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Milk marketings through FMMOs are falling and here’s why

Progressive Dairy Editor Dave Natzke Published on 22 June 2022

Declining fluid milk sales and Class III-IV milk price relationships that incentivize depooling are cutting into the percentage of U.S. milk production marketed through the Federal Milk Marketing Order (FMMO) system.

While FMMOs continue to serve as a valuable benchmark for pricing all milk – even the milk that is not in the pool – the trend has some in the dairy industry noting it is deregulation in slow motion. With discussions over dairy pricing policy reforms circulating, they’re questioning the significance of FMMOs and their future role and/or structure.

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First, some numbers: An annual USDA report, updated in May 2022, shows the percentage of annual U.S. milk production that was marketed through FMMOs hit two-decade lows in 2021 at 61%. That matched the lowest percentage for the fourth year since the turn of the century; other years at 61% were in 2015, 2012 and 2004.

The report, “Measures of Growth in Federal Orders,” is published by the USDA’s Agricultural Marketing Service (AMS). It estimates the amount of producer milk pooled on FMMOs as a percentage of all milk sold to U.S. plants and dealers, both as fluid grade (Grade A) and all milk sold. (With about 99% of all milk marketed in the U.S. now Grade A, the two percentages are almost identical.)

Milk marketings through FMMOs are tracked by USDA’s AMS, and the USDA’s National Agricultural Statistics Service (NASS) estimates total annual U.S. milk production and marketing through all channels (Table 1).

Latest percentage peak in 2019

Historically, with higher percentages of manufacturing grade (Grade B) milk produced in the U.S., the percentage of U.S milk production marketed through the FMMO system remained relatively low, ranging from 21% in 1947 to 49% in 1967. As Grade A percentages grew, so did FMMO milk marketings. The last time milk marketed through FMMOs accounted for less than 60% of all U.S. milk sold was in 1970 at 59%.

The most recent peak in the percentage of milk marketed through FMMOs was in 2019, the first full year that California joined the FMMO system. That year, milk marketed through FMMOs accounted for 72% of all milk sold in the U.S., the highest percentage since 2002’s record-high 76%.

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Beginning in late 2019, however, depooling has contributed to declining percentages of milk marketed through FMMOs, first in the California FMMO and then in early 2020 on a wider scale as the COVID-19 pandemic and USDA cheese purchases for food boxes created wide disparity between Class III and Class I/IV milk prices, providing financial incentives to depool Class III milk. Then, in late 2021, high demand for butterfat reversed the Class III-Class IV milk price spread, giving depooling incentives to Class IV handlers.

So even though 2020 U.S. milk marketings grew to 222.23 billion pounds (up 2.2% from 2019), receipts of milk pooled on FMMOs totaled 137.8 billion pounds, down 18.7 billion pounds (-11.9%) from 2019 (Table 1).

Total U.S. milk marketings grew to 225.22 billion pounds in 2021, up about 1.3% from 2020. However, receipts of milk pooled on FMMOs totaled 136.8 billion pounds, down 982 million pounds (-0.7%) from 2020 and the lowest level since 2017’s 135.5 billion pounds.

Although depooling slowed in recent months as Class III-IV price spreads shrunk, Class III depooling picked up in May 2022, and current milk futures prices suggest Class IV depooling could return and continue into 2023.

Individual FMMOs have different rules for pooling, depooling and repooling.

Class I utilization trending lower

Beyond depooling of Class III-IV milk, the other trend impacting the percentage of milk volumes flowing through FMMO pools is declining fluid milk sales. Historically, the percentage of producer milk utilized as Class I hit 60% or more 21 times between 1947-73. Following declining fluid milk consumption trends, Class I utilization fell below 50% by 1980, below 40% by 2000, and has been at or near 30% since 2016.

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Of the 136.8 billion pounds of milk pooled in 2021, 30.8% (42.1 billion pounds) was utilized as Class I, down 1% from 2020 and the lowest level since 2019, the first full year California milk was added to the FMMO system.

Revenue percentage declining too

Lower Class I utilization and more Class III-IV milk depooled also results in less shared revenue flowing into FMMO pools (Table 2).

With California fully joining the FMMO system in 2019, FMMO pooled revenue shared with all producers jumped nearly $5.2 billion to $27.2 billion. In the past two years, however, total pooled revenue fell to about $22.2 billion in 2020 and $23.7 billion in 2021.

With the declining percentage of milk volumes pooled, FMMO pools also provided a lower percentage of total receipts, declining from 62% and 67% in 2018 and 2019, respectively, to 55% and 57% in 2020 and 2021, respectively.

Lower revenues generated through FMMO pools don’t necessarily mean all producers received less money for their milk, but it does reflect how those funds are distributed. Through depooling, individual handlers can keep revenues out of the FMMO system with the option of paying their milk suppliers directly.

Other numbers

Declining producer numbers and dairy consolidation may also be reflected in the FMMO milk pooling data.

At 23,292, pooled producer numbers in 2021 were down 1,614 (-6.5%) from 2020 and down nearly 6,200 (21%) from 2019.

That has been offset by increases in average daily deliveries of milk per pooled producer. Averaging 16,047 pounds of milk in 2021, daily deliveries were up 972 pounds (6.4%) from 2020 and up 1,561 pounds (10.8%) from 2019.

Also in 2021, there were 223 pooled handlers for all FMMOs, down from 228 in 2020 and 230 in 2019.

Calls for reform

All the numbers are adding decibels to calls for a review of the FMMO system and possible reforms.

“If the Federal Milk Marketing Orders continue to represent an increasingly smaller percentage of national production, the industry is becoming deregulated without intending to and without a transition plan in place,” said Erick Metzger, general manager of National All-Jersey Inc. “In an era of continuing declining Class I sales, the industry can have a robust debate whether the FMMOs’ two basic purposes are still needed: to set minimum prices and to pool revenues. However, the orders also provide a wealth of important data that is not collected and reported on milk marketed outside the orders.”

“Most dairy farmers are not aware that almost 40 percent of U.S. milk production is being priced outside of the FMMO system today,” said Laurie Fischer, founder and CEO of the American Dairy Coalition (ADC). “In fact, this was one of American Dairy Coalition's prime motivations for having the two virtual forums earlier this year on the future of federal milk pricing. We wanted dairy farmers to understand that the system as it stands today is at risk. We also discussed benefits of the FMMOs we don't want to lose.

“One concerning factor for farmers which stood out was the change that was made legislatively to the Class I pricing formula from the previous ‘higher-of' to the current averaging method plus 74 cents,” Fischer continued. “Their concern is this formula wasn't vetted through a formal hearing process and has not stood the test of market shocks. Not only has this change produced a huge net loss since its implementation in May 2019 through June 2022, but milk handlers also lost the incentive to participate in FMMO pools in more than half of those 38 months, leading to dysfunction that affected farmers confidence in risk management tools as well as unexpected reductions in mailbox prices due to negative producer price differentials [PPDs].”

The shrinking Class I utilization has another impact going forward, noted Ken Bailey, dairy economic consultant and author of the textbook “Dairy Economics: Pricing, Policy and Risk Management.” To qualify as a Class III or Class IV supply plant during any month, a minimum percent of milk (varying by FMMO) of milk received from eligible dairy producers must be shipped to a Class I pool distributing plant. So as Class I volume shrinks in FMMO pools, some supply plants may become ineligible to participate.

"In a market with declining fluid milk sales, three things must happen if participating in FMMOs is to be maintained,” Bailey explained. “First, qualification rules for Class III/IV supply plants [the percent of milk that must be diverted to Class I plants] must be made more flexible. Second, rules for depooling and repooling must be tightened and made uniform across all orders. Third, Class III-IV formulas for each order must be localized and somehow reflect the actual cost of servicing the export market. All three are tall orders."  end mark

Dave Natzke
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