D A I R Y I n i t i a t i v e s N E W S L E T T E R
V o l u m e 8 I s s u e 2 F a l l 1 9 9 9

Milk Marketing Orders and Dairy Compacts

Why the Upper Midwest Concern?

BOB CROPP, Center for Cooperatives, University of Wisconsin-Madison

For almost 10 years, Upper Midwest dairy interests have been pushing for changes in the federal milk marketing order system. Recently there has been major concern over the expansion of dairy compacts. Other regions of the country have not raised similar concerns. What is it with the Upper Midwest?

The Upper Midwest dairy industry depends heavily upon the manufacturing and marketing of dairy products. About 90 percent of milk produced in Wisconsin and Minnesota is used for manufactured dairy products, primarily cheese. The price manufacturing milk plants can pay dairy farmers for milk depends on the prices of the dairy products made and sold. Thus, any milk pricing program that affects the prices of manufactured dairy products affects Upper Midwest producers.

Federal milk marketing orders seek to ensure that consumers have an adequate supply of Grade A milk to drink, encourage orderly marketing, and provide fair prices to dairy farmers. These objectives are accomplished by classified pricing and pooling provisions. Classified pricing sets minimum prices milk plants (called handlers) must pay farmers for milk based on how it is used (class). There are four classes of milk: Class I (beverage), Class II (soft manufactured dairy products), Class III (cheese), and Class IV (nonfat dry milk). The Basic Formula Price (BFP) is used to set the minimum price of Class III milk and moves the Class II and Class I prices. The BFP is an estimate of the average price paid to dairy farmers by Minnesota and Wisconsin manufacturing plants for Grade B milk. The Class IV price is determined under a product price formula.

The pricing controversy has been mainly over the Class I price. In the early 1960s, Eau Claire, Wisconsin, was chosen as the basing point for Class I milk (i.e., a Class I differential would be added to the BFP with distance from Eau Claire). This made sense at the time, because often the southern and southeastern United States were short of Grade A milk for fluid purposes while Wisconsin had enough to share. The differential would partially compensate for the cost to move the milk to where it was needed.

Since the 1960s, regional shifts in milk production and improved transportation have reduced the economic rationale for the differentials. At the same time, the differentials have encouraged milk production in excess of fluid needs in some regions, resulting in an increase in the manufacture of dairy products that compete with those produced in the Upper Midwest and consequently lower milk prices paid to dairy farmers in Minnesota and Wisconsin.

The Federal Agriculture Improvement and Reform Act of 1996 instructed the U.S. Secretary of Agriculture to consider reforming federal milk marketing orders. The Secretary issued a final rule on April 2, 1999. The rule responds to concerns of the Upper Midwest. It flattens the class I price surface. It also replaces the BFP with true multiple component pricing (MCP)--an improvement over existing MCP programs--and advance pricing of butterfat for Class I handlers. While the final rule does not go as far as some in the Upper Midwest wanted, it is definitely a move in the right direction. However, regions where Class I differentials are lowered are not happy. The final rule was approved in August. Implementation was scheduled for October 1, but a federal district court judge in Vermont has issued a temporary stay.

The 1996 act also authorized a Northeast Dairy Compact among the six New England states until the federal order reform is implemented. There have been aggressive political attempts to extend and expand the NE Compact and to authorize a Southeast/Southern Compact.

Why are dairy compacts bad for the Upper Midwest? Compacts seek to increase the price paid to dairy farmers within the compact region by setting the Class I price within the compact area higher than the federal order Class I price. Resulting additional milk production and possible lower beverage milk sales due to higher consumer prices for beverage milk means the production of more dairy products. And more dairy products mean lower milk prices paid to Minnesota and Wisconsin farmers.

Why doesn't the Upper Midwest form its own dairy compact? Compacts only increase the price of milk for fluid purposes. Prices cannot be increased in a given region for milk used for manufactured products because these products must compete on a national market. Since only a small percentage of Minnesota and Wisconsin milk is used for fluid purposes, little benefit is gained from increasing Class I prices.

D A I R Y I n i t i a t i v e s N E W S L E T T E R
Volume 8 Issue 2 Fall 1999