Dairy Processing - April 2021 - 62

COMMODITIES OUTLOOK

PRICE

formula debate
Processors may not be excited about changing Class I milk prices ... again.

D

airy farmers want their $700 million back from milk
processors. Most dairy farmers, and nearly all milk
bottling plants, are part of a Federal Milk Marketing
Order (FMMO) which means the minimum price that a dairy
plant pays back to the farmer is determined by a complicated
set of formulas each month. One of those formulas, the one
for bottled milk, changed in May 2019 and the new formula
has returned about $711.5 million dollars less to the farmers
than they would have received with the old price formula.
Now there is a push to change the price formula again.
There are four classes of milk in the FMMO system. There
is no physical difference in the milk, the class only refers to
the price a plant has to pay. Class II milk goes into soft dairy
products like yogurt, ice cream and cream cheese. Class III

62 APR 2021 | DAIRYPROCESSING.COM

milk goes into cheeses like Cheddar and mozzarella. Class IV
milk is butter and nonfat dry milk (NFDM). Class I milk goes
into bottles.
A priority of the FMMO system is to make sure there is
always enough Class I milk available to bottlers throughout
the country. One way to achieve that is to ensure the Class
I milk price is always the highest price. That way any
cooperative or farmer with milk to sell will sell it to the
bottling plant before they consider selling it to other plants.
For that reason, the Class I milk price used to be priced as the
" higher-of " the Class III or the Class IV price. That way, Class I
would always be the highest priced milk.
The old pricing formula, based on the higher-of, made
it hard for processors (and farmers) to hedge Class I milk.

©Goodpics - stock.adobe.com

by Nate Donnay | nate.donnay@stonex.com



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Dairy Processing - April 2021

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