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Federal Milk Marketing Order (FMMO) Background

Key Features of the FMMO System

Establishing and Amending FMMOs through the Hearing Process

Steps of Federal Hearing Process

Key Differences between Federal Order Hearings and Legislative Process

Recent Developments and Proposed Changes

Industry Involvement, Inisghts and Proposals

Proposal Projected Timelines

Pre-Hearing Information Session, Federal Milk Marketing Order Pricing Provisions Overview

Potential Implications

Federal Milk Marketing Order (FMMO) Background

The Federal Milk Marketing Order (FMMO) is a program overseen by the United States Department of Agriculture (USDA) that regulates the dairy industry. It includes 11 milk marketing orders and applies to about 75% of total US milk production. Federal Milk Marketing Orders (FMMOs) are a regulatory framework established by the Agricultural Marketing Agreement Act of 1937 to stabilize milk prices and ensure a steady supply of milk to consumers. The FMMO system has been a pillar of the dairy industry with few major changes to milk pricing and the administrative process in over a decade. 

FMMOs are administered by the USDA’s Agricultural Marketing Service (AMS) and are designed to ensure that dairy farmers receive a minimum price for their milk, while also ensuring that processors have a reliable supply of milk. Under the AMAA, the U.S. Department of Agriculture (USDA) was authorized to establish Federal Milk Marketing Orders. These orders provided a framework for regulating the marketing of milk and milk products across different regions of the country. Changes to these orders are made through a federal order hearing process.  The federal order hearing process is designed to ensure fair representation and participation from industry stakeholders. Producer groups, cooperative associations, individual farmers, and other interested parties have the opportunity to present their views, data, and evidence during the hearings. The federal order hearing process may also involve the formulation, amendment, addition and/or termination of a Federal Milk Marketing Order. The process requires public hearings to gather input from producers, handlers, and other stakeholders. USDA conducts these hearings with the goal of receiving evidence, arguments, and recommendations before making decisions. 

FMMO acts as a tool for price determination and discovery in the US dairy.  The FMMOs continue to play a vital role in the pricing of milk and ensuring a steady supply of milk to consumers for as long as the AMAA continues to be legislation. The market functions as the fundamental price-determining system, while FMMOs, serve as the procedural framework through which this price is computed and conveyed to the producer. In essence, the market is the driving force behind price, while Orders facilitate the effective transmission of that price to the producer.

Key Features of the FMMO System

Establishes Minimum Uniform Prices: FMMOs establish monthly uniform prices paid to farmers by first classifying milk by its end use.

There are four different classes of milk: Class I (fluid use), Class II (soft products such as ice cream), Class III (cheese), and Class IV (butter and nonfat dry milk) 

Class I fluid milk typically receives the highest price under the FMMO system.

Pooling of Milk: The FMMO system pools the value of milk and shares that value among the farmers participating in that marketing order. Pooling allows farmers to receive the uniform price of all milk in the pool regardless of what end product their milk was used for.

Regulation of Handlers: The regulatory provisions of the individual orders apply to handlers, not dairy farmers. Handlers are processors of raw milk.

There are two types of handlers: fluid (beverage milk) and manufacturing (cheese, ice cream, butter, etc.). Fluid milk handlers are required to pool their milk, while manufacturing handlers typically participate when it is economically beneficial.

Hearing Process: The USDA amends and establishes FMMOs through a hearing process overseen by the Secretary of Agriculture. The hearing process enables the dairy industry to submit proposals and evidence to support the establishment of and amendments to Federal Orders.

Establishing and Amending FMMOs through the Hearing Process

The establishment and amendment of Federal Milk Marketing Orders (FMMOs) are carried out through a formal public hearing process overseen by the United States Department of Agriculture (USDA).

This process allows interested parties, such as producers, handlers, or other stakeholders, to present evidence regarding marketing and economic conditions in support of or opposition to instituting or amending an order.

Steps of the Federal Hearing Process 

The Federal Order Hearing is a complex process that involves several steps. They are stated below:

• Proposal:   The process begins with the United States Department of Agriculture (USDA) receiving a proposal that outlines the potential changes.  This is the case of the one recently submitted on May 1,2023 to update/modernize the Federal Milk Marketing Order (FMMO) system, last changed in 2000. 
• Proposals to amend a Federal order must contain the following, as applicable:
• An explanation of the proposal, including its purpose, and a description of the marketing conditions that the proposal is intended to address.
• A description of the current Federal order requirements or industry practices relative to the proposal.
• A description and quantification of the expected impact on all segments of the industry, including producers, handlers, and consumers.
• A description and quantification of the expected impact on small businesses as defined by the Regulatory Flexibility Act (5 U.S.C. 601-612).
• An explanation of how adoption of the proposed amendment would increase or decrease costs to producers, handlers, consumers, and others in the marketing chain.
• A response as to whether a pre-hearing information session would be helpful to explain and understand the proposal. Information from such a session can aid USDA in determining the necessity of holding a hearing.

• Pre-Hearing: Happens if necessary to inform and explain the proposal. For the current proposal, this happened on Jun 16, 2023.
• Public Comment:  The public is given an opportunity to comment on the proposal. This includes dairy farmers, milk processors, and other interested parties. The public comment period is usually open for a few weeks, during which time stakeholders can submit written comments or testify in public hearings.
• Hearing: The USDA holds a public hearing where stakeholders can present their comments and concerns about the proposal. The hearing is conducted by an administrative law judge and is open to the public. 
• Voting: The hearing is followed by voting, via block vote, either in favor or opposition of the proposal.  
• Decision:  After considering all the comments and evidence presented during the hearing, the administrative law judge issues a decision on the proposed changes to the FMMO system. 
• Appeal:  The decision can be appealed by any party that disagrees with it. The appeal is heard by the USDA’s Judicial Officer, who makes the final decision.  
• Implementation: If the decision is not appealed, it is implemented by the USDA. The new rules and other changes are put into effect in the relevant Federal Order Hearing.

Overall, the Federal Order Hearing is a thorough process that attempts to consider all stakeholders in the pricing of milk and other related issues. The hearing ensures that the system is just and responsive to the needs of the dairy industry.

Key Differences between Federal Order Hearings and Legislative Process

 The Federal Order Hearing process differs from the legislative process in several ways based on scope, role and legal grounds.

Authority and scope: 

The FMMO program is authorized by Congress, but its specific rules and regulations are determined by the USDA, not by Congress. Legislative bills, on the other hand, are introduced and debated in Congress before being signed into law by the President.

Role of stakeholders and public participation:

 The Federal Order Hearing process provides a formal opportunity for stakeholders to participate in the decision-making process. Legislative bills also provide opportunities for public comment and input, but the process is more complex and less formal.

Decision-making process and legal implications:

 The Federal Order Hearing process involves a quasi-judicial decision-making process, with a hearing officer making a recommended decision that is subject to review by the Secretary of Agriculture. Legislative bills, on the other hand, involve a legislative decision-making process, with the bill passing through both chambers of Congress before being signed into law. The legal implications of the two processes also differ, with Federal Order Hearing decisions subject to judicial review in federal court.

In summary, the Federal Order Hearing process involves a quasi-judicial decision-making process, with a hearing officer making a recommended decision that is subject to review by the Secretary of Agriculture. Legislative bills, on the other hand, involve a legislative decision-making process, with the bill passing through both chambers of Congress before being signed into law. The legal implications of the two processes also differ, with Federal Order Hearing decisions subject to judicial review in federal court.

Recent Developments and Proposed Changes

The current system of FMMO pricing formulas was established in 2000, formulas have remained largely unchanged since then. The U.S dairy industry continues to evolve in ways that have made the current formulas arguably outdated, potentially contributing to market inefficiencies/disruption. A taskforce of NMPF was established in December 2021 to explore all the issues in depth and to develop recommendations for updates and changes to the pricing formulas. Approximately 150 meetings of various groupings of the Task Force have been held subsequently, resulting in a comprehensive package of recommendations. The NMPF Board of Directors has approved the full package of these modernization recommendations. NMPF submitted their proposal to the USDA to modernize the Federal Milk Marketing Order (FMMO) system on May 1,2023. NMPF has requested a national hearing to amend five pricing provisions under all FMMO, which include:

1. Updating make allowances in the component price formulas.

Based on adequate cost data, there is evidence that an adjustment to make allowance may be in order.  To allow the industry to adjust to this change, NMPF proposes the following interim adjustment to be implemented.  Once additional cost and yield data are made available through mandatory studies, future adjustments can be more confidently made. 

Cheese ($/lb.)	Dry Whey ($/lb.)	Butter ($/lb.)	NFDM ($/lb.)
From- To: $0.2003   $0.2400	From- To: $0.1991 $0.2300	From-To: $0.1715 $0.2100	From-To: $0.1678  $0.2100

2. Discontinuing the use of barrel cheese in the protein component price formula.

USDA uses the weighted average of block and barrel cheddar cheese survey prices to determine the value of protein in federal order pricing. Slightly more than half of the cheese reported to survey is barrels, but barrels price only about ten percent of all cheese. This current practice of using both was established in 2000, based on the assumption that block and barrel cheddar cheese are effectively the same product, and that prices would average the same when barrel prices are adjusted to block moisture levels and for an assumed fixed 3 percent difference in packaging costs. The block and barrel cheese did indeed stay generally within a moisture- standardized 3-cent difference of each until 2017, when changes in the cheddar cheese industry began to cause block and barrel prices to diverge widely and unpredictably. Since the beginning of 2019, barrel prices have varied between $0.17/pound below to $0.13/pound below block prices during that time. It may be possible that this resulted in disorderly marketing conditions and underpayment to dairy farmers for the true value of their milk used to produce cheese. NMPF is proposing that barrel cheese prices no longer be used to determine the federal order value of protein, so that protein will be valued based only on cheddar block prices.

3. Returning to the “higher-of” Class I Mover.

Previously, NMPF advocated for the initial change of the class 1 mover.  Going from “higher-of”, to the “average-of” mover.  The reasoning for this was to allow some processors, primarily of ESL milk, to better hedge class1 prices. The current mover was meant to be revenue neutral. The current mover carries asymmetric risk in relation to the previous “higher-of” mover. It can never be more than $0.74/cwt higher than the previous mover but it can be much lower. It was $5.19/cwt lower in December 2020. Disruptive episodes in the dairy industry that can cause Class III and Class IV prices to differ by more than $1.48/cwt cause the current mover to underperform the higher-of mover. Such episodes are frequently increasing. Some argue producer losses in the pooled value of Class I skim milk resulting from such disruptions do not get fully recouped by the markets when such episode’s end. NMPF has extensively studied the ways to fix this problem with the current mover but has decided to seek to restore the previous higher of Class II and IV mover.

4. Updating the milk component factors for protein, other solids, and nonfat solids in the Class III and Class IV skim milk price formulas.

The component composition factors in the current FMMO skim milk formulas are based on milk containing 3.5% fat used as the standard for quoting prices. Not on actual milk composition, which has been increasing over time. Some argue this increasingly understates the value of producer milk in classes II, III and IV in the four fat skim pricing orders and the value of class one producer milk in all orders. In the seven component pricing orders, class II, III and IV, producer milk has not been underpaid in this way. This steady potential erosion of the value of producer milk used in class I has not only potentially reduced the value of federal order, pooled milk to dairy farmers, but has also potentially eroded the difference between class I and manufacturing milk values, which may exacerbate the occurrence of de-pooling. NMPF is proposing a procedure be implemented to update the milk component factors for protein, other solids and non-fat solids in the monthly and advanced class three and class four skim milk price formulas on a regular and systematic basis. In the future a federal order hearing decision and producer vote would be required to establish the procedure to do this but not to make subsequent updates.

The NMPF Board of Directors has unanimously approved the package of proposals, and the organization is hopeful that the USDA will move forward with a national federal milk market order hearing to address these issues. 

There are two other recommendations that are subjected to unanimous approval, regardless of the federal-order hearing process, as they don’t involve changing federal order regulations. These include:

5. Extension of 30-day USDA product price reporting limit to 45 days on forward priced sales on nonfat dry milk and dry buttermilk to target more exports sales.

At least two thirds of all nonfat dry milk and about half of the dry whey produced in the United States in 2022 was exported. With the majority of these products being exported. The value of these products is more closely tied to export sales. Almost all these sales would have been forward priced more than 30 days before the sales were completed, ensuring that they were not reported to the price survey and therefore not reflected in the federal order. Nonfat solids and other solids component values. NMPF is proposing that the current 30-day limit for reporting forward priced sales of NFDM and dry whey to the National Dairy Product Sales Report (NDPSR) be extended to 45 days to increase the representation of exported volumes of NFDM and driveway in the NDPSR.  

6. Developing legislative language for the farm bill to ensure the make allowance is regularly reviewed by directing USDA to conduct mandatory plant-cost studies every two years.

The current federal order component price formula make allowances have not changed since they were implemented in 2008. The costs of manufacturing the dairy products used in these price formulas have increased significantly since the current make allowances were implemented. Some industry stakeholders have voiced that formulas have become increasingly inadequate to perform their essential role in the current product price formula. The problem of adjusting/maintaining proper make allowance in the federal order pricing formulas is worsened by the consistent lack of regular accurate information on the average cost of manufacturing dairy products. The equally important, average product yield factors have not been adjusted for some time. NMPF will seek to enact legislation in the next farm bill to require USDA to conduct regular plant cost studies in the future to finally provide adequate data, to properly maintain make allowances and product yield factors. Under this legislation USDA would survey plants that manufacture the products used in the federal order price formulas every two years.  Response would be mandatory for such plans and the results would be subject to audit.  USDA would report results to the dairy industry and thereby allow industry participants to make informed decisions and recommendations on, make allowances and yield factors.

 Industry Involvement, Insights and Proposals

Industry organizations such as National Milk Producers Federation (NMPF) submitted a comprehensive proposal to USDA in May 2023. Similarly, just prior to NMPF, International Dairy Foods Association (IDFA) submitted a proposal to USDA in April 2023, which focused on reforming the Class I mover.  IDFA also proposed to eliminate the advanced pricing feature and allow more flexibility for handlers to opt out of pooling.

Furthermore, Wisconsin Cheese Makers Association (WCMA) suggested changes to the Class I mover.  WCMA also proposed to eliminate the advanced pricing feature and allow more flexibility for handlers to opt out of pooling. Moreover, American Farm Bureau Federation (AFBF) did not submit a formal proposal to USDA, but released a report in January 2022 with four key recommendations for FMMO reform, such as giving dairy farmers an individual and confidential vote, expanding price discovery, adopting more uniform pricing rules, and improving efficiency. Organizational involvement is summarized in Table 1. 

Table 1. FMMO Reform Participating Organizations

Reforms	Organizations
Adjust Class 1 mover formula	NMF1, IDFA2, WCMA3
Eliminate de pooling and negative PPDs	NMPF
Create a national FMMO	NMPF
Enhance risk management options	NMPF
Eliminate advanced pricing feature	IDFA, WCMA
Allow more flexibility for handlers to opt out of pooling	IDFA, WCMA, Edge
Give dairy farmers an individual and confidential vote	AFBF4
Expand price discovery	AFBF
Adopt more uniform pricing and pooling rules	AFBF
Improve efficiency	AFBF

1National Milk Producers Federation

2 International Dairy Foods Association

3 Wisconsin Cheese Makers Association

4 American Farm Bureau Federation

Proposal Projected Timelines

NMPF CEO shared on June 4,2023 (https://www.nmpf.org/dairy-will-seize-generational-fmmo-opportunity/) likely preliminary next steps in the Federal Order Hearing process.  ‘Once USDA conducts some preliminary steps (providing opportunity for additional proposals; holding a pre-hearing workshop) and sends out its hearing notice – likely late July – the stage is set for the hearing, which could begin as early as August and take 6-8 weeks. Once all the testimony is considered, USDA would be on track to put forward a final plan for a producer vote in 2024. Assuming that’s successful, implementation would begin late next year.’  

Table 2. Preliminary Steps

Pre-Hearing Steps	Anticipated Timeframe
Additional Proposals Requested	Additional proposals must be received by 5:00 p.m. (ET), Wednesday, June 14, 2023
Virtual Pre-hearing Information Session	Friday, June 16, 2023 – 10:00 a.m. (ET)
Modified Proposals Due	Tuesday, June 20, 2023 – 5:00 p.m. (ET)
Hearing Published Federal Register	Late July 2023
Tentative Hearing Start Date	August 23, 2023

Pre-Hearing Information Session, Federal Milk Marketing Order Pricing Provisions Overview:

1. USDA will hold a virtual Pre-hearing Information Session on Friday June 16, 2023, beginning at 10:00 a.m. ET.
2. The session will give stakeholders submitting proposals an opportunity to explain how their proposal(s) would be implemented and operate. 
3. Information Session Details:
   1. The Information Session is optional. Stakeholders who submitted a proposal(s) are strongly encouraged to participate.
   2. The purpose of the session is not for stakeholders to provide the justification for or impact of their proposal(s). 
   3. Only USDA staff will have the ability to ask technical operational questions of stakeholders regarding their proposal. 
4. USDA welcomes stakeholders to provide initial descriptions of likely data requests so USDA can begin evaluating collection and potential release of relevant data if a formal rulemaking proceeding is initiated. 
5. Logistics:
   1. Each stakeholder submission may have one representative participate per individual proposal. If a submission contains multiple proposals, the representative will have equal amounts of time for each individual proposal. 
   2. Each representative will have 15 minutes to discuss their proposal, followed by questions from USDA staff. 
   3. The session will proceed by stakeholder, not by subject area. 
   4. Stakeholders presenting proposals will receive detailed participation instructions via email on June 15, 2023. 
   5. A link for interested parties to virtually observe the session will be posted at https://www.ams.usda.gov/rules-regulations/moa/dairy by 9:00 a.m. (ET) the day of the workshop. 
6. Additional Information:
   1. Following the Pre-hearing Information Session, proponents have until Tuesday, June 20, 2023, at 5:00 p.m. ET to submit modified proposals.

Potential Implications

There are several potential impacts of proposed reforms. These changes may vary by region, market, product, and stakeholder group. Some may benefit from higher prices, lower costs, or more stability, while others may face lower revenues, higher expenses, or more uncertainty.  Therefore, any changes to the FMMO system may have different impacts on different types of dairy businesses, depending on their size, location, product mix, market access, and risk management strategies. 

The impacts may include: 

– In the short term, dairy farmers across various regions and processors may face uncertainty and volatility in milk prices and revenue sharing as USDA decides whether and how to proceed with a hearing on FMMO reforms. Depending on the outcome of the hearing, some FMMO pricing provisions may change significantly, affecting the profitability and competitiveness of businesses.  Some organizations have suggested gradual implementation of any changes, in an attempt to ease any market shocks. 

– In the long term, across various regions dairy farmers and processors may benefit from some FMMO reforms that aim to improve efficiency, transparency, risk management, and market representativeness in the dairy industry. For example, updating milk component factors, yields and/or the value of other solids may better reflect the value of milk and cheese production, a major segment of Wisconsin’s dairy industry. Returning to the “higher of” Class I mover may change processors incentive to de-pool

Removing barrel cheese from the Class III price formula may affect a portion of Wisconsin’s cheese production. Updating the Class I differential may change the incentive structure for delivering fluid milk from the milk surplus state of Wisconsin to outside areas. Similarly, the impacts may vary across states and regions, subject to their individual unique characteristics and interplay within the US milk market. Further research and investigation are needed to definitively identify the implications of any proposed changes.

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