HTML _ 97-322 - Federal Milk Marketing Orders: A Primer
6-Mar-1997; Ralph M. Chite; 8 p.

Abstract: Federal milk marketing orders, which are administered by the U.S. Department of Agriculture's Agricultural Marketing Service, were instituted in the 1930s to promote orderly marketing conditions by, among other things, applying a uniform system of classified pricing throughout the market. Federal milk orders regulate handlers that sell milk or milk products within an order region, by requiring them to pay not less than an established minimum price for the Grade A milk they purchase from dairy producers, depending on how the milk is used. This classified pricing system requires handlers to pay a higher price for milk used for fluid consumption (Class I) than for milk used in manufactured dairy products such as yogurt, ice cream, cheese, butter and nonfat dry milk (Class II, Class III and Class III-A products). The minimum price paid for Class I milk varies by order region and is generally higher the more distant a region is located from the Upper Midwest (Wisconsin and Minnesota). This distance differential was designed to make it profitable for Upper Midwest producers to ship their surplus milk to deficit markets and to avoid shortages in deficit regions. However, many producer groups in the Upper Midwest claim that the higher minimum prices dictated by Federal orders in non-traditional dairying regions such as the Southeast encourage excess local production and discourage the movement of surplus milk from other regions. The 1996 farm bill requires a reduction in the number of milk marketing order regions from the current 32, to at least 10 but no more than 14 -- and gives USDA three years (until April 1999) to administratively achieve this goal using informal rulemaking procedures. On December 2, 1996, USDA announced its preliminary merger plans which would consolidate the number of order regions to 10. The next step in the consolidation process is for USDA to propose a pricing structure for the consolidated regions, including details on how Class I milk would be priced. Concurrently, USDA is considering a replacement to the current basic formula price (BFP), which serves as the base price for all farm milk priced under federal orders. Most policymakers agree that the current BFP needs to be revised because it depends on a survey of prices of Grade B milk, which currently makes up less than 5 percent of all milk produced. Some groups also question the use of the National Cheese Exchange as a component in the BFP, saying that it contributes to farm milk price volatility. The 1996 farm bill also granted congressional approval of a Northeast dairy compact, which allows the six New England states to create an interstate commission to set a minimum farm milk price above the federal order minimum price. The compact expires at the same time that federal order consolidation is completed. However, some opponents are seeking to rescind congressional approval of the compact. (See CRS Issue Brief IB97011 for recent developments.) [read report]

Topics: Agriculture

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