What happened to the FMMOs in 2019?

This post provides additional detail to the recent "Progressive Dairy" article published by this author.  The year 2019 was the first year that California was included as a Federal Milk Marketing Order (FMMO).  It was also a year that saw extreme amounts of de-pooling.  When milk is de-pooled, it is not reported in the FMMO numbers although the producers are still a member.  This significantly clouds the real numbers on production and usage of milk in the FMMOs.

The article in "Progressive Dairy" provides a summary of the FMMOs.  The charts and data in this post provide details for the individual orders.  The information reported in the article and in this post includes estimates for the amount of milk that was de-pooled in 2019.  The data specifically reported in the FMMO publications does not include the de-pooled milk and as a result the reported data varies significantly from month-to-month and does not report the total milk production by the FMMO members.  Because Class I cannot be de-pooled, the de-pooling primarily reduces the amounts of Class III and IV milk.  The estimates used for de-pooled milk are based on historical information and seasonal trends.

SUMMARY OF THE FEDERAL ORDERS

In total, the profile of the Federal Orders is shown in Chart I below.  The volume of Class III milk for cheese now makes up near half of the total milk supply.  Class I milk for drinking is down to less than one quarter of the milk supply and falling.  As Class I milk continues to fall, the “Uniform” price will fall, and more de-pooling will result.

Chart I - Profile of All Federal Orders

THE UPPER MIDWEST FEDERAL ORDER

The Upper Midwest Order is the largest Federal Order and the milk from this order is used primarily for Cheese (Chart II).  In 2019, 88 percent of the milk in the Upper Midwest was used for cheese production.  About 25 percent of that Class III milk was de-pooled in 2019.

Chart II - Profile of Midwest Federal Order

Because Cheese dominates the Upper Midwest Order, the difference between the Class III price and the Uniform price is minimal.   The Uniform price is the average of the four Classes.

However, the Producer Price Differential (PPD) can become negative when cheese prices are rising.  That event involves the timing of the pricing of each Class of Milk.  If the price of cheese is rising, the Class I skim price may then be lower than the final “Component” priced Class III skim milk, creating a lower “Uniform” price and a negative PPD.  The producer would then owe money to the pool of the four Classes of milk.  To avoid this, producers (typically through their cooperative) will elect to de-pool to avoid “owing” this money.  When this happens, much of the Class III milk is de-pooled and not reported to the FMMO. 

Additionally, as of May 1, 2019, the base Class I milk price is now based equally on the skim price of the Class III and Class IV milk plus 74 cents and is calculated before the month starts via the “Advanced” pricing system. This can also reduce the Class I price causing a negative PPD, resulting in additional de-pooling.  See the January 12 post to this blog for additional detail on the change in Class I pricing. 

Also, when the Class IV price is above the Class III price, some of the Class IV milk may be de-pooled for the same reasons stated above.

THE CALIFORNIA FEDERAL ORDER

When California became an FMMO, one of the big changes was the ability to de-pool milk from all but the Class I milk for beverages. Under the previous California payment system, de-pooling was not allowed for any milk. The huge portion of California milk used in Class III and Class IV provides a large volume of milk that can be de-pooled.

As shown in Chart III, 37 percent of the milk delivered in California is used as Class IV milk for nonfat dry milk and butter.  California uses roughly 13 billion pounds of milk in Class IV production.  Other Orders use far less of their milk for Class IV.  An extreme example is the Upper Midwest which uses only 3 percent of its milk for Class IV.

When the Class IV price is higher than the Class III price it may be advantageous to de-pool as much Class IV milk as possible to avoid losing the higher price of Class IV and likely incurring a negative PPD. 

Chart III - Profile of California Federal Order

The California Order started de-pooling from its first month as a Federal Order.  It would appear that much of the motivation for becoming a Federal Order was the ability to de-pool. 

Additionally, California under their prior state-run pricing system had a mechanism for providing a premium for milk that was paid under the “quota” program.  This was maintained after California became a Federal Order and the payment system for “quota” milk was managed by the state of California.  The milk that is not covered by “quota” is accessed a fee which is used to pay the premium for the milk that is included in “quota.”  The “quota” payment factor as well as de-pooling makes the California milk that is not covered by quota and is not de-pooled, some of the lowest paid milk in the U.S.

THE NORTHEAST FEDERAL ORDER

The third largest Order is the Northeast Order (Chart IV).  The Northeast Order has a nicely balanced portfolio of milk usage.  Class I milk, typically the highest priced milk, is the largest use of milk in the Northeast Order.  Class II milk is also high priced and with 24 percent of the Northeast Order milk used in Class II production, the PPD has been consistently positive.  For that reason, de-pooling has been essentially nonexistent.

However, due to the formula revisions made May 1 of 2019 reviewed above, the Northeast did exhibit an unusual negative PPD at the end of 2019.  That may lead to increased de-pooling for the Northeast Order in the future.

Chart IV - Profile of Northeast Federal Order

THE MIDEAST FEDERAL ORDER

The Mideast Federal Order (Chart V) is about half the size of the Upper Midwest Order.  Of the Federal Orders paid by the “Component” formulas, the Mideast has the largest percent of Class I milk.  There is also a large percentage of Class III milk.  There was significant de-pooling as cheese prices rapidly increased in the last part of 2019.

Chart V - Profile of Mideast Federal Order

THE CENTRAL FEDERAL ORDER

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The Central Federal Order (Chart VI) is about the same size of the Mideast Order, but with a larger amount of Class III milk.  With 26 percent Class I milk and 49 percent Class III milk, the rapidly increasing cheese prices lead to a significant amount of de-pooled milk in final months of 2019.

Chart VI - Profile of Central Federal Order

THE SOUTHWEST FEDERAL ORDER

The Southwest Federal Order also has almost half of its milk in Class III (Chart VII.). Because of the large amount of Class III milk, there was also a significant amount of de-pooled milk in the final months of 2019 as cheese prices were increasing.

Chart VII - Profile of Southwest Federal Order

THE PACIFIC NORTHWEST FEDERAL ORDER

The smallest of the Federal Orders paid by the “Component” formulas is the Pacific Northwest Order (Chart VIII.). The milk in this Order is heavily weighted by Class III and Class IV milk.  The Class IV milk shares the same West coast export advantage as the new California Order.  The largest category of milk usage is Class III with an estimated 42 percent of the total including de-pooled milk.

Chart VIII - Profile of Northwest Federal Order

THE FEDERAL ORDERS PAID BY THE “ADVANCED” FORMULAS

The Federal Orders paid on the “Advanced” system are characterized very differently.  Together, the FMMOs paid by the “Advanced” formulas make up less than 10 percent of the milk delivered by all FMMOs.

There are four Federal Orders that are paid by the “Advanced” formulas and three of these are located in the Southeast United States.  They all share the characteristics of being small and primarily fluid milk. The profile of these three orders is shown in Chart IX.

Chart IX - Profile of the Three Orders in the Southeast U.S.

The fourth Federal Order paid by the “Advanced” formulas is Arizona.  Chart X shows the profile of the Arizona Order which is very different from the other three Orders paid by the "Advanced” formulas.  Because of its West coast location, a significant amount of the milk is used in Class IV.

Chart X - Profile of Arizona Federal Order

For additional details on the FMMOs in 2019, see the recent "Progressive Dairy" article by this author.