Federal Milk Marketing Orders 101: Purpose, Structure, and How the System Works

Overview

Federal Milk Marketing Orders (FMMOs) are one of the most consequential and least understood features of the U.S. dairy industry. They are often described as a pricing system, but that description alone misses what the orders actually do. This article explains what an FMMO is, the two core mechanisms that define the system, how minimum formula prices are built, how orders are amended, and who is and is not covered.

A common misunderstanding is worth addressing up front. FMMOs do not set the prices producers are paid. Markets set the price. FMMOs establish the rules of the game for how regulated handlers account for and pool producer milk. They generate minimum regulated formula prices derived from surveyed wholesale commodity values. What a producer receives in a milk check reflects those minimums for milk that is pooled, plus a range of market-determined items layered on top or handled separately.

What is an FMMO

An FMMO is a federal regulatory instrument authorized by the Agricultural Marketing Agreement Act of 1937. The U.S. Department of Agriculture Agricultural Marketing Service (AMS) administers the orders. There are currently 11 FMMOs, each covering a defined geographic marketing area. Together they account for roughly two-thirds of U.S. milk production. The remaining production is either not pooled on a federal order, produced in areas not covered by an order, or handled through state milk marketing programs.

In FMMO terminology, dairy farmers are producers and the dairy processors that buy milk from them are handlers. Regulated handlers in a marketing area must account for the milk they receive and pay at least the minimum regulated price on the milk they pool under the order.

Why the System Was Created

The FMMO system traces to the 1930s. Before federal orders, dairy markets were volatile, and as refrigeration and transportation improved, milk processors concentrated bargaining power on the handler side. Congress authorized marketing orders to promote orderly marketing conditions, stabilize fluid milk supplies, and establish common rules that all regulated handlers in a marketing area had to follow. The modern system retains those basic purposes.

The Two Core Mechanisms

Two mechanisms define how the FMMO system operates: classified pricing and marketwide pooling.

Classified pricing assigns producer milk to one of four end-use classes based on how the handler uses it. Class I is fluid beverage milk, Class II is soft-manufactured products, Class III is cheese, and Class IV is butter and dry milk products. AMS publishes a minimum regulated formula price for each class every month. The formula prices are regulatory minimums for how pooled milk is valued, not pay prices.

Marketwide pooling turns the class values into a single price for pooled producers. Handlers report how the milk they received was used by class. AMS market administrators calculate the total value of pooled milk across classes and divide by the total pounds pooled. The result is the uniform or blended price for that order for that month. The mechanism distributes higher-value Class I revenue across all pooled producers rather than limiting it to producers whose milk happened to be bottled that month.

How the Minimum Formula Prices Are Built

Each month, AMS surveys wholesale prices for cheddar cheese, butter, nonfat dry milk, and dry whey through mandatory reporting. Surveyed prices are combined with yield factors and a manufacturing cost allowance, known as a make allowance, to produce component values for butterfat, protein, nonfat solids, and other solids. These values feed the four class minimums. Class III and Class IV minimums are announced each month. Class II uses the advanced Class IV skim milk pricing factor plus an added amount per hundredweight. Class I is priced in advance of the month. Under the 2025 FMMO final rule, the advanced Class I skim milk price is the higher of the advanced Class III or advanced Class IV skim milk pricing factor, with an extended-shelf-life adjustment applied. A location-specific Class I differential is then added based on where the regulated handler is located. The higher-of method replaced the 2018 Farm Bill average-of method. Movement in cheese, butter, and powder markets drives the class minimums month to month, not a decision by the USDA.

As a simplified example of how this works in practice, if cheddar cheese and dry whey wholesale prices rise during a month, the Class III formula reflects that increase, and the announced Class III minimum rises for that month. USDA itself has not changed any policy. The minimum has moved because the surveyed wholesale commodity values that feed the formula have moved.

How FMMOs Are Created and Amended

FMMO provisions are changed through a formal rulemaking process. Industry stakeholders submit proposals. AMS holds a public hearing, issues a recommended decision followed by a final decision, and any amendment must be approved by eligible producers in a referendum before it takes effect. A cooperative may cast a single bloc vote representing its eligible members. Producers have the final vote.

The 2025 final rule on uniform pricing formula provisions, which took effect in stages during 2025, updated processing cost assumptions (make allowances), skim milk composition factors, the Class I formula, and Class I differentials. The amendments responded to industry concerns that the 2018 Farm Bill average-of Class I formula had contributed to unusually large negative producer price differentials during 2020-2023, and that the previous make allowances no longer reflected current processing costs. The rulemaking process drew extensive public comment and proceeded through a formal hearing record before the final rule was issued.

Who is Pooled and Who is Not?

FMMOs together cover roughly two-thirds of U.S. milk production. The remainder is outside the federal system, either in areas not served by an order or through arrangements that do not qualify for pooling. Even within an FMMO marketing area, not all milk that moves through a regulated handler is pooled every month. Pooling is a handler-level decision within the rules of the order, not a producer-level decision.

Class I milk that is distributed as fluid beverage milk must always be pooled. Manufacturing-class milk, meaning Class II, Class III, and Class IV, can be kept off the pool under the performance and qualification rules of each order. This is known as depooling. Depooling becomes attractive to handlers when the monthly value of a manufacturing class, most often Class III or Class IV, exceeds the uniform price. In this situation, pooling the milk would require the handler to contribute revenue to the pool, while keeping the milk out of the pool allows the handler to retain the full manufacturing-class value. When depooling occurs, the affected milk is not priced under the uniform price for that month; it is priced through arrangements between the handler and the producer.

Pooling status is decided month by month, so milk that was depooled one month can be pooled the next month. Each FMMO has its own performance and qualification rules that govern how often a handler can move milk in and out of the pool, and some orders include provisions designed to discourage routine in-and-out behavior.

For a producer, this matters for reading a milk check. How the uniform price is translated to the farm level depends on the pricing method used in the order. Seven FMMOs, including the Upper Midwest, use multiple component pricing (MCP), under which producers are paid on butterfat, protein, other solids, and a producer price differential (PPD) that captures the remaining pool value. Four FMMOs, Appalachian, Arizona, Florida, and Southeast, use skim-fat pricing, under which producers are paid on a uniform skim milk price and a uniform butterfat price without separate protein and other solids values. In both systems, location differentials adjust the price to the producer’s delivery point.

Any milk that is not pooled is priced outside the uniform price formula. In all cases, the final milk check also reflects market-determined and regulated items layered on top of, or deducted from, the pool-based value. Examples include premiums above the regulatory minimums, quality premiums or adjustments, hauling, assessments such as the national and state dairy promotion check-offs, and any cooperative marketing adjustments.

Conclusion

The FMMO system is a set of federal rules governing how regulated handlers account for and pool producer milk within defined marketing areas. It uses classified pricing and marketwide pooling to produce a monthly uniform price based on surveyed commodity markets. It does not determine what a producer is paid. Understanding that distinction, along with the structure of classes, pooling, and the amendment process, gives producers and advisors a clearer foundation for reading monthly announcements and interpreting dairy markets at the farm gate.