests acknowledge the need for a better way to determine and update make allowances through a mandatory survey of manufacturers’ cost of production and product yield. One-way plants have improved profitability is to improve product yield. These future mandatory surveys would provide much better accuracy for updating the make allowances by having all processors participate and having the data be auditable. While USDA has the authority to do this data collection, congress will have to fund this survey data collection, making the mandatory survey somewhat separate from the Federal Order hearing.

NMPF predicts that the proposed updated make allowances will have a negative initial effect on producers if done alone from other 4 proposals. It would reduce the national all-milk price by $0.54/cwt, Class III price by $0.58/cwt, and Class IV by $0.53/cwt. Increased make allowances long term should lead to increased investment in process facilities, increased production of higher-value products that are also more expensive to produce, and the ability for efficient plants to again pay producer premiums for high-quality milk.

Class I Mover Change

The Class I mover would return to the higher of Class III or Class IV skim milk price as it was prior to 2019. In 2019, the Class I milk price calculation was changed to the average of Class III and Class IV plus $0.74/cwt. This appeared to be a better way to calculate Class I milk price and allow for better risk management, but this has not been the case. The current average calculation allows for simpler risk management as producers and processors can hedge both Class III and Class IV skim milk and know that will be the basis of their milk price. Unfortunately, this has led to increased Class I volatility and decreased milk prices. There has also not been a significant increase in hedging as a risk management tool by producers or processors. As demand for manufactured products changes, the Class III and Class IV prices do not always move in the same direction or magnitude as each other, causing spreads greater than $1.48/cwt, which can lead to manufacturing classes of milk having a higher price than fluid milk. The monthly volatility between the advanced price that Class I milk is priced on and the final price for Class III and Class IV has also been made worse by the current calculation leading to increased negative producer price differentials. The average formula has also led to increased depooling, as for multiple-months manufacturing class prices have exceeded fluid milk prices, causing the Federal Order to work in reverse where manufacturing plants had to pay into the pool instead of receiving from the pool which could decrease the supply of fluid milk.  Since the implementation of the current system in May of 2019, it is estimated that across all Federal Orders, this formula has reduced milk checks by $937.9 million dollars compared to the higher of the formula. While USDA corrected some of this with the Pandemic Market Volatility Assistance Program, a solution to this problem in the future is needed. For this reason, NMPF is proposing a return to the higher of the formula for the Class I milk price mover. This change should have a net positive effect on producers’ milk prices, helping to offset the negative effects of increased make allowances.

Protein Value Change by Removing 500-pound Barrels

The next proposal is the removal of 500-pound barrels of cheddar cheese from the protein price formula and only using 40-pound blocks. Approximately 28% of the cheese produced in the US is cheddar. Prior to 2017, blocks and barrels of cheddar cheese were closely correlated and stayed within $0.05/lb of each other. Since then, the block/barrel spread has increased to an average of $0.12/lb with blocks exceeding barrel price most of the time. Only 7% of US cheddar cheese is processed as barrel cheese but represents just under half the surveyed cheese price volume. This has decreased the value of milk protein and dairy producers’ milk checks, thus this change should have a positive effect on producer milk prices. From 2019 to 2022, this change would have increased protein price by $0.15/lb, Class III milk price by $0.45/cwt, Class I price by $0.20/cwt, or US average all milk price by $0.25/cwt.

Milk Component Factors in Skim Milk

While it will have minimal effect on component-based Federal Orders (FO) like FO33, the proposed adjustment to the component factors in the skim milk pricing formula will have a significant effect on non-component orders like FO5. In component-based Federal Orders, it should increase the Class I milk price and decrease the amount of depooling.  The current proposal is to increase the calculated amount of components to 9.36 lb per hundred of nonfat solids, 3.35 lb per hundred of protein, and 6.01 lb per hundred of other solids.  By increasing component factors in skim milk to represent current industry values, Class I milk price will increase by $0.55/cwt in all Federal Orders. For non-component-based Federal Orders, Class III would increase by $0.73/cwt and Class IV by $0.38/cwt.  

Class I Differential Pricing Surface Model

Geographically, the US dairy industry has greatly changed where cows are located since 2000 with only modest changes to Class I differentials in the Appalachian, Florida, and Southeast Orders occurring in 2008. Since then, there has been drastic increases in transportation cost and the distance milk is traveling to ensure that all regions of the country have access to a fresh supply of fluid milk. The current Class I differentials are based on a time when it cost approximately $0.347 to 0.388/cwt per 100 miles that milk was hauled. Today, this cost is $0.920 to 1.00/cwt per 100 miles that milk is transported. Milk haulers are also struggling to find backhauls due to decreased citrus concentrate and limited time to add an extra wash once the milk tanker makes it back to the farm area. Tankers often need to be refilled quickly with milk. This increased cost of transportation is putting the fresh fluid milk supply in some areas of the country at risk of consumers not having access to freshly processed fluid milk. It is also adding a burden to dairy farms who are subsidizing the cost of trucking to supply these regions with a fresh supply of fluid milk. NMPF recommended changes to the Class I differential that would increase FO33 from $1.98 to $3.68/cwt or a $1.70/cwt net increase in Class I differential. 

Together, these 5 areas should have a positive benefit to Ohio dairy farmers and processors. These changes would allow both groups to reinvest in the dairy industry. If a Federal Order hearing takes place, we will work to keep you updated on the process of what it means to your farm and how to participate.