Federal Milk Marketing Orders: Role, Protections, and Potential Unintended Consequences of Deregulation

The FMMO system has two primary components: classified pricing and milk pooling. It categorizes milk into four classes (table 1): Class I (fluid milk), Class II (soft products like ice cream), Class III (cheese), and Class IV (butter and milk powder). Handlers report all milk receipts based on their end use, and the FMMO uses fixed minimum-price formulas to value this pool of milk receipts and compute the prices for the four classes (USDA, 2023). Handlers are required to pay producers at least the weighted-average price of all class uses, referred to as the “uniform” or “blend” price (Jesse & Cropp, 2018).

FMMO Milk Classes and Products

Class	Description	Examples
Class I	Fluid milk	Whole milk, skim milk
Class II	Soft products	Ice cream, yogurt
Class III	Cheese production	Cheddar, mozzarella
Class IV	Butter and milk powder	Butter, nonfat dry milk

The main goals of FMMOs are to:

• Ensure orderly marketing conditions in fluid milk markets
• Improve the income situation of dairy farmers
• Oversee the terms of trade in milk markets to foster more equitable bargaining between producers and processors
• Guarantee consumers an adequate supply of high-quality milk at reasonable prices

FMMOs are permanently authorized by the Agricultural Marketing Agreement Act of 1937, as amended, and do not require reauthorization. They are established and amended through a formal public-hearing process that allows stakeholders to present evidence on marketing and economic conditions to support or oppose the implementation or modification of an order (Novakovic & Stephenson, 2018). Most changes to FMMOs are made administratively by the USDA through the rulemaking process, which must then be approved by farmers via a referendum. Legislation can also address issues related to the FMMO system (USDA, 2023).

Benefits and Protections Provided by Federal Milk Marketing Orders

1. Price Stability and Uniformity
   • Minimum Pricing: FMMOs establish minimum prices that processors must pay to dairy farmers, based on formulas that account for market conditions and the end-use of the milk (USDA, 2021). This mechanism helps protect farmers from volatile market fluctuations and ensures a more predictable income (Bailey, 2019).
   • Pooling Mechanism: The orders facilitate the pooling of milk from different producers, ensuring that all farmers receive a uniform price for their milk regardless of its final use (USDA, 2021). This practice mitigates regional price disparities and promotes equity among producers (Nicholson & Stephenson, 2020).
2. Market Transparency
   • Market Information: FMMOs require the regular reporting of prices, production volumes, and other critical market data (USDA, 2021). This transparency allows farmers to make more informed business decisions and enhances market efficiency (Wolf, 2019).
3. Fair Competition
   • Orderly Marketing Conditions: By regulating how milk is marketed, FMMOs help prevent practices that could lead to unfair competition among producers and processors (USDA, 2021). This contributes to a more orderly and predictable market environment (Bailey, 2019).
4. Quality Standards
   • Product Quality and Safety: FMMOs often include provisions that establish quality standards for milk, ensuring that consumers receive high-quality dairy products (USDA, 2021). These standards can help protect the reputation of U.S. dairy products domestically and internationally (Wolf, 2019).
5. Support for Small and Medium-Sized Farms
   • Economic Viability: By providing these services which aid in stabilizing market conditions, FMMOs help maintain the economic viability of small and medium-sized dairy farms (Nicholson & Stephenson, 2020). This is particularly important in rural communities where dairy farming is a key economic activity (Bailey, 2019). 
6. Producer Payments
   • Audit and Enforcement: FMMOs establish and verify tests of milk components to ensure that farmers are paid the component levels in the milk they sell. Auditing includes monitoring and checking market transactions by USDA, which has enforcement authority. Auditing ensures accurate and timely payments to dairy farmers (Wolf, 2024). 

Potential Risks of Abolishing Federal Milk Marketing Orders

1. Increased Price Volatility
   • Market Fluctuations: Without the price stabilization mechanisms provided by FMMOs, dairy farmers could face greater exposure to market volatility (Wolf, 2019). This could lead to substantial income fluctuations, making financial planning and investment more challenging (Nicholson & Stephenson, 2020).
   • Seasonal Variability: Dairy prices are often subject to seasonal changes. The absence of FMMOs could exacerbate these fluctuations, making it difficult for farmers to manage their operations effectively (Bailey, 2019).
2. Regional Price Disparities
   • Unequal Pricing: The elimination of pooling mechanisms could result in vital regional price disparities. Farmers in regions with less demand or higher transportation costs might receive lower prices for their milk, creating an uneven playing field (Nicholson & Stephenson, 2020).
3. Market Power Imbalances
   • Processor Dominance: Without FMMOs, large dairy processors could gain excessive market power, potentially leading to unfair pricing practices and reduced bargaining power for individual farmers (Wolf, 2019). This could further marginalize small and medium-sized producers (Bailey, 2019).
4. Reduction in Market Transparency
   • Less Information: The requirement for market data reporting might diminish, leading to reduced transparency. Farmers would have less access to critical market information, making it harder to make informed decisions and strategize effectively (USDA, 2021).
5. Quality and Safety Concerns
   • Inconsistent Standards: The abolition of FMMOs could result in inconsistent quality and safety standards across the dairy industry. This could undermine consumer confidence and potentially harm the reputation of U.S. dairy products (Wolf, 2019).
6. Economic Strain on Rural Communities
   • Community Impact: The destabilization of dairy farm incomes could have broader economic impacts on rural communities that rely heavily on dairy farming. Reduced farm incomes could lead to lower spending in local economies, affecting other businesses and services (Nicholson & Stephenson, 2020).

Conclusion

The Federal Milk Marketing Orders (FMMOs) play a crucial role in ensuring stability, fairness, and quality in the U.S. dairy market. They provide significant benefits and protections to dairy farmers, including price stability, market transparency, fair competition, and quality standards, which in turn support small and medium-sized farms. The potential risks associated with abolishing FMMOs—such as increased price volatility, regional price disparities, market power imbalances, reduced transparency, quality and safety concerns, accelerated dairy producer consolidation, and economic strain on rural communities—underscore the importance of these regulations in maintaining a stable and orderly dairy industry. Policymakers, stakeholders, and producers must carefully consider these factors when evaluating the future of FMMOs to ensure the continued prosperity and sustainability of the U.S. dairy sector.

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