Changes in federal orders to impact milk prices

MADISON, Wis. — Dairy producers may see differences in their milk checks from changes that are included in the Federal Milk Marketing Orders referendum.

“Keep in mind that the federal orders are a mechanism of calculating a portion of the producer pay price — it’s not the entire milk check,” said Leonard Polzin, dairy markets and policy outreach specialist at the University of Wisconsin-Madison.

“Markets influence prices way more than federal orders will,” said Polzin during a webinar hosted by Hoard’s Dairyman. “While we would see price impacts, policy or market changes have the potential to far outweigh any differences in producer pay price than what we’re seeing now.”

The objective of the Federal Milk Marketing Orders is to promote orderly marketing conditions in fluid milk markets, Polzin said.

In addition to classified pricing and pooling, the federal orders also provide several other functions to the industry.

“Some that are easy to overlook are the weights and measures and the component and volume audits,” Polzin said. “The orders audit those things to make sure everything is up to snuff with processors that are transforming raw milk into sellable products.”

Federal orders do export certification services, facilitate checkoff programs and dictate and insure timely payments to producers.

“If this legislation was not in place, the formal traffic cop function would be nonexistent,” Polzin said.

The U.S. Department of Agriculture’s recommended decision includes a change in the standard milk composition.

“This comes from a trend we’ve been seeing over time of our fat and protein production increasing year over year for quite some time,” Polzin said. “The protein will increase from 3.1% to 3.3%, other solids are up, as well, and nonfat solids will go from 9% to 9.3%.”

The recommendation is to remove cheese barrels from the Class III pricing.

“Right now, we price based off 40-pound blocks and 500-pound barrels,” Polzin said. “The USDA recommendation is to drop the 500-pound barrels since there is sufficient enough information to simply include the block price to calculate those prices.”

Another element in the changes is an increase of make allowances for cheese, butter, nonfat dry milk and dry whey which is used in Class III and Class IV pricing from 5 to 7 cents per pound of product.

“For what the producers are going to receive as their component price, we take the wholesale price less the make allowance which accounts for the transformation of milk to get to an end product,” Polzin said.

“The cost of transforming milk into a product has not kept up with the make allowance, so we hope as we increase the make allowance, we would see dynamic market factors that would increase premiums to dairy producers.”

The USDA has recommended reverting to the higher of advanced Class III or Class IV skim milk price for the Class I skim milk price.

“This is the system we had before and we expect an increase to the producer’s price,” the specialist said. “The new thing is a provision to handle extended shelf-life milk.”

The increase in Class I differentials, Polzin said, is a geographical component of the federal orders.

“This tries to incentivize the movement of fluid milk from surplus areas to deficit areas,” he said. “This will increase the price in Wisconsin about $1.20 per hundredweight and this also retains the $1.60 per hundredweight minimum differential value.”

The deadline to submit ballots to the order administrator was at the end of 2024 and the ballots are now being counted. If the referendum passes, Polzin expects implementation to start in March or April.

“There will be a step-in implementation process for the changes with the make allowance increase in the March to April time period,” Polzin said.

“The next implementation of the increase of standard protein and other solid levels will be six months after the make allowance increase,” the specialist said.

“Be aware of your risk management practices because it wouldn’t be unrealistic that we would see some price pressure from the increase of make allowance and again I wouldn’t be surprised to see some additional price movements six months later,” he said.

A good year for dairymen for return on assets is when milk supply is low and exports are high.

“We’ve seen a resurgence in cow numbers recently and I think it’s reasonable to think cow numbers will continue to rise in 2025,” Polzin said.

“We have a lot of production capacity coming online in 2025 and beyond,” he said. “The U.S. all milk fat test is above every month where we were the previous year and it’s the same thing for the protein test, so because we’re producing so many components our calculated amount of components is up 12.24%.”

Milk solids exported have been around 16%, Polzin said.

“Mexico is a good purchaser of our cheese,” he said. “While our dry whey exports to China have been a bit less this year, we are seeing exports to other countries up.”

Last year, there was a bit more production during the spring flush than what has occurred historically over the last few years, Polzin said.

“If that holds true again, that would be additional price pressures in 2025 over the next few months,” he predicted.

“The CME has Class III price average through November at $19.64,” the specialist said. “For a price range, I think maybe we’ll hit $25 per hundredweight and down to $18 per hundredweight.

“The big thing is processing capacity and how quickly these are filled and how much of their demand is already accounted for by internal growth from their suppliers, how much is going to be from the open market and how quickly we get to capacity,” he said.