Jason Hartschuh, Assistant Professor, OSU Extension Field Specialist, Dairy Management and Precision Livestock, Ohio State University
On January 17th, USDA published the Final Federal Order Rules amending the uniform pricing formulas in all 11 Federal milk marketing orders (FMMO). The full final rules can be found at: https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/national-fmmo-pricing-hearing. These rules will go into effect on June 1, 2025 for all of the following changes except for the changes to the skim milk composition factors. The changes to the skim milk composition factors will be implemented on December 1, 2025. The changes will apply to all milk marketed after these dates and will be reflected in both the advanced pricing released before the milk is marketed and the class and component prices announced after the close of the month.
Final rules announced and passed by all 11 FMMO’s and considerations for milk price
- Updating the skim milk composition factors to 3.3% true protein, 6.0% other solids, and 9.3% nonfat solids (not implemented until December 1, 2025)
- This change brings skim milk prices more in line with what is being produced in the industry as genetics and cow nutrition programs have changed. The modern cow is producing a more nutrient-dense product. This change will be reflected in the calculated skim milk class prices. It will also raise the Class I price in all orders, resulting in a slight increase to the pool value. The most impact will be for producers in the 3 skim-fat Federal orders where producers are paid for set protein and other solids levels, along with the fat they produce and are not compensated for any increase in milk protein or other solids.
- Removing the 500 lb barrel cheddar cheese price from the Dairy Product Mandatory Reporting Program survey.
- This change will adjust how cheese price is calculated by only using the 40 lb block cheddar cheese price in the monthly calculation. Over the past 5 years, the cheddar block-barrel spread has been large as these commodities move independently of each other. If only block price had been used for the last 5 years, it would have increased Class III milk price by $0.47/cwt.
- Updating the Class III and IV manufacturing allowances to $0.2519 for cheese, $0.2272 for butter, $0.2393 for nonfat dry milk, and $0.2668 for dry whey, all on a per pound basis, and updating the milk fat recovery factor to 91%.
- This change may feel counter-productive to dairy producers as it will lower pay price, but it is an important step in the reform process to ensure processor long-term sustainability. While processors of commodity dairy products may have the benefit of knowing what they will make per pound of product processed, the only way they have been able to maintain profits as input costs like electricity or labor increased was to become more efficient. In some instances, this has led to decreased investments in processing plants and decreased producer premiums offered for high-quality milk.
- Returning the base Clase I skim milk price formula to the higher-of the advanced Class III or IV skim milk prices for the month. In addition, the adoption of a Class I extended shelf life (ESL) adjustment for all ESL products will equal the average-of-mover plus a 24-month rolling average adjuster with a 12-month lag.
- Over the last several years, the spread between Class III and IV milk prices has been large for multiple months. In 2020, there was a point when the Class III-IV spread was greater than $8.00/cwt; any time the class spread is over $1.50/cwt, this change will increase Class I milk price. In 2024 for over half of the year, this change would have resulted in a higher Class I milk price, putting more money in the pool and raising the statistically uniform price. This change will also help with depooling as there should be minimal times when Class I milk price falls below Class III or IV prices for over a month. This should only occur when there is a rapid change during the month from when the Class I milk price is calculated the month prior during the advanced price calculation, and when the Class III and IV prices are calculated after the end of the month. This may, however, change your risk protection strategy when using Dairy Revenue Protection or the futures and options market as you will no longer know as closely how much of your milk check will be based on the underlying Class III or IV milk prices. Choosing the higher contract between these two to hedge the portion of your milk represented by Class I prices is probably the most reliable strategy. Keep in mind that if your milk is pooled on the Federal order, the price you receive is a blend between all four classes of milk based on the processing utilization that month in the order. In most months, this change will bring more value to the FMMO 33 Pool.
- Updating the Class I differential values to reflect the increased cost of servicing the Class I market.
- Class I location differentials are fixed values that increase the regulated fluid milk price in a county based on the need for fluid milk and the distance milk needs to travel to consumers in that county. This location differential only applies to Class I fluid milk. The location differential is for the county where the milk is processed, not the county it is produced in. In Ohio, this location differential increase was between $1.30 and 2.30/cwt for Class I milk, but across all of FMMO 33, the increase ranged from $1.10 to 2.30/cwt. This increase will bring slightly more money into the pool from Class I milk with about a third of milk in FMMO being utilized for Class I. It will also help cover the hauling cost of moving milk into major fluid milk deficit areas, such as the southeast, hopefully bringing enough milk into these regions so that consumers always have access to fluid milk and decrease milk dumping.
In the end, the FMMO reform will have variable changes to the farm gate milk price, depending on each FMMO. In FMMO 33, Mideast, if these changes had been in place from January 2019 to December of 2023, the Statistically Uniform Price average at actual fat test would have increased $0.50/cwt. These changes may impact how you use market-based tools in the future to manage risk between Class III and IV. It should assist at least some processors in investing in processing plants to allow for increased capacity as national milk production grows and the possibility for more competition between processors. While these recommendations were back-tested to determine their consequence, only time can tell us how these changes will play out in the markets and affect producers' bottom line. An increase in milk price often leads to an increase in production. Higher milk prices can also lead to higher dairy product prices on the store shelves and decreased consumption, all factors that cannot be accounted for in back-testing.