The U.S. Dairy Industry: More Than a Glass of Milk
In anticipation of the 2012 (2014) Farm Bill, the AEI commissioned a similar set of papers as we
have today whose objective was to provide an understanding of issues facing U.S. agriculture
and assess the appropriate role of Federal agricultural policy. Balagatas (2011) provided a brief
review of previous U.S. dairy policy and programs.1 In contrast, the objective of this paper is
four-fold. First, we provide an overview of what makes production of fluid milk different than
the production of other agricultural commodities. A second objective is to provide an overview
of industry trends in terms of location of raw milk production, changing dairy farm size
distribution and increasing dependence on dairy exports. Third, we provide an overview of dairy
policy after passage of the Agricultural Act of 2014 (i.e, the 2014 Farm Bill). The 2014 Farm
Bill is a watershed piece of legislation as 70+ year old dairy policies were suspended and for the
first time, individual producer risk management became the principle dairy policy. Finally, I
present some comments as to what may appear in the 2018 Farm Bill.

I. What Makes the Dairy Industry Different Than Others?
Prior to the early 1990’s, there was little need for dairy price risk management. With increased
milk price volatility the use of CME dairy-based futures and options have also increased from 0
open interest in 1996 to having approximately 15% of U.S. 2015 milk production being
represented by the open interest on Dec. 1, 2014.2
24
One of the primary reasons for the slow
22
adoption of price risk management is the more 20
Support Price
MW/Class III Price
than 75+ year history of Federal dairy policies
18
whose objectives were to support the milk
16
price by purchasing cheddar cheese, butter and 14
12
nonfat dry milk. Historically, dairy farm
10
operators have not had to provide their own
8
revenue protection given minimum milk prices
6
being protected by the Federal Government
4
until the 2014 Farm Bill eliminated the Dairy
Figure 1: MW/Class III Milk vs. Support Price: 1970-2017
Product Price Support Program (DPPSP).

1

Manchester (1983) and Erba and Novakovic (1990) contain detailed reviews of U.S. dairy
policy prior to 1985. Manchester and Blayney (2001) provide an overview of milk pricing prior
to 2000 as well as under Federal Order Reform. In Appendix Table A1, we update the Blayney
and Normile (2004) overview of important state and Federal dairy legislation.
2
This figure is our estimate as of the open interest on Dec. 1, 2014. This percentage is an
overestimate of the degree to which dairy farm operators are using Class III futures and options
for price risk management. The above open interest values include those market participants that
use milk and dairy products as an ingredient, speculators and participants from other countries.
1

 Monthly minimum milk prices used in cheese manufacturing are shown in Figure 1. Prior to the
mid-1980’s there was little milk price volatility and there was a close correspondence between
market prices and the parity based milk support prices (Manchester, 1983; p.259-264).

I.1 Milk Production is the Result of Herd Size and Per Cow Productivity
Milk is unique among agricultural products in a number of ways. First, industry output is a
combination of herd size and productivity of the cows in the herd. Thus a change in policy or
market conditions can impact the industry in terms of changes in either of these components.3
The dairy cow physiology results in changes in milk production being an asymmetric process
with herd size reduction a much easier process than herd expansion.. Cows produce milk from
calf birth until approximately two months prior to next birth, at which time they are removed
from the milking herd to rest before the next delivery. A newborn calf takes approximately nine
months to reach the weight of 500 pounds, the threshold used by USDA for classification as a
replacement heifer. Heifers are made pregnant at approximately 15 months of age and give birth
when approximately two years old. If a dairy farm operator decides to expand using farm
produced heifers, milk expansion could take considerable time after changes in dairy markets
provide impetus for this increase. Decreasing herd productivity via cow culling is much easier.
Cow productivity (lbs./cow/day) can be impacted, to a limited degree, through dairy ration
management. Milk composition (i.e., percent milkfat, protein, lactose and other solids) can also
be impacted. For example, increasing energy intake can increase milk protein content by 0.2 to
0.3 percentage points, an increase of 6-10% of standard concentration. Increased feeding
frequency of low fiber, high grain diets have also been found to increase milkfat composition
(Stokes, et al., 2000).
Given these relatively small impacts, herd size and age distribution are the primary factors used
to expand or reduce total herd output. Herd culling depends on a number of factors including
expected future milk yield, current/expected prices (i.e., milk, feed, and slaughter), cow
replacement yields, and current/expected replacement heifer costs (Bozic, Kanter and Gould,
2012). The culling of the dairy herd is important for the dairy farm operator but also for the
overall beef market. For example, in Nov. 2014, 20% of U.S. beef production was sourced from
culled dairy cows (Bechtel, 2014).

I.2 Harvesting Occurs Daily, 365 Days a Year
For example, USDA’s Dairy Whole Herd Buyout program provided more than 9,000 dairy
farm operations in 1986 to sell their dairy herds. The USDA paid dairy farmers according to up
the rights to milk production over the five-year period. Fees were set through a bidding process
in which farmers submitted a price that they would accept for going out of business. This
objective of this program was to reduce excess milk supplies resulting in significant Federal
government purchases of manufactured dairy products to support the milk price. In contrast, the
FDA approval of the use of rBST in milk production in 1993 had the impact of increasing per
cow productivity for treated cows.
3

2

 Unlike crop and fruit production, there is no growing season for the typical U.S. dairy farm.
Milk is harvested twice (or three times) a day. There is some seasonality to cow productivity
with increased production during spring and decreasing during winter months, ceteris paribus
(Figure 2). The spring flush occurs for a variety of reasons including spring calving, increased
access to quality forages, longer sunlight periods and moderated weather conditions. The trend
of a reduction in magnitude of this flush is attributable to a number of factors. First, the location
of production has been slowly moving to the West/Southwest U.S., which tend to have warmer
temperatures. The use of confinement versus the more traditional grazing production systems
lead to better ration control and thus minimize the impact of having feed reduced/changed during
winter months and then in the spring being let out into newly grown forage acres. Under a
confinement system, there is improved feed quality during fall/winter.
18,250
17,750

(Million lbs)

17,250

2011

2012

2013

2014

2015

2016

16,750
16,250
15,750

15,250

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Figure 2: Seasonality in U.S. Milk Production
Year round calving is becoming a more commonly accepted practice. Evening out the profile of
calving over the course of the year eliminates dramatic increases in calves during the late
winter/early spring. Given that productivity is greatest during early stages of a particular
lactation, avoiding having most calves born during late winter/early spring reduces the additional
supply of milk coming in the 2nd quarter.
Besides yield seasonality, milk’s solids concentration also changes throughout the year. This is
important given that under most milk pricing systems, milk’s value is determined by its solids
component profile:
Milk fat and protein concentrations peak in the winter months and fall to their lowest
point around July and August, with the annual range for milk fat being approximately
0.25 percentage units. This highly repeatable pattern appears to be independent of yearto-year differences in forage quality and weather. A similar pattern is also observed for
other milk marketing orders in different regions of the U.S. that experience even more
heat stress.( Pretz and Schuling, 2012, p.1)

3

 As an example, 2016 average butterfat and protein content of delivered milk in selected Federal
Orders is shown in Figure 3.
Average 2016 Butterfat Content: Selected Orders (%)
4.000

Upper Midwest

Florida

Southwest

All Orders

Average 2016 Protein Content: Selected Orders
Standard

3.925

3.375

Upper Midwest

Southwest

All Orders

Standard

3.300

3.850
3.225

3.775
3.150

3.700
3.625

3.075

3.550
3.000

3.475
3.400

Jan Feb Mar Apr May Jun

Jul Aug Sep Oct Nov Dec Avg

2.925
Jan Feb Mar Apr May Jun

Jul Aug Sep Oct Nov Dec Avg

Figure 3. Seasonal Changes in Milk Composition vs. Standard
Also, the amount of milk produced by a cow decreases the greater number of lactations it has
experienced. Stokes et al (2001) assert that while milk fat content remains relatively constant,
milk protein content gradually decreases as more lactations are experienced by the cow;
decreases by 0.10-0.15 points have been noted with five or more lactations. This reduction in
productivity is a factor in herd culling decisions.

I.3 Unique Relationships Exist Between Dairy Industry Participants
With the dairy farmer producing a flow instead of a one-time harvest, there exists a unique
relationship between the dairy farmer, processor and final customer (Manchester, 1983). The
typical dairy farmer has a sole customer who must purchase the entire herd output and establish
a mutually agreed upon price that is specified at an agreed time to cover the production of the
previous month for a large portion of milk supplied. Federal and state milk marketing agencies
have established milk price principles that determine the minimum price that must be paid by the
first handlers of milk by regulated producers. Given the number of transactions that occur
between a first handler and producer during a month, daily milk pricing would be time
consuming and costly to administer.
Dairy product manufacturers produce a final product whose primary input has significant price
volatility while the manufacturer’s customers (e.g., a retailer) are reluctant to change their
pricing. There is significant seasonality in product demand where plant and/or customers may
incur significant storage costs. Similarly, given long-term storage and price volatility,
seasonality of product demand may result in significant differences in current commodity selling
price vs. pre-storage value. Seasonal milk quantity and quality may reduce dairy product yields
and prevent a manufacturer’s ability to meet product demand.
Processors operating within Federal and State marketing orders may have to pool milk and pay
uniform prices to all producers (subject to farm-specific milk quality) where some plants will pay
into the Order Pool if the plant’s weighted average milk valuation is greater than the Order pool
average. Other plants may withdraw value from the Order pool if the plant’s average milk
valuation is less than the Order pool average. Specific plants in a particular Order are designated
4

 as a balancing plant where equating beverage milk supply and demand being the highest
priority. Any excess milk obtained from this balancing the fluid milk market is diverted to
butter, nonfat dry milk (NDFM) or cheese manufacturing. Any deficit in the supply of Class I
milk is filled from manufacturing milk supplies where the balancing plant receives payments
from firms needing milk transfers for costs of providing these services.

I.4 Cooperatives Are Extremely Important as Both Producer and Manufacturer
The U.S. dairy industry is unique in the roles occupied by farmer cooperatives. Historically, due
to milk’s perishability and high transportation costs, dairy processors possessed a
disproportionate amount of market power in the setting of raw milk prices (Manchester, 1985).
The first U.S. dairy cooperative was established in 1810. By 1935, 2,270 dairy cooperatives
represented 16% of dairy farmers and 45% of marketed milk. In 2015, there were 124 dairy
cooperatives with more than 43,000 members. Including milk from non-members and other
firms, total milk handled by cooperatives accounted for 84% of the U.S. milk supply in 2012 (the
most recent data available). With respect to manufactured dairy products, in 2012, 47
cooperatives operated bottling plants/receiving stations, 75% of butter was produced by
cooperatives, 91% of milk powders, 22% of natural cheeses and 43% of dry whey products
(Ling, 2014). The importance of cooperatives to the dairy industry varies across region as shown
in Figure 4.

Figure 4: Importance of Dairy Cooperatives to the U.S. Dairy Industry
The degree of concentration of the total U.S. milk supply marketed by dairy cooperatives is
relatively high. Approximately 40% of U.S. milk production is associated with the four largest
dairy cooperatives. More than 68% of production originates from the 20 largest dairy
5

 cooperatives. These trends have been relatively consistent in recent years with degree of
concentration varying across region (Ling, 2014).

I.5 Location and Scale of Milk Production Has Changed
In 1970 there were approximately 648,000 dairy farms housing 12 million cows that produced
9,751 lbs. per cow and resulted in total milk production of 117.0 billion lbs. By 2016, there
were 51,000 farms (92%↓) and the U.S. dairy herd had decreased to 9.3 million (22.5%↓) with
each cow producing 22,400 lbs annually(a 129.7%↑). Total milk production in 2016 was 212
billion lbs (81,2%↑). Figure 5 is used to show the relationship between U.S. dairy herd size,
number of dairy farms, total milk production and production per cow using 1970 as a base (i.e.,
1970 =1). Between 1970 and 2016 U.S. milk production increased with a compound annual
growth rate (CAGR) of 2.3%, production per cow increased with a CAGR of 1.9%, U.S. herd
size decreased with a CAGR of −0.5% and the number of dairy farms generated a CAGR of 5.4%.4

U.S. Dairy Industry Characteristics, 1970=1
2.50
2.25
2.00

Milk Production
No. of Farms

Per Cow Production
No. of Milk Cows

2.296

1.75
1.50

1.783

1.25
1.00

0.776

0.75
0.50

0.079
0.25
0.00

Figure 5: Changes in Number of Dairy Farms and Milk Production, 1970=1.0
Since the early 1980’s milk production has increased dramatically in California, the Pacific
Northwest and Southwestern states. Between 1960 and 2007, California milk production grew at
a CAGR of 7.0% (Figure 6). The recent multi-year drought, high feed costs and reduced dairy
farm income have resulted in lower production. Notwithstanding, California still accounts for
20% of the U.S. milk supply. Remember California is not part of the Federal Milk Marketing
Order (FMMO) system and is subject to its own classified pricing system.5 During Sept.-Nov.


1

Ending Value  # of years 


1
The CAGR formula used is the following: CAGR  

 Beginning Value 
5
A marketing board is an organization created by many producers to try to market their product
with the objective of increasing total revenue from the sale of their products. A marketing order
4

6

 2015, hearings were held concerning the California milk industry joining the FMMO system. In
Feb, 2017 the USDA provided its Recommended Final Decision.6 As of Sept. 2017, there has
not been a vote by California dairy farmers whether to accept this recommended.
Percent of U.S. Milk Production: Traditional States
18.5%

16.0%

Wisconsin
Minnesota
Vermont

17.7%

14.4%

13.5%

11.0%
8.3%

New York
Penn.
Michigan

Percent of U.S. Milk Production: Western States
24.5%

17.5%

6 State Total
1960: 46.5%
1988: 42.9%
2015 36.6%

13.9%

12.9%

14.0%
8.5%

8.5%

6.8%

10.5%

5.6%
4.2%

5.2%

7.1%

6.8%
4.9%

4.9%
4.5%

3.5%

2.4%

1.3%

0.7%

2.1%

0.2%

1.3%

1.0%

19.6%

5 State Total
1960: 11.7%
1988: 20.3%
2015: 38.3%

7.0%

3.4%
1.5%

21.9%

Idaho
Texas

6.5%

6.0%

3.5%

California
New Mexico
Washington

21.0%

3.8%

3.1%

3.2%

0.0%

Figure 6. Importance of Various States to the U.S. Milk Suppl
The expansion of the dairy industry to new areas is important not only from the perspective of
location, but many of the new farms tend are relatively large. As a comparison, in 2015, the average
Wisconsin herd had 129 cows compared to 1,214 cows in California, 2,153 for New Mexico and
1,125 for Idaho (Progressive Dairyman, 2016). In 1993, 45% of the U.S. milk supply originated
from farms with less than 100 cows. In 2012, this contribution decreased to 13.7%. In 2012, herds
with 1,000+ cows accounted for 50% of U.S. production and less than 4% of the number of dairy
operations (USDA, NASS, 2017).

I.6 Milk Price Volatility has Increased Significantly Since Order Reform
There is no doubt that the U.S. dairy industry has experienced increased milk price volatility
over the last two decades as shown for the U.S. as a whole in Figure 1. There are a number of
reasons for this. In most regulated milk markets milk pricing has evolved from minimum milk
prices being based on surveys of dairy plants’ competitive pay prices to minimum milk prices
now determined by plant-level dairy product prices received. The price volatility in
manufactured dairy products now has a direct effect on farm-level milk prices.
Another reason for increase domestic milk prices is that in recent history milk production growth
rates exceed those of domestic demand. This has resulted in an increased reliance on dairy
product exports to help clear dairy markets (Figure 7). The importance of these export markets
on domestic milk prices is apparent when examining the impacts of the drop in U.S. dairy

is also defined as an organization set up by a government (state/Federal) to regulate the buying
and selling of a certain commodity within a specified area.
6
For a copy of the recommended final decision refer to this URL:
future.aae.wisc.edu/publications/CA_Recommended_Final_Decision.pdf

7

 exports in 2009. The 2008 U.S. average All-Milk price was $18.33/cwt.7 Exports in 2008 was
the sixth consecutive year of Y-O-Y increases in the percent of milk solids exported by the U.S.
dairy industry. In 2009, the percent of solids exported decreased to 9.3% from 11% in 2008.
The 2009 average All-Milk price had decreased to $12.83/cwt, a 30.0% decrease from the 2008
average. Between 2014 and 2016, the percent of total U.S. milk solids accounted for by U.S.
exports decreased from 15.3% to 13.5%. Concurrently, the U.S. average All-Milk price
decreased from the all-time record of $23.97/cwt in 2014 to $16.30/cwt in 2016, a 32.0%
decrease. For specific dairy products, this sensitivity to changing export levels is even higher
given that for manufactured products, such as NFDM, dry whey, and lactose more than half of
U.S. production is typically exported (U.S. Dairy Export Council, 2017).
17.5
16.0

% of U.S. Total Milk Solids

14.5
13.0
11.5

Exports
Imports
Net Exports
Exports Expon. Trend
Net Exports Expon. Trend

10.0
8.5

R² = 0.8315

7.0
5.5

R² = 0.9376

4.0
2.5
1.0

Figure 7: Dairy Exports, Imports and Net Exports
as a % of Total U.S. Milk Solids Produced

7

The All-Milk price represents the price received by farmers before deductions for hauling,
promotions, or dues, but including any premiums paid such as for quality or quantity. It
essentially represents a gross milk price received by the dairy farm operator.
8

 Unlike many other agricultural commodities, dairy products such as butter, NFDM, fluid milk,
etc. exhibit relatively inelastic supply and demand conditions. That is, both supply and demand
do not respond significantly to changes in output prices and input costs. The case that the supply
response is even less for dairy than other agricultural
commodities given the physiology of dairy cows and
heifers. We can represent the aggregate market for
farm milk via Figure 8. Relatively inelastic supply
and demand curves are characterized as have steeply
sloped relationships between price and quantity. The
implications of having inelastic supply and demand
curves is that any change in supply or overall demand
will be reflected by large movements in price
compared to quantity marketed. Assume that the
initial supply and demand curves are curves S and D,
respectively. With a decrease in overall demand due,
for example, to reduced dairy exports, the total market
demand curve will shift inwards towards the origin.
Figure 8: Example of Inelastic Supply
The impact on equilibrium price is much greater in a
and Demand Curves
proportional sense than the change in quantity
demanded.
A price series often used as an indicator of U.S. average milk price is USDA’s All-Milk price.
The All-Milk price differ across production regions due to a variety of reasons.8 One reason is
the difference in the relative use of raw milk for beverage milk vs. production of manufactured
products. As will be discussed later, a majority of the milk marketed in the U.S. are regulated by
the FMMO or state regulator agencies. Minimum milk prices depend on how raw milk is used.
Under the current FMMO pricing system, there are four classes of milk depending on use:
beverage milk (Class I), yogurt/soft manufactured products (Class II), hard cheeses (Class III)
and butter/NFDM (Class IV). Class I milk is the most valuable while Class IV tends to be the
least. Only the value of Class I milk varies depending on where the milk is processed with the
highest value being milk further from the major milk producing regions.

8

For example, in 2016 the average All-Milk price in Wisconsin averaged $16.78/cwt. This
compares with annual average values of $15.04/cwt and $19.60/cwt for California and Florida,
respectively.
9

 There are two major milk pricing regulatory systems in the U.S.: FMMO and California. These
two states account for 80-85% of the U.S. milk supply. Historically the raw milk prices have
been lower under the California milk pricing system than those obtained under the FMMO
system.9 Under these pricing systems, the
Class III Value
Percent
%
value of milk is based on milk component
Breed
True Other Total
$/cwt Above
Fat
Protein Solids Solids
Std.
(milkfat, protein and other solids) values,
% of Milk 3.88
3.12
5.69
12.69
which in turn, depend on how the milk is
Ayshire % Above
16.01 7.6%
10.9%
4.3%
-3.6% 2.4%
Std. Milk
used. This is important, as there are
% of Milk 3.98
3.33
5.33
12.64
Brown Swiss % Above
16.65 11.9%
significant differences in component
13.7% 11.4% -9.7% 2.0%
Std. Milk
composition in milk produced by different
% of Milk 4.46
3.28
6.02
13.76
Guernsey % Above
17.72 19.0%
27.4%
9.7%
2.0% 11.1%
cow breeds. This value can differ by as
Std. Milk
% of Milk 3.64
2.97
5.63
12.24
much as 25% per cwt. (Table 1, Shuwei et
Holstein % Above
15.14 1.7%
4.0%
-0.7% -4.6% -1.2%
Std. Milk
al, 2017). Using average 2016 FMMO
% of Milk 4.64
3.54
5.86
14.04
butter, cheddar cheese and dry whey prices
Jersey % Above
18.66 25.4%
32.6% 18.4% -0.7% 13.3%
Std. Milk
we find as much as a 25% difference in milk
% of Milk 3.59
3.07
5.80
12.46
Milking
15.25 2.5%
% Above
values across breed. Besides breed type,
2.6%
2.7%
-1.7% 0.6%
Shorthorn
Std. Milk
observed milk value differences will be
2.99
5.90
12.39 14.88
----Std. Milk % of Milk 3.50
2016
Component
Values
obtained under different relative commodity
2.3084
2.0955 0.0910 ------------($/lb)
price scenarios.
Source:

Table 1: Comparison of 2016 Milk Value
Different regions of the U.S. may face
Per Cwt by Breed
different raw milk supply-demand
conditions. Where excess demand
conditions exist, oftentimes there are over-order premiums paid for milk resulting in milk prices
considerably above the minimums. With excess supply conditions, first handlers of milk who
may have paid the minimum milk price may have to sell milk at a discount to free up storage.
Figure 9 shows the regional differences in milk class utilization for each FMMO and
California.10 In the Florida Order during 2016, 84% of milk was used for Class I purposes
compared to 10% in the Upper Midwest. The largest milk Class usage for the FMMO as a whole
is associated with cheese manufacturing. For the FMMO system, 30% of milk production goes
for Class I purposes. In contrast, the Upper Midwest order used 81% of raw milk for cheese
manufacturing vs. 2% in the Florida Order. California allocates approximately 46% of its milk

9

As an example, between 2000 and 2016, the average annual FMMO Class III price was
$14.94/cwt vs. $14.04/cwt generated for the similar class of milk obtained under California
pricing. Over this time period there were many changes to California’s milk pricing system but
the overall philosophy remained the same. There were minor changes to the FMMO system over
this period.
10
The percentage of milk across milk class and region prior to 2006 cannot be compared as the
ability of plants to depool its milk was much easier and the occurrence of distant pooling was
much more prevalent (Jesse and Cropp, 2004).
10

 for cheese production. The Pacific Northwest and Arizona along with California allocate a third
of their milk to the typically least valuable use, Class IV.
100%
90%
80%
70%
60%
50%

40%
30%
20%
10%
0%

Class I

Class II

Class III

Class IV

Figure 9: Milk Utilization Across the FMMO’s and California, 2016

II. A Very Short History of Milk Marketing Orders and U.S. Milk Pricing
The supply of milk can be identified as originating from 5 different types of milk marketing
environments. For about 60% of the milk produced in the U.S., the USDA Federal Milk
Marketing Orders (FMMO) regulate transactions between producers of raw milk and
manufacturing firms that transform this milk into beverage or manufactured dairy products.
There are 6 Federal Orders with multiple component pricing (MCP), and 4 orders that utilize fatskim milk pricing, California has a MCP system for milk produced in that state that is similar in
philosophy to the FMMO’s. There are other State regulated areas including areas in
Pennsylvania, New York, Maine and Virginia. Each has their own milk pricing system. The last
type of marketing environment is unregulated where milk pricing is not subject to administrative
oversight. The state of Idaho is the largest unregulated milk-producing region accounting for
6.8% of the U.S. milk supply in 2016.
The USDA has historically had 3 objectives guiding the administration of the FMMO’s: (i)
Assuring consumers an adequate supply of beverage milk at a reasonable price; (ii) Promotion of
producer price stability and orderly marketing; and (iii) Establishment of minimum milk prices
to ensure an adequate supply of Grade A milk. The methods by which the FMMO’s achieve
these objectives are through the: (i) Establishment of minimum pay prices whose value is
dependent on milk use, i.e., classified pricing; and (ii) payment of an order blend price (Cropp
and Jesse, 2008). The minimum price received by farmers from the first handler is this blend (or
uniform) price that is a weighted average of the class prices where the weights of the amount of

11

 milk used for the alternative classified milks. 11 The accumulation of the production of milk
across all producers in a particular Order is referred to as Pooling.
Dairy farmers voluntarily create each Federal Order being created through a hearing and
referendum process. An Order can be eliminated via a similar referendum of milk producers.12
It is important to note that while dairy farmers approve the establishment of an order, it is the
processing plants being regulated.
Figure 10 provides an overview of alternative measures of FMMO evolution (USDA, AMS
2016). Since 2000, the proportion of U.S. milk receipts associated with FMMOs has declined
primarily due to growth in milk production in California and Idaho. Since Federal Order reform,
the number of first handlers in the system have declined by 38%. Concurrently, total milk
receipts have increased 7.9%. The number of dairy farms shipping to Order plants, decreased
64% between 1990 and 2015.

Figure 10: Indicators of FMMO Growth
Prior to 1995, the price of milk used in the manufacture of cheese, butter and nonfat dry milk
under the FMMO system was the Minnesota-Wisconsin (M-W) price. This price was a survey11

The minimum price received by farmers from the first handler is referred to as a uniform price
that is a weighted average of the class prices for standard quality milk. Standard milk under the
FMMO system is defined as having 3.5% fat, 2.99% protein and 5.7% other solids (Jesse and
Cropp, 2008). The Order uniform price received by a dairy farmer is not necessarily the blend
price of the Order in which that farm is located but the Order in which the regulated plant that
purchases the raw milk is located.
12
Whenever a referendum is held concerning changes to a particular order, if the referendum is
defeated, the order is then dissolved. In 2004, the Western Order which included Utah and
portions of Wyoming, Idaho, Nevada and Oregon was eliminated due to the lack of a majority of
producers voting for amendments to change the existing order.
12

 based estimate of the current price received by farmers in Minnesota and Wisconsin for Grade B
milk that was used in manufacturing. Under this system two surveys were conducted. The first
survey of plant managers was used to obtain the previous month’s raw milk price, volumes
purchased, and butterfat percentage. A second survey, sent to a smaller sample, was used to
obtain prices paid during the current month’s first 2 weeks and expected changes in milk prices
over the next 2 weeks. This latter data was used to update first survey prices.
Both Grade A and B milk can be used for dairy product manufacturing whereas only Grade A
milk can be used for fluid purposes. Grade A is produced under higher farm sanitation standards
(Buxton, 1978). In 1970, 73% of milk produced within the FMMO system was Grade A. By
1980 this had increased to 84%. In 2000 less than 2% of FMMO covered milk was Grade B.
Given reduced Grade B supply, the industry needed another method for milk price discovery. As
a first step, in 1995, the FMMO system adopted their first milk pricing system that was partially
based on wholesale commodity prices, i.e., the Basic Formula Price (ERS, 1996). The base
manufacturing milk price was based on a survey of Grade B milk users in Minnesota and
Wisconsin. The BFP system then adjusted that price by an administratively defined product
price formula (ERS, 1996).
Contained within the Dairy Title of the 1996 Federal Agricultural Improvement and Reform Act
(i.e., 1996 Farm Bill) were requirements that the USDA consolidate the FMMO system to
between 10 and 14 orders from the then 33 orders. It authorized the USDA to consider using
multiple basing points and fluid milk utilization rates in setting Class I prices. It also authorized
USDA to consider using uniform multiple component pricing in a new yet to be developed
FMMO classified pricing system.
Under the 2000 Federal Order Reform authorized by the 1996 Farm Bill, the minimum raw milk
value by milk solids composition (i.e., milkfat, protein, and nonfat/non-protein solids).
Wholesale prices of products manufactured whose yields (i.e., pounds of product/cwt of raw
milk) are used to value these components. Milk’s value is the remaining total gross component
value net of regulation determined non-milk processing costs (i.e., make allowance).
The commodity prices used in component valuation are monthly averages of weekly plant cash
sales of cheddar cheese, butter, nonfat dry milk and dried whey (Figure 11).13 Resulting Class
II-IV administratively determined monthly prices are released by the 5th of the month following
production. In contrast, the Class I base price is released by the 23rd of the month prior to
production month. Under the FMMO system, Class I base milk prices are set equal to the higher
of the two week Advanced Class III and Class IV prices.14 County specific differentials are
added to determine the final farm-specific Class I price. In general, differentials decrease with
distance from the major consumption location within the order. Class I differentials in the eight
13

The values in Figure 9 are for raw milk with standard composition.
The Class II price is a combination of the Announced butterfat value and Advanced Class IV
skim value.
14

13

 markets east of the Rocky Mountains generally increase with distance from the Upper Midwest.
Class I differentials in the two markets west of the Rocky Mountains are not aligned with Eastern
differentials (Jesse and Cropp, 2008).

Figure 11: Determination of Monthly Class III and IV Announced/Advanced Prices
At the time of adoption of the new FMMO pricing system, the difference in Class I differentials
approximated differences in bulk milk hauling costs. These differentials were designed to attract
milk from the direction of the Upper Midwest when supplies were short in other regions. Milk
would then move in response to regional price differences. Over time, hauling costs increased
and there were no compensating changes in the geographically based Class I price alignment.
Concurrently, the need for supplemental milk supplies has also decreased (Jesse and Cropp,
2008).
Of the 10 FMMO’s, the Appalachian, Southeast, Florida and Arizona Federal Orders use fatskim pricing. Dairy producers in these markets are not paid for milk components other than
butterfat. Instead, they receive the uniform skim milk price × 0.965 plus the value of butterfat
(i.e., 3.5 × butterfat’s value, $/lb of butterfat).

III. Federal Dairy Policy after the 2014 Farm Bill
The three major Federal dairy policies existing after passage of the Food, Conservation, and
Energy Act of 2008 (i.e., the 2008 Farm Bill) were the Dairy Product Price Support Program
(DPPSP), Milk Income Loss Contract (MILC) program; and Dairy Export Incentives Program
(DEIP). In contrast, the dairy policy resulting from the 2014 Farm Bill represents a structural
change to one where individual risk management is emphasized. The 2014 Bill replaced the
target dairy price deficiency program (i.e., MILC) and a variant of the 70+ year-old price support
program (DPPSP). In their place was the establishment of a dairy margin (i.e., dairy income –
purchased feed costs) insurance program (i.e., the Margin Protection Program for Dairy, MPP)
and a USDA driven (vs. manufacturer) dairy product purchase program (i.e., the Dairy Product
Donation Program, DPDP).
As noted by Schnepf (2014), the initial design of the MPP was to include provisions designed to
reduce aggregate milk supply when margins were at low levels. The use of supply management
14

 was dropped in favor of the use of the DPDP to increase dairy product demand as the means of
improving producer margins.

III.1 Dairy Program Repeals and Reauthorizations
A summary of the 2008 Farm Bill dairy programs repealed or reauthorized via the 2014 Farm
Bill is contained in Appendix Table B1. Appendix Tables B2 and B3 contain summaries of
sections establishing MPP and DPDP, respectively. The DPPSP and its precursor, the Dairy
Price Support Program (DPSP) are suspended by the 2014 Bill. The DPSP program would be
reactivated should the MPP expire at the end of FY2018 without replacement or extension. The
MILC counter-cycle payment program was extended by the 2014 Farm Bill but was set up such
that it would be repealed depending on the establishment of the MPP by Sept. 1, 2014. Given
the eventual activation of the MPP, the MILC program was discontinued. The previous MILC
program had expired on September 30, 2013. Under previous Farm Bills, the Dairy Export
Incentive Program provided cash payments to U.S. dairy exporters subject to WTO regulations.
The last year of positive DEIP expenditures occurred in 2009/2010. The DEIP had expired on
Sept. 30, 2013. It was not renewed.
Under the 2008 Farm Bill, dairy farmers within the FMMO system were allowed to voluntarily
participate in plant sponsored forward pricing of Class II, III and IV milk where the outcomes
from these arrangements were deemed to satisfy FMMO minimum price requirements. This
ability was then extended in 2014 with new contracts being available until Sept. 30, 2018 and no
milk covered beyond Sept. 30, 2021.
The Dairy Indemnity Program compensates dairy farmers when they are required to remove
milk from the commercial market because of contamination caused by exogenous factors. The
Dairy Promotion and Research Board, established in 1983, collects 15¢/cwt of milk produced
and marketed in the U.S.15 Funds collected are used to support generic dairy product promotion,
research, and nutrition education initiatives. Both programs are extended through Sept. 30, 2018.
The 2008 Farm Bill authorized the Secretary of Agriculture to recognize California as a separate
FMMO upon petition and approval by California dairy farm operators. The 2014 Farm Bill
removed the expiration date for such consideration. During Sept.-Nov. 2015, hearings were held
concerning the California milk industry joining the FMMO system. In Feb, 2017 the USDA
provided its Recommended Final Decision. Essentially this decision clones current MCP
Federal Orders to a stand-alone California order with special provisions for the state run milk
quota program.16As of Sept. 2017, there has not been a vote by California dairy farmers on
whether to accept this recommended decision.

15

Dairy products imported into the U.S. are required to pay 7.5¢ per milk equivalent.
For the full recommended decision refer to this URL:
https://www.federalregister.gov/documents/2017/02/14/2017-02732/marketing-orders-milk-incalifornia-establishment
16

15

 III.2 Establishment of the Dairy Margin Protection Program (MPP)
The 2014 Farm Bill, required USDA to establish the Margin Protection Program for Dairy with
the objective of enabling dairy farm operators to set a floor on their income over purchased feed
costs (IOFC) margin. When the U.S. average margin goes below the chosen insured minimum, a
program payment of the difference is payed to the insured. The 2014 Bill provided an outline of
the MPP program with specific operational details to be defined within program regulations.
The final MPP regulations were released on August 29, 2014 and enrollment started on
September 2, 2014 for 2014 and 2015 calendar year coverages. After enrolling, the producer is
committed until the Bill’s termination.

III.3 General Overview of the MPP
The MPP is a voluntary program with a program margin defined as the U.S. average All-Milk
price ($/cwt) minus the average cost of purchased feed necessary to produce this milk (i.e., $/cwt
of milk).17 Figure 12 contains an overview of the MPP structure which is characterized by:
actual market data, program rules, producer supplied production history, producer program
choices, and actual program outcomes.
The distinguishing characteristic of this program is the inability of the producer to design a
contract specific to that producer’s market risk environment. There are only two choices subject
to producer control, minimum margin to establish and the percent of Annual Production History
(APH) to insure.

17

The single fixed program defined ration includes feed requirements for the milking herd and
supporting animals such as dry cows, bulls, heifers, etc.
16

 Figure 12: General Structure of the Margin Protection Program
The milk price used to calculate revenue is the U.S. average All-Milk price. The final version of
this price, evaluated once a month, is reported in USDA’s Agricultural Prices report. A program
ration consisting of corn, soybean meal and alfalfa hay is assumed. Ration costs are evaluated
using monthly U.S. average corn and alfalfa hay prices also reported in the Agricultural Prices
report, The soybean meal price used is the monthly Central Illinois price (rail) published by
AMS, USDA (2017). With All-Milk price and ration costs defined in $/cwt of milk, the
difference between these two is the program’s defined margin.
The minimum MPP margin target can range from $4.00-$8.00/cwt. in $0.50 increments. The
percent of APH insurable ranges from 25% to 90%. Milk insured per month equals total amount
of insured milk divided by 12 (Jan. – Dec). Producers renew/change contract design prior to the
year of coverage. Actual margins for indemnity determination purposes are evaluated on a
bimonthly basis, Jan-Feb, Mar-Apr, etc.
Premiums are determined from two fixed premium schedules outlined in the Bill. These
premiums increase as the minimum margin insured increases. There is one premium schedule
for the first 4 million insured lbs and a second for additional milk. The $4/cwt margin (i.e.,
catastrophic) has no premium. These premium schedules do not change with changes in dairy or
feed market prices (i.e., fixed in level amounts). This fixed premium structure, regardless of
market conditions, results in varying degrees of premium subsidization.18

III.4 “History” of MPP Performance: 2005-Present

18

For more detail concerning the design and operation of the MPP, refer to Appendix Table C1.
Gould (2016) creates a side-by-side comparison with the LGM-Dairy dairy margin insurance
program.
17

 24.85
23.50
22.15

10.75

19.45

9.50

18.10

8.25

16.75

7.00

15.40

5.75

14.05

4.50

12.70

3.25

11.35

2.00

10.00

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Figure 13(A): U.S. Monthly Dairy Feed Cost and All Milk Price
($/cwt)
3.150

3.25

Feed Cost
All Milk Price
IOFC

2.90

2.55
2.20
1.85

1.596

1.50
1.15
1.383

0.80
1.289

0.45
0.236

0.10

0.509

Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul

0.199

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Figure 13(B): U.S. Monthly Dairy Feed Cost, All Milk Price and IOFC,
Jan 2005 = 1
We combine the All-Milk price and feed cost values and in Figure 14 show monthly margins.
The green band identifies the level of protection available under MPP.

18

All Milk Price

20.80

Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May

Feed Cost & IOFC

Given the above configuration of the MPP, we simulated MPP feed costs and margins over the
2005 – 2017 period. Figure 13(A) provides the resulting revenue and feed cost estimates. In
Panel B we show the
17.00
relative values of these
Feed Cost
15.75
two variables using
All Milk Price
14.50
January 2005’s Feed
13.25
Costs and All-Milk Price
12.00
equal to 1.0.

 $16.00
15.633
$14.00

$12.00

$10.00

$8.00

$6.00
5.754
$4.00
2.668
$2.00

Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May
Sept
Jan
May

2.251

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016 2017

Figure 14: MPP Monthly Margins, 2005-2017 ($/cwt)
The free $4/cwt margin contract is truly a catastrophic level of protection. Only 7.5% of the
months over the 2005-2017 period generated margins less than $4.00 with 60% of these months
being between Feb – Jul, 2009 and the remainder between May – Aug. 2012. The minimum
margin occurred in June 2009 with a value of $2.25/cwt.
As indicated above, at the end of each calendar year, dairy producers specify the MPP contract
they would like for the next calendar year. This is a significant limitation of this program given
the degree of milk price volatility observed since Order Reform.
Figure 15 provides comparisons of the distribution of sign-up across protection levels for 20152017 coverage. The increase in catastrophic margin protection can be explained by the dynamics
of margins observed in 2014-2016. In 2014, the average bimonthly MPP margin was $13.33/cwt
and there was no need to sign up for 2014. Signing up for 2015 coverage was more problematic.
At signup time in 2014 (e.g., Sept. 30, 2014) FSA estimates of the Jan-Dec 2015 MPP margins
ranged from a minimum of $10.79/cwt for May-Jun period to a high of $11.60 for Jan-Feb.
This resulted in a moderate participation in what we consider the “sweet spot” of this program
where long-run indemnity payments equal subsidized premiums.19 The actual outcome for 2015

19

It should be emphasized that insurance premium rates are not set equal to expected indemnities
in contrast to the more established crop insurance programs where premiums must be set to be
equal to indemnities before the subsidy is applied. It is unclear as to the exact subsidy provided.
19

 was that only in the
Apr-Mar (49.4¢)
90.0%
and Aug-Sep
(30.5¢) bi-months
75.0%
2015 2016 2017
where there any
60.0%
significant
indemnity
45.0%
payments. These
30.0%
payments were
limited to the 1.1%
15.0%
of enrolled farm
0.0%
operators who chose
$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 >$4.00 >$6.00
the $8 level of
coverage. The
Figure 15: Distribution of MPP Contracts by Protection Level
indemnities paid
were substantially less than out-of-pocket premium costs.
Given the experience obtained in 2015 and combined with FSA forecasted 2016 margins on
Sept. 30, 2015 ranging from $8.98/cwt for Jan-Feb to $9.69 for Nov-Dec, the increase in
utilization of the catastrophic level of protection was anticipated. In 2016 there were significant
payments for the Mar-Apr and May-Jun bi-months. In fact, for the first time, there were
payments actually paid to contract holders besides those with $8.00 protection. In reaction to the
experience in 2016, the proportion of participating dairy operations with only catastrophic (i.e.,
$4) coveragein 2017 increased from 77.4% to 94.1% of the contracts.

20

 III.4 Overview of the Dairy Product Donation Program (DPDP)
Quoting from an FSA summary of the DPDP:
The DPDP addresses low margins for dairy operations by using Commodity Credit
Corporation (CCC) funds to purchase dairy products for donation to public and private
nonprofit organizations that provide nutrition assistance to low-income populations.
(USDA, FSA 2014)
Under this program, the DPDP must be exercised whenever the actual MPP margin is $4.00/cwt.
or less for the preceding 2 months. USDA must purchase dairy products, at prevailing market
prices, until at least one of the termination conditions outlined in Appendix Table B2 have been
met. USDA must coordinate with organizations used to feed low-income individuals so as to
identify quantities of dairy products to purchase. These purchases are not allowed to be stored.
Any organization receiving dairy products under the DPDP is prohibited from selling the
products back to commercial markets (Schenpf, 2014, p. 16). The level of margins since 2014
Farm Bill passage have been such that the DPDP has not been exercised.

IV. The 2018 Farm Bill and Dairy Subtitle: What Can we Expect?
We are likely to experience some change in Federal dairy policies under the next Farm Bill. The
consensus of the industry is that the MPP as currently configured is not providing the desired
level of risk protection. This may not be an accurate assessment given that we have had limited
opportunity for dairy farm operators to learn how to evaluate their future risk, especially that an
evaluation of dairy market conditions over a 15 month period is required.
The current structure of the MPP program is reflecting, in part, the budgetary concerns as to the
use of this unknown insurance product. The CBO budgeting of the initial program proposal
resulted in a revision of the ration to be 10% below the initially proposal. This results in a
decrease in the probability of receiving indemnities, ceteris paribus. Given the current policy
environment, the anticipation is that there will be very little new initiatives such as the
implementation of a deficiency payment program such as enacted with the MILC program.

IV.1 Option #1: Replace MPP with an LGM-Dairy Type of Program
One of the overall objectives of the 2014 Farm Bill was to promote increased individual initiated
risk management activities. A major criticism of the current MPP contract configuration is that it
provides little flexibility in risk management efforts. That is, only one fixed insurance contract
can be purchased and the insurance period is for the 12-month period starting January 1. There
is no mechanism to allow the dairy farm operator to adjust ones risk management position if
market conditions change over the 12-month coverage period. This inability to adjust strategy is
significant given the volatility of milk prices.
With the explicit MPP assumption that all feed is purchased in a national market, the level of
feed market risk being protected may not be representative of the actual risk faced by the
producer. The cost risk associated with feeding depends on the type of feed system used ranging
21

 from 100% grazing where most feed grains and forages are grown on-farm to 100% confinement
systems where all feed is purchased. The feed cost volatility faced by these two extreme farm
types clearly differ and would justify different risk management strategies.
There is significant seasonality in milk production. The degree of this seasonality is exacerbated
in warmer climates. Weldon et al. (2014) note that in Florida the seasonality in milk production
can be as much as 15% above the annual average during the spring and 15% below the annual
average during the heat of the summer. The MPP does not allow for such seasonality and the
insured production is spread evenly over the 12 month period of coverage. In contrast, milk
production seasonality may imply that the type of risk management plan may depend on the time
of year of coverage.
Both the MPP and LGM-Dairy programs are USDA supported systems with the risk
management objective of providing some minimum level of insured dairy margin.20 The 2012
Farm Bill prevents a dairy farm operator from participating in both programs simultaneously
even if there is no duplication of coverage of the months of production. . The programs differ
significantly in terms of the flexibility in insurance contract design. The LGM-Dairy program
allows for flexibility in insurance contract design and as such requires more decisions to be made
at insurance sign-up. It is unclear as to why participation in both programs is not possible even
when not allowing for duplicate production coverage.
From a policy (and budgetary) perspective, one of the main issues of providing a safety net to
U.S. dairy farms concerns potential program cost. This is especially the case for the MPP given
premiums are not set to be actuarially fair. It is unclear as to the MPP premiums have been
established given they do not change with changing market conditions. It is clear that the rates
are designed to benefit small dairy farms given the establishment of a two-tier rate structure that
depends on the minimum margin protected and the amount of milk being insured. The initial 4
million lbs insured under the MPP program are charged substantially lower premiums compared
to milk in excess of this amount.
With increased emphasis on individual decision maker risk management, a variety of pilot
livestock insurance programs have been made available by USDA’s Risk Management Agency
(RMA): Livestock Gross Margin (i.e., Cattle, Swine, Dairy) and Livestock Risk Protection, (i.e.,
LRP for Lamb, Feeder Cattle, Fed Cattle, Swine). LRP contracts are designed to protect against
risk associated with changes in livestock prices relative to expected values at sign-up. In
contrast, LGM systems are designed to protect against unforeseen reductions in gross margin
defined as selling price minus purchased feed costs per unit of production. These programs were
privately developed and are administered via USDA’s RMA.
As noted above, LGM-Dairy is an alternative dairy margin (i.e., milk value-feed costs)
management program. This program has a number of characteristics that, if adopted within the
20

The MPP is managed by the Agricultural Marketing Service (AMS) of USDA while the LGMDairy program is under the control of USDA’s Risk Management Agency (RMA).
22

 general MPP program, could make the MPP more effective. Appendix Table C1 provides a sideby-side comparison of the MPP and LGM-Dairy programs.
In 2007, the Federal Crop Insurance Corporation approved the establishment of LGM-Dairy.
This program became available in August 2008 for dairy producers in 31 states and expanded to
48 states in July 2010. At that time, premium subsidies were introduced (e.g., % of premium
paid by USDA) with relative subsidy increasing with higher insurance deductibles. Figure 15
provides an overview of the structure of the LGM-Dairy program. When viewing this structure
you will note the increased complexity of this system vs. MPP. Clearly there is a tradeoff
between program complexities vs. flexibilities. There is a higher degree of producer
involvement/choice in insurance contract design and premium determination. As such,
educating insurance providers, dairy farm operators and others on the appropriate use of this
program continues to be a challenge. Under LGM-Dairy an indemnity (insurance payment) at
the end of coverage period is the difference, if positive, between the expected gross margin
valued at insurance contract purchase and actual gross margins valued at insurance contract
expiration.

Figure 15: Structure of the LGM-Dairy Program
Under LGM-Dairy the evaluation of all expected revenues, expected feed costs and premiums
are based on 3 days’ worth of CME Class III, Corn and SBM futures/options contract settlement
prices that exist at contract purchase. Actual monthly revenues and feed costs are valued using 3
day’s futures settlement price averages prior to the last trading day associated with that month’s
23

 futures contract. In contrast to the use of traditional futures and options strategies, there are no
purchases of futures and options to offset the insurance position. The futures/options markets are
simply used for valuation purposes. The pre-subsidy contract premiums are set to be actuarially
sound plus an added 3%.
The system represented in Figure 15 is partitioned into two sections. The portion to the left of the
vertical dashed line shows the flow of information associated with development and net cost of a
particular contract design. The cost and level of protection are known at insurance sign-up given
the expected Class III milk, corn and SBM prices noted above. At sign-up the producer declares
that amount of corn and SBM equivalents used in production for each month. Like other
insurance policies, the producer can reduce the contract costs by increasing the deductible which
shows by how much the margin can decrease from the requested coverage before a payment is
forthcoming. Unlike the amount of milk insured, the producer is not required that all of the feed
used in milk production be declared for margin calculation. At the extreme where essentially no
feed costs are declared, the resulting LGM-Dairy margin is essentially a weighted average Class
III put option contract where the weights are each month’s share of the total amount of insured
milk.
The information on the right side of the vertical dashed line is used to provide a representation of
how the LGM-Dairy system establishes actual market conditions at the end of each contract
month, the likelihood of a payment probability (i.e., actual margin + deductible being less the
guaranteed minimum), and the contract’s forthcoming indemnity, if any.
Under LGM-Dairy the producer must decide on the amount of milk to insure which can vary
across month. The ration per cwt. of milk needs to be declared and can also vary across insured
months. Similar to usual insurance contracts, a deductible can be chosen so as to decrease
inherent
# of Policies
CWT Milk Insured
$1,000
Loss Ratio
%
Insurance
Indemcontract
IndemPer
LiabilTotal
IndemTotal
Sub.
Year
Sold
Total
Subsidy
nified
nified
Contract
ities
Prem
nity
Prem.
Prem.
costs.
Table 2
provides a
summary of
participation
in LGMDairy since
its

08-09
45
34
75.6
09-10
153
56
36.6
10-11
1412
24
1.7
11-12
1769
124
7.0
12-13
1697
221
13.0
13-14
1626
123
7.6
14-15
2090
445
21.3
15-16
1638
236
14.4
16-17
1638
14
0.9
Data as of July 27, 2017. Insurance Year

401,680
8,926
4,716
1,872,499 12,239 24,915
46,172,815 32,700 769,645
40,474,408 22,880 704,000
34,178,852 20,141 664,078
27,739,076 17,060 546,366
48,737,639 23,319 889,332
20,064,453 12,249 300,854
18,688,749 11,409 307,066
runs from July 1-June 30.

287 ---782 ---25,013 10,736
19,144 8,862
16,873 7,656
11,592 4,967
22,338 10,178
7,184 3,142
6,619 2,967

718
281
65
1,395
2,666
3,653
16,717
8,719
176

2.500
0.359
0.003
0.073
0.158
0.315
0.748
1.214
0.022

------0.005
0.136
0.289
0.551
1.375
2.157
0.048

Table 2: LGM-Dairy Participation Characteristics

establishment in 2008. In terms of the amount of milk insured, for 2016/17 insurance year,
LGM-Dairy insured less than 1% of U.S. milk production.

24

 IV.1.1 MPP vs. LGM-Dairy: What are the Differences in Milk and Feed
Prices Used?
The MPP and LGM-Dairy programs have essentially the same program goal: Establishment of a
minimum level of margin that can cover all variable costs and at least a portion of fixed costs.
Differences exist with respect to price series used for milk revenue and food cost evaluation.
Under MPP, the All-Milk price is used for revenue estimation while under LGM-Dairy, milk is
valued at its Class III use. Both of these prices can be considered cash prices. Although
expected milk prices under LGM-Dairy at sign-up are obtained from Class III futures settlement
prices. In contrast, the All-Milk price, obtained from USDA’s Agricultural Prices report,
represents an average cash price received for marketed milk regardless of its use. Over the 20002017 period the average basis between the U.S. average All-Milk and Class III price was
$1.45/cwt with a standard deviation of $0.82/cwt. There is significant seasonality in this basis
with the lowest values observed during summer months. The Jun-Aug average basis was
$1.05/cwt compared to $1.88/cwt during Nov-Jan.
In terms of feed costs, under the MPP the U.S. prices received for corn, soybeans and baled
alfalfa hay are used. That is there are cash prices. In contrast, under LGM-Dairy CME futures
prices are used to value corn and soybean meal equivalents at sign up and as the LGM-Dairy
contract matures.

IV.1.2 MPP vs. LGM-Dairy: Milk Production Flexibility
One of the main criticisms of the MPP program is its lack of flexibility in recognizing different
market conditions, production profiles and risk management objectives. Remember, under MPP,
producers insure production over the entire year by the same percentage across the fixed 12month contract. All producers are assumed to be feeding the same ration over the contract
lifetime. Seasonality of milk production is not recognized in the MPP. As can be seen in Figure
15, under LGM-Dairy the producer can vary not only the amount of production covered each
month but also percent of that farm’s verified production to be insured. This percentage can
range from 0% to 100% and these percentages can be month specific. Subject to funding, up to
12 LGM-Dairy contracts can be purchased yearly (one contract/month). Production associated
with a particular month can be insured using multiple contracts so long as no more than 100% of
verified monthly production is insured. This means that with changing market conditions, a farm
operator can augment previous contract coverages. A purchased contract can cover 1-10 months
of production starting in the 2nd month following contract purchase.

IV.1.3 MPP vs. LGM-Dairy: Feed Ration Definition
In contrast to the fixed MPP ration, under LGM-Dairy there is no limit on declared rations
except that all rations need to be defined by use of corn and SBM equivalents which and between
program-defined minimum and maximum amounts per cwt of milk.

25

 Unlike the level of milk production, the amount of feed used vs. rations declared in the LGMDairy contract are not audited. Given this characteristic, many producers use this program to
design an insurance contract that mimics a weighted average put option across months. This is
accomplished by declaring the ration as using minimum corn and SBM equivalents. Such a
configuration would be appropriate for a dairy operation that has limited feed market risk with
most feed requirements being met out of on-farm feed sources

IV.1.4 MPP vs. LGM-Dairy: Improved Ability to Control Insurance
Contract Costs
Under the MPP program, the only method that can be used to control insurance costs is to change
the target margin. Under LGM-Dairy the composition of that margin is subject to producer
choice and thus the same margin can be protected under a variety of insurance cost structures. In
addition, the producer can identify a deductible level that represents the change in margin that
has to occur before any indemnity will be warranted. Increasing the deductible reduces the
inherent risk associated with underwriting a particular contract. Our research has found that
changing the deductible from $0/cwt – $2.00/cwt contract costs can be reduced by more than
80% while the level of protected margin often is decreased by less than 20%.
There are unknown subsidies associated with the MPP given the fixity of insurance premiums
regardless of market conditions. There are two types of subsidies associated with LGM-Dairy.
There is an explicit premium subsidy of 18% – 50% depending on deductible which ranges from.
$0/cwt – $2.00/cwt in 10¢ increments. The minimum premium subsidy is 18% under a $0
deductible contract limit and increases to 50% for deductibles at or above $1.10/cwt.
There is a second subsidy associated with this program. The RMA pays the fees charged by
insurance providers. These charges vary from provider to provider. From conversations with
insurance providers, the charge of approximately 20% of unsubsidized premium is not
considered unusual.
It is my contention that there would still be demand for this product should these subsidies
disappear. Since its inception, there have been periods in which the demand for LGM-Dairy has
exceeded the program budget. During those times we continue to receive requests from
producers concerning the desire to purchase an insurance contract with the producer paying the
full cost. This may want to be considered an option for the MPP program to manage program
costs.21

IV.2 Option #2: Modification of the Current MPP
Instead of moving to an LGM-Dairy type of program there are other alternatives that may
improve protection generated by the MPP. Three of the general areas that could be modified

21

Unlike Multiple Peril Crop Insurance the private sector to this point has not offered margin
insurance contracts.
26

 include using region-specific prices, have shorter contract duration and allowing more flexibility
in overall contract design.
The use of U.S. average feed prices may not reflect the market based risk faced by many
producers both in terms of differences in local feed prices and dependence on purchased feeds.
To examine the difference in margins across states we use state specific All-Milk and alfalfa hay
prices in the calculation of state-specific margins. Due to the lack of data in all states, we used
corn and SBM prices from nearby states if not available for a particular state. In Table 3 we
display the proportion of months in which state specific margins fall within specific ranges over
the 2000-2017 period.
Percent of Months: 2000-2017
Area

Over the 18 year period,
U.S.
58% of the month’s MPP
NY
margins greater then
WI
$8/cwt. Using state specific
OH
ID
prices we find that
CA
Wisconsin had 69% of its
TX
margins greater than $8
NM
compared to 16% of months Table 3:

< $4
4.7%
4.7%
1.9%
4.3%
22.3%
28.0%
6.2%
17.1%

$4-$5
2.4%
1.9%
2.4%
1.9%
22.3%
20.4%
1.9%
16.6%

$5-$6
6.6%
8.1%
4.7%
4.7%
16.1%
14.7%
8.1%
16.6%

$6-$7
8.1%
11.8%
7.6%
8.1%
10.9%
13.3%
13.7%
14.7%

$7-$8
20.4%
20.9%
14.2%
13.7%
9.5%
8.1%
21.3%
14.2%

> $8
57.8%
52.6%
69.2%
67.3%
19.0%
15.6%
48.8%
20.9%

Distribution of Months Across Alternative Margin Values

in California. In contrast, California had 28% of its months with margins less than $4/cwt. U.S.
and Wisconsin simulations generated 5% and 2% of margins, respectively, being less than $4.00.
The main reason for the differences were due to the lower feed costs in the traditional dairy
states as the state specific All-Milk prices were relatively close in value. Given that we had to
use proxies for some of the costs, these results may not hold up with more accurate cost feed
price estimates.
In April 2017, the National Milk Producers Federation (NMPF) put forward a series of suggested
changes to the current MPP structure.22 These changes were to re-instate the original MPP feed
cost formula’s. Due to budget concerns, these feed costs were reduced by 10% from original
proposed levels. This effectively increases the calculated margins. The original MPP premiums
were based on the same methodology used to develop actuarially sound premiums for traditional
insurance products. These premiums were based on actual prices, feed costs and margins during
a period of higher feed costs and lower milk prices. The NMPF suggests keeping premiums at
levels that encourage program participation regardless of the implications of setting actuarially
sound premiums. The NMPF recommends that instead of MPP program payments being
determined by bi-monthly average margins, evaluate margins on a monthly basis. The bimonthly averaging of margins was adopted to reduce program costs during Farm Bill adoption.
A final NFPF proposal suggests that the USDA make changes to the MPP to improve the
complementarity with the LGM-Dairy program. This would require an increase in the funding
22

For a review of the NMPF proposal, refer to the following URL:
http://www.nmpf.org/margin-protection-program-2014-farm-bill .
27

 flexibility of LGM-Dairy. This program is a Risk Management Agency pilot program and, as
such, has a fixed budget set by statute rather than originating the general RMA budget. Allowing
farm milk not covered by MPP enrollment to be insured under LGM-Dairy would greatly
increase program complementarities.

IV.2 Option #3: Creation of a Revenue Protection Program: The American
Farm Bureau Proposal
There exists significant differences in
the average amount of revenue
generated per cow (Figure 17). The
American Farm Bureau has proposed
the development of a stand alone
Dairy Revenue Protection (Dairy-RP)
insurance policy.23 Although
developed as a private insurance
program, something similar could be
adopted in the Dairy Sub-Title

Figure 17: 2016 Average Revenue Per Milk Cow

Dairy-RP would offer insurance
protection on quarterly revenue risk (price and/or quantity determined) in contrast to margin risk
encompassed by the MPP in its current form.
Under the Dairy-RP program, there would be two methods for determining per cwt milk value:
Class Price vs. Component Valuation. Under the Class Price option, dairy farmers select a
combination of Chicago Mercantile Exchange milk futures for Class III and IV milk that best
match determines the producer’s mailbox price. Under the Component Option, farmers will be
able to select revenue protection based on milk valuation determined by component (vs. milk
cwt) production, i.e., butterfat, protein, and other milk solids. The producer can select the desired
butterfat percentage and protein percentage to insure. The resulting component levels are
multiplied by implied CME-based per pound valuations.
This program could be designed to require a limited number of decisions while at the same time
have some flexibility in contract design. For example, under the current version of the proposed
Dairy-RP, the decisions that need to be made include the method used to value quarterly milk
production, amount of milk production to cover, level of coverage (between 70%-90% of the
revenue guarantee), and quarterly contracts he/she wishes to be purchased.

IV.2 Option #4: Replace MPP with a Target Milk Price Program
The American Farm Bureau has suggested that one policy option for the Dairy Subtitle would be
to replace the MPP with a target milk price program similar to the MILC program repealed by
23

For a more complete review of this proposed program refer to the following URL:
https://www.fb.org/analysis/what-is-dairy-revenue-protection
28

 the 2014 Farm Bill (AFBF, 2016) Under such a program, producers could receive protection
against milk price declines below a market-based or historical average. Regardless of the milk
price used as the target, an option for the program could be the ability to purchase additional
protection above the minimum price difference.
Under the final version of the MILC program prior to its repeal, MILC payments were based on
45% of the difference between the Boston Class I price and $16.94/cwt. A feed adjuster was
calculated via the price movements of the corn, soybean and alfalfa hay used in a 16% protein
mixed dairy feed.24 If feed prices exceeded $7.35/cwt of milk, the $16.94 trigger price was
adjusted by the percentage that the feed price exceeded $7.35. This program had a limit of 2.985
million lb. that could receive MILC payments. Using the 2016 U.S. average annual milk
yield/cow of 22,770 lbs., this limit represents 100% production of an operation with 131 cow
milking herd. In 2016, the average number of milking cows per farm in Wisconsin was 134. In
California, the average number of cows per farm in 2016 was 1,217 cows.
Issues that arose with the use of the MILC program will need to be addressed should a similar
program be re-introduced. What milk price should be used as the target? Should regional or
U.S. average prices be the target price? Should there be a feed cost adjuster that would increase
the target price with higher feed costs above some predefined level. An important question that
would need to be addressed is the disproportional effect of having relatively low maximum milk
amounts eligible to receive deficiency payments. Budgetary considerations would have a very
significant influence on program configuration and extent of coverage.

V. The Dairy Industry Without Federal Orders: An Unlikely Scenario
One of the distinguishing characteristics of the U.S. dairy industry is the existence of the
FMMO’s. As noted above, these orders regulate transactions between producers of raw milk
and manufacturing firms that transform this milk into beverage or manufactured dairy products.
FMMOs have existed in one form or another since the late 1930’s. The question remains as to
the functioning of a dairy industry without them. In order to assess the possible impacts of such
elimination we need to have a clear understanding of the basic FMMO functions and to
differentiate the impacts across dairy industry participants. Siebert et al (1997) provides an
analysis of FMMO elimination impacts on:
− Dairy farms. In 2015 there were 36,000 dairy farms covered within the FMMO system.
− Cooperatives. Today, dairy cooperatives bottle milk and produce a variety of dairy
products. Dairy marketing cooperatives do not take ownership or process any milk but
simply represent its members in the negotiation for the sale of their milk to proprietary
firms.

24

USDA defines a 16% mixed dairy ration as being composed (by weight) of 51% corn, 8%
soybeans, and 41% alfalfa.
29

 − Dairy product manufacturers. Given the expense of shipping raw milk, dairy bottling
and manufacturing tend to be located relatively close to raw milk supplies.
− Consumers. With 13-15% of U.S. milk solids exported annually, the definition of
consumers must include not only domestic consumers but also our export markets.
Siebert et al’s (1997) assessment of elimination of specific FMMO functions was done prior to
the passage of the Farm Security and Rural Investment Act of 2002. These assessments pertain
to the net impact on each participant group as a whole (Table 4). As they note, for certain
functions, there could be different impacts (both positive and negative) across Federal Orders
and within an Order across class of farmer or processor. We have augmented their original table
to highlight the possibility of differ impacts across Federal Orders.

Regulatory Function
Eliminated
Minimum Classified Prices
Pool Uniform Prices
Price Diffentials, Zone Credits
or Transportation Credits
Timely Payment Enforcement
Milk Payment Audits
Compensatory Payments
Loss of Data

Impacted Dairy Industry Participant
Producers

Cooperatives

Processors

Consumers

−*
−*
+/−
−
−
+/−
−

−*
+/−
+/−
−
−
+/−
−

+/−
+/−
+/−
+
+
+/−
+

+**
+**
+/−
+
+
+/−
−

Source: Siebert et al. (1997)
Table 4: Possible Dairy Industry Participant Impacts with FMMO Elimination

V.1 Elimination of Minimum Classified Pricing
Without minimum milk prices, an alternative method of price discovery would have to fill the
void. Stephenson (2010) addresses the question of what could replace FMMO price discovery
services. Alternatives include a futures market based system where the contract weighted
average price for milk in the last month of a contract is traded. Economic formulas could be
used to set prices so as to cover production costs, maintain parity or move with major input costs.
Similar to the pre-1995 Minnesota-Wisconsin (M-W) milk prices could be determined from a
survey of the prices paid by unregulated milk where plants have access to Class I markets and
could receive a pool draw. They would be allowed to negotiate a manufactured milk price.
Alternatively, all plants, even Class I plants, would negotiate the price of milk from producers.
All plants associated with the pool would have a pool draw. Class I plants might only make an
equalization payment into the pool.

30

 Another replacement could obtained from a national milk spot market. Any buyer or seller could
make available a load of milk F.O.B. the buyer’s or seller’s location. Nearby plants or sellers
could bid on the load and when a transaction takes place, the value of milk at that location on
that day is established. A monthly price could be established and announced from a weighted
average sale of product from around the country.
Given the price discrimination system embedded in FMMO classified pricing one would expect
beverage milk price to decrease and the price of manufacturing milk to increase under the
elimination of Federal Orders. The size of these changes would depend on the sensitivity of
product demand to price changes. Historically, it has been assumed beverage milk own-price
elasticity is less than other manufactured products. Beverage milk price response may be more
than previously thought given the (i) decrease in the traditional breakfast experience; (ii)
proliferation of products that compete with fluid milk; and (iii) the continuing importance in food
purchased -away-from-home as a source of daily food consumption.
It is likely that fluid milk and manufactured dairy product demand will continue to exhibit ownprice inelastic characteristics. Chounaird et al (2010) using a demand systems approach and
grocery store scanner data obtain own price elasticities that are statistically significant, negative
and inelastic for the fluid milk and manufactured dairy products analyzed. In contrast to
historical dairy product demand characteristics, the authors found that in many cases the ownprice elasticity for beverage milk was greater than manufactured dairy products.
With higher manufacturing milk prices and inelastic product demand, the overall level of
revenue obtained from the demand for these products will increase. The level of beverage milk
demand will increase but at less than proportional to price decrease meaning that the beverage
revenue would decline. Regions that have a high Class I milk utilization would be negatively
impacted. The opposite would hold true for Orders with minimal Class I utilization. With 84%
of raw milk being used for Class I purposes in the Florida Order a decrease in Class I prices
could result in significant dairy revenue declines. With 81% of milk being used for cheese
production and only 10% for Class I purposes in the Upper Midwest, this region could
experience an increase in total dairy revenue.
Another impact of the elimination of minimum classified prices could be an increase in the
frequency of price changes. Besides a decrease in purchase agreement lengths, there could be an
increase in the seasonal price impacts of surplus supply during the spring and reduced supply
during winter periods. The overall seasonal supply impacts will depend on how they match the
seasonal nature of the demand for dairy products.

V.2 Elimination of Pooled Blend Prices
Under the FMMO pricing system, producers in a particular Order will receive the same
regulated minimum price regardless of how that particular producer’s milk is used, ceteris
paribus. This pooling function will disappear with the elimination of FMMO’s. The losers of
this elimination will be dairy product manufacturers and the winners will be Class I bottlers.
31

 Without the pooling function processors (primary Class I processors) will no longer be required
to pay into the pool equalization fund and dairy product manufactures would no longer have the
ability to draw from the fund.

V.3 Elimination of Price Differentials, Zone Credits and Transportation
Credits
The elimination of price differentials and credits will impact both producers and processors. The
impacts will vary depending on where the producer/processor is located. Historically these
policies have been used to provide incentives to move raw milk supplies located in rural areas to
processing plants in more urban environments. With their elimination, market forces will have
more of an impact on spatial price relationships. The relative position of producers, processors
and consumers will determine who gains and who loses from the elimination of spatial-based
premiums/credits. Depending on how the market values Class I milk will determine the net
impact on high Class I utilization regions given that the above price differentials only apply to
Class I milk. The significant differences in Class I utilization noted previously will result in
substantial regional ima

V.4 Elimination of Timely Payments from Processors to Producers
FMMO’s typically require payment for raw milk to occur within 30 days of delivery to the first
handler. Like any other contract condition the timely payment from processors can be made
part of any purchase agreement.

V.5 Elimination of Milk Payment Audits
FMMO administrators produce monthly audits of the payments made by processors to dairy farm
operators. The results of these audits are shown by the monthly Market Administrator’s reports
that are generated by all FMMO’s. This auditing function will be needed depending on the price
discovery and valuation system that replaces the current Order pricing and pooling requirements.

V.6 No Compensatory Payments
FMMO’s have instituted a payment system that provides a disincentive for fluid milk bottlers to
reconstitute dry milk from being shipped into an Order. Any charges incurred represents a
revenue source to the pool. Without a FMMO overseeing the market there will be no
disincentive.

VI. Concluding Comments
Starting in early Spring, 2017 both U.S. Senate and House of Representatives began the task of
developing the foundation of the next Farm Bill. In terms of the Dairy Subtitle, on July 20th the
Senate Appropriations Committee, under the leadership of Senators Cochran and Leahy,
included a set of modifications to the current configuration of the MPP in its mark-up of the
FY2018 agricultural appropriations. This proposal may form the foundation of a revised MPP
under the next Farm Bill.
Previously we reviewed the primary changes being saught by the NMPF concerning changes to
the MPP….. The AFBF’s Dairy Subtitle recommendations for the 2018 Farm Bill is to improve
32

 the MPP program (AFBF, 2017). In a July 2017 letter to the House and Senate Agriculture
Committee Chairman and Ranking Committee members the AFBF provided the following
suggestions for the future structure of the MPP:
− Continue to treat annual production of 4 million lbs. of milk differently than more than 4
million pounds;
− Increase the administrative fee from $100 to $300 for catastrophic margin protection;
− Reduce premium rates 25% for the first 4 million pounds of covered milk;
− Increase premium rates 25% for coverage above 4 million pounds;
− Decrease the maximum protected margin from $8.00 to $7.00/cwt;
− Increase the catastrophic margin level from $4.00 to $4.50/cwt;
− Increase the feed ration formula by 10%.
Besides the above, the AFBF has suggested that under the 2018 Farm Bill that the annual budget
for pilot Risk Management Agency livestock insurance products to be increased from $20
million annual cap on livestock insurance products to $75 million. Although other livestock
types are included in these pilot programs, expenditures for LGM-Dairy program has historically
used the largest portion of this budget.
On July 20, 2017 the Senate Agricultural Appropriations Committee approved a 2018
Agricultural Appropriations bill that suggested significant changes to the dairy and cotton Farm
Bill programs (Ag. Appropriations Committee, 2017). In terms of the dairy component, these
changes focused on improving the MPP’s effectiveness and encouraging producers to purchase
contracts guaranteeing more than catastrophic margins. Some of the dairy policy
recommendations follow quite closely with those proposed by the NMPF noted above.25 For
example, similar to the NMPF proposal, one suggested change was to move to monthly
indemnity determination.
As noted above, under the
Tier I
Tier I vs Tier II Ratio
Margin
Tier II
current MPP there are two
Current Proposed % Change
Current Proposed
premium schedules, one for
$4.00
$0.000
$0.000
----$0.000
--------the first 4 million lbs of
$4.50
$0.010
$0.000
-100%
$0.020
0.500
----insured milk (i.e., Tier I) and
$5.00
$0.025
$0.000
-100%
$0.040
0.625
----$5.50
$0.040
$0.009
-78%
$0.100
0.400
0.090
a second schedule for insured
$6.00
$0.055
$0.017
-69%
$0.155
0.355
0.110
milk in excess of 4 million lbs
$6.50
$0.090
$0.043
-52%
$0.290
0.310
0.148
(i.e., Tier II). The Committee
$7.00
$0.217
$0.068
-69%
$0.830
0.261
0.082
is proposing to reduce the
$7.50
$0.300
$0.094
-69%
$1.060
0.283
0.089
Tier I premiums and increase
$8.00
$0.475
$0.153
-68%
$1.360
0.349
0.113
the amount of production that Table 9. Proposed Premiums Under Modified MPP
could be covered by these
premiums from 4 to 5 million lbs. The increased subsidization of premiums has as its objective
to increase the utilization of higher than catastrophic coverage). With the median U.S. dairy herd
25

For a detailed review of the Committee’s recommendations refer to Newton(2017).
33

 size of more than 220 cows, the 5 million limit is more reflective of this size of operation. The
above table shows the current vs. proposed Tier I and II MPP premiums.
An analysis undertaken by Newton (2017) shows that with these changes there would have been
significant changes in the net benefit of MPP participation for higher level covering in 2016
(Figure 16).

Figure 16: Impact of Ag. Appropriation Committee’s MPP Premium Changes and
Monthly Indemnity Determination Recommendations
Other suggestions include a waiving of the $100 administrative fee being waived for underserved
producers and to have the USDA National Agricultural Statistics Service is collect premium
alfalfa hay prices as these are not currently collected. It should be noted that the committee did
not recommend an increase in the calculation of feed costs probably due to budgetary reasons.
The International Dairy Foods Association (IDFA) represents the U.S. dairy manufacturing,
dairy marketing and their suppliers. The membership consists of more than 500 firms and is
composed of three organizations: Milk Industry Foundation, National Cheese Institute and
International Ice Cream Association.
On July 24th, IDFA CEO Michael Dykes provide testimony to the Senate Committee on
Agriculture, Nutrition, and Forestry concerning the upcoming Farm Bill considerations (Dykes,
2017). Contained in his testimony was that “First and foremost, the dairy industry needs better
mechanisms for risk management – and that’s on both the farm and processor side. The IDFA
supports change to the MPP to make it more effective as a risk management tool. Similarly,
expanding funding limits to the LGM-Dairy program should be made part of the Dairy Sub-title.
Currently dairy product manufacturers can enter into forward contracts and dairy farmers and
satisfy Federal Order minimum price requirements for Class II, III and IV products. The IDFA
34

 would like to see this program made permanent instead of being subject to renewal under
consecutive Farm Bills. Their contention is that as the end of a Farm Bill approaches, entering
into forward contracts becomes problematic and a less effective risk management alternative.
They would also like to have this program extended to Class I milk. Finally, even with forward
contracts, a plant is required to participate in the pooling process as if the minimum Federal
Order prices were paid. If the first handler is a Class I plant then the plant typically has to pay
into the pool.
As noted IDFA’s testimony: “In addition to allowing all classes of milk to establish forward
price contracts, many other aspects of the current milk pricing regulatory system should be
reviewed in the context of today’s consumer trends and global marketplace. The system’s
underlying assumption that beverage milk can bear a significantly higher price burden may no
longer be accurate in today’s highly competitive beverage market in which fluid milk sales
continue to decline”.

35