How Milk Prices Work in the USA

By Andi Anderson

Milk pricing in the United States is a complex process that is governed by Federal Milk Marketing Orders (FMMOs). FMMOs are federal laws that specify the minimum price that producers must be paid by handlers for their milk. In FMMOs, milk processors are referred to as "handlers" of milk. This article uses the same terminology.

There are 11 different FMMO regions across the United States. Each order has its own unique set of pricing rules. However, there are some general principles that apply to all FMMOs.

One key principle is that the price of milk is based on the value of the products that can be produced from milk, less a make allowance (processing costs). The USDA conducts surveys on the prices of four key commodities: cheese, butter, whey, and non-fat dry milk. These prices are used to calculate the value of the components in milk, such as protein, other solids, and butterfat.

Another key principle is that all milk in an order is pooled together (economically, not physically) and averaged. This means that all farmers in an order receive the same base price for their milk, regardless of which class of milk it is sold into. The base price is then adjusted for the actual component levels of the milk.

There are two different milk pricing approaches used in the US: milk component pricing (MCP) and skim-fat pricing. Under MCP, all handlers except Class I handlers must adjust their payments into the pool for the actual milk components they receive. Under skim-fat pricing, all handlers pay for base components levels for protein and other solids but pay for actual component tests for butterfat.

Class I milk is the highest priced class of milk. It is used to produce fluid milk products, such as whole milk, skim milk, and reduced-fat milk. Class II milk is used to produce products such as yogurt, ice cream, and cottage cheese. Class III milk is used to produce cheese and butter. Class IV milk is used to produce non-fat dry milk and other dry milk products.

Pooling is a complex topic, but it is important to understand how it works in order to understand milk pricing. Pooling helps to ensure that all farmers in an order receive a fair price for their milk.

Here is a simplified example of how milk pricing works:

Suppose that the Class I skim milk price is $1.00 per pound and the Class III skim milk price is $0.50 per pound. A farmer in an FMMO that uses MCP would receive a base price of $0.75 per pound for their milk, regardless of which class of milk it is sold into. This is because the base price is an average of the Class I and Class III skim milk prices.

Now, suppose that the farmer's milk has a butterfat content of 4%. Under MCP, the farmer would receive an additional $0.10 per pound for the butterfat in their milk. This is because the butterfat premium is $0.25 per pound and the farmer's milk has a butterfat content of 4%.

Therefore, the farmer would receive a total price of $0.85 per pound for their milk. This price is made up of the base price of $0.75 per pound plus the butterfat premium of $0.10 per pound.

It's crucial to understand that the example provided here is a simplified representation. The actual compensation a farmer receives for their milk can fluctuate significantly due to various factors, including the milk's classification, its component levels, and the specific Federal Milk Marketing Order (FMMO) to which the farmer belongs.
 

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