Legislation authorizing the beginning of federal milk marketing orders started in 1933. Since then, orders have been implemented, amended, terminated, challenged in the courts, tinkered with by Congress, debated, discussed and cursed. Having worked with federal orders a good portion of my life, I am asked many questions regarding them. This article is a condensed version of my responses to some of the common questions categorized in three areas: history, purpose, and future areas of discussion.
History
During the Great Depression, dairy cooperatives asked the federal government for help in milk marketing. Milk’s perishability, production not in synchronization with consumer consumption, many more sellers than buyers and multiple uses of milk were some of the challenges in profitably marketing milk.
The Agricultural Adjustment Act of 1933 was the first legislation related to federal orders. The 1933 act was then improved with the Agricultural Marketing Agreement Act of 1937.
The 1937 law better defined marketing orders and is the legal authority under which orders operate today. Over the years, the legality of federal orders has been challenged in the courts, but they have withstood the challenges.
A federal milk marketing order is a regulation issued by the Secretary of Agriculture that places certain requirements on the handling of grade milk in a specified geographical area. Orders must be approved by dairy farmers.
An affirmative vote of two-thirds of dairy farmers, or dairy farmers supplying two-thirds of the milk, is required for implementation of an order and to approve amendments to an existing order. Dairy farmers can terminate an existing federal order as well.
This occurred in April 2004 when the Western order was terminated after two-thirds of dairy farmers in that order failed to approve the order as amended.
The first federal order started in St. Louis on February 1, 1936. By 1940, the number of orders expanded to sixteen. In 1950, there were 40 orders. The number of orders peaked at 83 in 1962.
However, less than one-half of the nation’s milk production was marketed under federal orders in 1962. Today, as the result of order consolidation, there 10 orders. But these 10 orders regulate over twice the milk production the 83 orders did back in 1962.
Purpose
Federal orders have two primary purposes. They ensure consumers have an adequate supply of fresh and wholesome fluid milk. They also assist dairy farmers in developing stable and reliable milk markets and promote and maintain orderly milk marketing conditions.
Federal orders work to meet these two purposes by classifying milk according to its use; establishing minimum prices that regulated milk buyers pay for milk; pooling milk receipts and determining a blend or uniform price paid to dairy farmers; establishing regulations (pooling requirements) to determine what milk is eligible to receive the blend price; ensuring that milk is accurately tested, weighed and classified; and providing useful market information.
It should be noted that federal orders do not establish minimum retail prices, guarantee a dairy farmer a milk market or a profitable milk price, control milk production or establish quality requirements. Milk must meet Grade A requirements to participate in a federal order, and some orders do make price adjustments based on somatic cell count level.
Federal orders establish minimum prices that regulated buyers of milk must pay. Generally, a regulated milk buyer is a plant that processes and distributes fluid milk in consumer packages, or in other words, a fluid milk plant.
Some fluid plants may also manufacture products such as cottage cheese or ice cream. Milk used to produce these products is subject to minimum prices.
In simple terms, a plant that manufactures dairy products (cheese, butter, powder) and does not bottle fluid milk is not regulated under a federal order and is not subject to the minimum price requirement.
However, if the manufacturing plant is a supply plant (a plant that provides a reserve supply of milk for fluid use) it is then regulated and is subject to minimum pricing provisions.
Plus, there are cases in which manufacturing plants work with fluid milk plants to “pool” milk they receive from dairy farmers. In this case, the pooled milk is subject to minimum price requirements.
Future
Looking ahead, I see four major areas of discussion.
1. The first is price discovery – how to establish the minimum prices. Since 2000, a product price formula, using a USDA survey of dairy commodity prices, is used to establish minimum prices. Prior to 2000, a survey of prices paid by unregulated plants (competitive price) with an adjustment based on commodity prices was the basis for calculating minimum prices.
Today, some propose going back to a competitive price because they say it better reflects the market value of milk, and they dislike fixed make allowances and yield factors.
Today, with such a small volume of unregulated milk, competitive pricing is a challenge, and a competitive price is not as transparent as the product price formula. Price discovery does not have a simple answer.
2. The second area is the number of classes of milk. Currently, there is one class for fluid milk and three for manufacturing milk. Some think there only needs to be two classes, one for fluid and one for manufacturing. Reasons given for one manufacturing class are to simplify the system and encourage the movement of milk to its highest value.
On the other hand, a fourth class (butter-powder) was added in 1993 because dairy cooperatives argued they were not recovering milk balancing costs.
And some have even suggested more classes; for example, adding an export class. The California state order has five classes and in Canada there are 20 classes for milk.
3. Fluid or Class I milk is the third area. The Class I price ranges from $1.60 to $6 higher than the advanced Class III or IV price. One of the initial reasons for a higher Class I price was to encourage dairy farmers to move from producing Grade B or C milk to Grade A milk.
With almost all U.S. milk now Grade A, this incentive is not as critical today. Another reason for the higher Class I price is to increase income to dairy farmers.
For many years, the price elasticity of fluid milk was considered to be low, which provided the opportunity for a higher fluid price and thus more potential income to dairy farmers.
Today, many will agree, the price elasticity for fluid milk is higher than it was or thought to be. Plus, fluid milk consumption continues to decline, volatility in prices impact fluid milk sales and the number of fluid milk substitutes continues to grow. All of these factors lead to discussion on a better way to price fluid milk.
4. The fourth area is the requirement for pooling milk. Each order has its own requirements on how much and how often a dairy farmer’s milk must be associated with a fluid plant to participate in the respective order’s pool and to receive a share of the higher Class I and II values.
A goal for pooling requirements is to ensure an adequate milk supply for fluid plants, along with a reasonable means for dairy farmers to associate with the fluid market.
Plus, this goal should be met in the most efficient, economical and equitable manner.
With a smaller percent of federal order milk used for fluid (35 percent today compared to over 60 percent in 1970) and milk more easily moving greater distances, meeting this goal becomes more difficult. Pooling requirements will always be discussed.
Hopefully, this article has provided a brief summary of the history, purpose and future discussion topics on federal orders, and encouraged dairy farmers to stay informed and involved in future discussions. PD
Covington is a retired dairy co-op CEO and currently a management consultant.
Calvin Covington
Farm Consultant
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