Dairy producers in all 11 Federal Milk Marketing Orders (FMMO) ratified recent changes to the milk pricing system. In general, these changes went into effect June 1, 2025, but the advanced prices became effective the first of May. USDA just released the June Class I prices, which gives us the first glimpse of how these changes will impact prices. Granted, one month does not represent a trend, but it does provide a framework to discuss differences.
Changes to the milk pricing system can be generalized into two categories. The first is to address added costs of processing commodities into end products. An underlying tenant of the milk pricing system is that the price of commodities (i.e., whey, cheese, butter, on nonfat dry milk) plus a “make allowance” is used to calculate class and component values. Make allowances were raised, which lowers the value of milk. The second category involves changes designed to raise the value of producer’s milk thus resulting in minimal damage to producers. What has generally not been discussed is the impact of these changes on consumer prices. The only influence that consumers exert is to lower demand. To discuss the impact of the FMMO changes, I will use the June 2025 Advanced Class I prices.
Table 1 contains an example of the relationship of cheese to Class III price. The new make allowances for cheese reduce the Class III price by 92 cents per hundredweight (cwt.). Assuming a yield of 10 pounds of cheese from 100 pounds of milk, these changes add 9 cents per pound of cheese to processors’ margins. In this example, 10 pounds of cheese is worth $18.02, which did not change, but the price paid for milk to make the cheese is significantly reduced. This price difference suggests that cheese production should pick up.
Another change made in the FMMO formulas was to remove barrels from the price discovery of cheese (e.g. National Dairy Products Sales Report). Using both blocks and barrels, cheese price would have been $1.8235. Under the new system, cheese price was $1.8019, which is $0.0216 lower. This lowers the Class III skim price from $8.77 to $8.55 representing 22 cents and lowered the value of producer milk in June Class I prices. There are perhaps numerous other unintended consequences of removing barrels from cheese price. First, Table 2 contains the last five weeks of price discovery, and the volume of blocks is under 12 million pounds per week. Total cheese production is usually about 273 million pounds per week. This means that less than 5% of production is used for price discovery.
Another impact of removing barrels from cheese price is that it eliminates the ability to hedge barrel cheese on the futures market. Previously, cheese was a weighted average of the two types. This has the potential to change business strategies of cheese producers.
The final modification of the FMMO system was to change the Class I differential which is added to base Class I price to ensure Class I milk has the highest price in the FMMO. However, the changes were not uniform across the FMMOs (Table 3). The largest raise was in Order 5 (mid-Atlantic) which went up from $3.40 per cwt. to $5.60 while the lowest bump was in Order 131 (Arizona) which only increased 25 cents per cwt. Table 3 also contains the total impact of formula changes on each FMMO. Some FMMO gained value (i.e., 1, 5,7, 33) while others lost value (i.e., 6, 30, 32, 51, 124, 126, 131).
Overall, the impact of the FMMO changes in June Class I prices were positive for processors but negative for producers. It is also clear from watching market dynamics (CME futures) that a significant amount of emotion has been interjected due to the uncertainty that these impacts will have.
For more information, you can watch the recent "Milk Market Tid-Bits: April Cold Storage Report" here.
