The Federal Milk Marketing Orders (FMMOs) exist to create orderly milk markets, provide fair prices for dairy farmers, and ensure a steady supply of quality milk for consumers at reasonable prices. The USDA has recently implemented significant changes to the formulas used to calculate the price of producer milk. The changes significantly decrease the prices paid to producers. The calculations which are used make the value of producer milk very different in each FMMO, as has been covered many times in posts to this sight.
There is one element that makes the financial difference between orders that is very complex. That is de-pooling of milk from the Federal Orders to avoid the pricing process of the FMMOs. This post will be the first of a series to delve deeply in the de-pooling process. De-pooling further increases the price differences between FMMOs
Table I below lists the percent of U.S. milk that is processed by the FMMOs. About two thirds of the U.S. milk is priced by the FMMO formulas. The remaining one third of the milk is priced by negotiations between the producer’s handlers and the processors that make the final milk products. Some areas in the U.S. are not covered by FMMOs and some of the milk in FMMOs is de-pooled by the complicated and variable de-pooling methods. The amount of milk processed outside of a Federal Order varies each year as shown in Table I, but over time remains stable.
Priced by the FMMOs
Charts I and II below show the amount of milk that is processed by the FMMO rules and the amount de-pooled in the two largest FMMOs, California and the Upper Midwest. The data in these charts is estimated, as there is no process to accurately account for the de-pooled milk. Both the volume and the price of de-pooled milk is private.
CALIFORNIA FEDERAL ORDER POOLED MILK
California became a Federal Order in 2018 and immediately began de-pooling huge quantities of milk. Did California become a Federal Order primarily to allow de-pooling? In the state-controlled system that California had, no milk could be de-pooled.
Charts I and II follow the monthly amount of pooled milk for Class III milk for cheese and Class IV milk for butter. California is a major cheese producer and makes about one third of the U.S. butter. In both charts there are months when the pooled milk processed under the FMMO system reached near zero, meaning that most all the milk for these categories was de-pooled. Chart IV has most of the milk de-pooled over the course of the Chart.
Chart V shows the Class III milk for cheese processed by the Upper Midwest FMMO process. While cheese production continues to increase in the Upper Midwest, there are significant drops in some months and a declining trend in the last three years In Chart V. The remaining milk used for cheese has been moved to the private sector by the de-pooling. However, different from California, not all the Class III milk is de-pooled as the de-pooling rules in the Upper Midwest are different from the California process.
Chart VI shows the Class III milk processed in the Northeast FMMO. There are no major monthly drops over the five years covered in the chart. The amount of cheese produced in the Northeast Federal Order shows an increasing production of cheese. Why is the Northeast so different from California and the Upper Midwest. Their de-pooling rules are very different.
WHY ARE THE DE-POOLING RULES IN THESE FEDERAL ORDERS SO DIFFERENT?
Why has a Federal Order system meant to standardize milk prices become so variable? The rules for de-pooling are very different in each Federal Order. The differences in de-pooling rules will be covered in the next post to milkpay.com.
Other recent posts are available at this link, and older posts are available at this link.
