Milk checks reflect new Federal Order pricing

MADISON, Wis. — Five of the seven updates to pricing formulas in Federal Milk Marketing Orders were implemented June 1, and producers are now seeing the effects on their milk checks. For many in the Upper Midwest, the mailbox price has been smaller than the pre-order changes.

This is largely due to increases in make allowances — variables in the milk pricing formula that represent costs incurred by processors to convert raw milk into dairy products like cheese, butter, nonfat dry milk and whey. Depending on the product, increases ranged from 5-7 cents per pound and now stand at 23-27 cents per pound.

The increases, reflected in prices for Class III and Class IV milk, add up, especially for producers in the Upper Midwest, Central and Mideast FMMOs, which are heavy with cheese plants. Analysis conducted during the FMMO hearings in 2023 and 2024 suggested price decreases of up to $0.90 per cwt., amounts that have indeed been realized.

“Producers should keep in mind that make allowances don’t come through as a deduction on the milk check, like a hauling charge,” said Leonard Polzin, dairy markets and policy outreach specialist with the University of Wisconsin-Madison Division of Extension. “Make allowances are embedded in the federal pricing formulas rather than itemized on a milk check. You can’t point to a single line and say, ‘That change is from make allowances.’”

The calculation of Class III and Class IV prices is a lengthy process that includes not just deductions for make allowances, but adjustments for product prices, recovery factors, product value and component values — butterfat, protein and other solids — as well.

Polzin said they take end-product prices — surveyed prices from processors for cheese, butter, nonfat dry milk and whey — and combine them with make allowances, recovery factors and other adjustments to get to the final milk price.

Producers should view FMMOs Polzin said as the formulas that calculate minimum milk prices using market survey data, which determine the pooled uniform price, and, therefore, a portion of the pay price. The remainder is driven by non-pooled premiums and marketing deductions.

“At the end of the day, markets will influence producer pay more than an adjustment in the math,” he said. “Fundamental changes are going to have a much more dramatic effect on milk prices than how they are calculated.”

As well, once make allowances are changed, they are static, and can only be changed through another Federal Order hearing process and a producer referendum, Polzin said.

“They don’t change month to month like end-product prices,” he said. “A lot of the variance in your paycheck is coming from market prices for cheese, butter, nonfat dry milk and whey.”

The downside for producers shipping Class III and Class IV milk is timing.

“If we had market conditions that precipitated a large increase in Class III price at the same time we had make allowance changes, it likely would not have received the attention it has,” Polzin said. “It just so happened that make allowance change coincided with steady down-market conditions that made it even more apparent on the producer paycheck side.”

However, other changes in the FMMO pricing structure offer opportunity, including the restoration of the “higher of” Class I skim milk base price to the 2019 method and updates to Class I differentials, adopted in June, and new milk composition factors and skim milk composition factors, to be implemented Dec 1.

In coming to its recommended decision, it was the goal of the U.S. Department of Agriculture to positively impact producers as an aggregate, and so far, it seems to be operating as anticipated, Polzin said.

The National Milk Producers Federation estimates the full package of rule changes will provide a net gain of $0.25 per cwt. for producers across the country.

“There will be winners, losers and net evens in this whole policy change for sure,” Polzin said. “It just so happens that here in the Upper Midwest, we are on the losing side due to heavy Class III utilization. Other parts of the U.S. benefit from a utilization that is more evenly spread across classes.”

The entire FMMO system originated in the 1937 Agricultural Marketing Agreement Act, which created four classes for milk depending on its end use. Federal Order Reform, in January 2000, consolidated the previous 31 orders into 11. The last adjustment to make allowances was made in 2008, following industry cost studies and a USDA final decision.

The original language of this legislation was written with fluid milk in mind, Polzin said. But people are now chewing their milk, and the old price discovery mechanisms no longer reflect the market as they once did.

When decades pass between order hearings or updates to the legislation, Polzin said the system inevitably falls behind.

“That is what happened here and why the make allowance change feels quite large,” he said. “We are catching up, marrying the legislation, which is static, to the marketplace, which is dynamic.”

Producers themselves had the final say on whether to keep the FMMO system that had guided the industry for more than eight decades, along with USDA’s proposed updates. The all-or-nothing choice was to keep the FMMO system for their order with changes or scrap it altogether. There was no option to maintain the status quo.

By a majority vote last fall, producers in all 11 orders opted to retain FMMOs with USDA’s final decision regarding changes.

Polzin encourages producers to keep in mind the beneficial aspects of the order beyond milk pricing, including auditing, testing and market information.

“A lot of times, the pricing that comes from Federal Orders is used as reference prices throughout the dairy industry because it is a public price,” he said. “Federal Orders create an informed marketplace. . .and keep producers aware of where their pay price is in relation to the broader marketplace. They are one of the last few regulatory backstops when it comes to pricing in the dairy space.”

Long term, Polzin said there are several ways the FMMO changes could affect producers.

“In the next 5-10 years, we would theoretically expect to see more pooling, more premiums returning to the producer as over-order premiums, and positive (Producer Price Differentials),” Polzin said. “As well, the negative implications on pay price are expected to diminish over time.”

Polzin said the Federal Order changes should be viewed more as an update and tweak than a new regime of rules.

“Large fundamental things happening in the marketplace right now are going to have a much greater effect in 5-10 years than this Federal Order change,” he said. “The industry is maturing and consolidating, and as that happens more and more, effective policy and legislation could be different.”

Polzin said the changes are not simply producers versus processors. Instead, it is a complex, symbiotic relationship.

“Producers know that they need processors and vice versa — but they are on opposite ends of the pay equation,” Polzin said. “It is a unique balance of cooperation and competitiveness at the same time.”

A hopeful sign, he said, is a greater desire to understand processing costs and gather better data to arrive at make allowances.

“More information is good; we can make decisions from that,” Polzin said.

Polzin said he does not think this is the end of the conversation on make allowances or changes to FMMOs.

“The best thing the industry can do now is to prepare for the next round of milk-pricing updates,” Polzin said. “With the ‘One Big Beautiful Bill Act’ now requiring USDA to conduct mandatory processor cost and yield surveys, we have a framework to collect data to inform future adjustments. How those data are used will matter.”

In preparation for this — whether five, 10 or 15 years down the road — producers should start thinking about and asking the hard questions now Polzin said. He said he encourages them to talk with processors and cooperatives to fully understand what has been implemented and how it impacts the business.

“If the producer voice isn’t heard and these questions aren’t asked, they cannot be a part of the discussion when something like this inevitably does happen again,” Polzin said.