ELKHART LAKE, Wis. – The USDA has been hearing testimony since August from the nation’s top farm groups on proposals to amend the agency’s Federal Milk Marketing Order system on dairy pricing regulations that is expected to continue after the Thanksgiving recess.

“Federal Milk Marketing Orders were implemented to establish certain provisions under which dairy processors purchase fresh milk from dairy farmers supplying a marketing area,” Robin Schmahl, founder and commodity broker with AgDairy, LLC, the dairy division of John Stewart & Associates Inc., told Farm World.

The USDA and dairy industry stakeholders will be considering for approval 22 proposals requesting updates to the way U.S. dairy producers’ milk checks are determined.

“Federal orders were established to maintain stable marketing relationships for all handlers and producers supplying marketing areas, and to aid in the process of marketing fresh milk,” Schmahl said.

He said the goal of the Federal Milk Marketing Orders is to: assure milk availability to all areas, with pricing based on milk utilization; promote orderly marketing conditions in fluid milk markets; and improve the income of dairy farmers, compared to what it had been.

“The Federal Milk Marketing Orders were introduced during the 1930s, with initially 31 orders set up,” he said. “Currently, there are 11 Federal Orders areas in the country, and applies to about 75 percent of total U.S. milk production.”

The system identifies four classes of milk: Class I (fluid use), Class II (soft products such as ice cream and yogurt), Class III (cheese), and Class IV (butter and milk powder). The USDA sets the prices based on the weekly average wholesale market price trends for block and barrel cheese, dry whey, non-fat dairy milk, and butter.

These four classes of milk are priced as follows: Class I is fluid milk with price based off the average price of Class III and Class IV milk, plus $0.74 for every hundred pounds of milk. Class II price is based on nonfat dry milk and butter prices, plus a differential of $0.70 for every hundred pounds of milk. Class III milk price is based on cheese, dry whey, and butter prices. Class IV milk is based on nonfat dry milk, and butter prices.

The hearing comes after several calls from the American Farm Bureau Federation (AFBF) and dairy groups to begin the process of reform to Federal Milk Marketing Orders. In October 2022, the AFBF brought together representatives from all sectors of the industry for a Federal Milk Marketing Order Forum, held in Kansas City, Mo.

On Aug. 28, Roger Cryan, AFBF chief economist, presented the first round of testimony on behalf of the organization and its membership at the ongoing Federal Milk Marketing Order Pricing Formula hearing.

AFBF submitted nine proposals for consideration during the hearing, of which four the USDA has already accepted.

Cryan said the organization largely supports four of the five proposals the National Milk Producers Federation had submitted.

“The American Farm Bureau Federation supports the updating of the component values in the Class III and IV skim price formulas,” he said. “Adjusting these values will more accurately define the market value of skim milk used in the skim and butterfat markets, and in Class I in all markets.

“In component markets, it will ensure that Class I milk prices reflect at least the national average component value, rather than a low, outdated value, which undermines the premium for Class I milk intended by Federal Milk Marketing Orders pricing formulas,” he added.

He said some of the issues being discussed during the hearings include how big the margin should be that’s allowed for dairy plants between the milk price and the prices of cheese and whey – and the butter and powder prices – so that plants are encouraged to take farmer’s milk, but still give farmers a fair share.

“Changing the formula price for bottling milk so that the market pooling of those milk values is fair and more consistent to avoid some of the market chaos that farmers experienced in the middle of 2020,” he said.

“And now, farm bureau is getting deeply involved in federal milk orders really for the first time in a long time to fix some of these things,” he added. “We support the cooperatives’ efforts to update a lot of the formulas to raise milk prices, but the co-ops and the processors also want to increase the processors’ margins.”

He said, “We don’t want to see that happen until the USDA can collect data from all the processors on their costs and their yields. We also want to end the advanced pricing of bottling milk, and we also want to increase the price for milk used to make cream and ice cream and sour cream, and we want to put more products in the product price survey the USDA uses to set milk prices.”

While hearings are scheduled to continue after the Thanksgiving recess, he said it may not end until early next year.

“After that, it’ll be six or seven months until the USDA proposes something, and then three to four months, or maybe five months for public comments, and the USDA’s rewrite, then there will be a producer vote,” he said.

“So, it may be that a rule won’t be made official until the beginning of 2025, and even longer for full implementation since the USDA is considering delaying the implementation of some elements to avoid disruption of the futures markets,” he added.