Dairy groups across the United States are currently working on proposals to overhaul the Federal Milk Marketing Orders.

For years, the orders have put Midwestern dairy producers at a significant pricing disadvantage to their counterparts in other areas of the country. That is because this complex marketing system pays producers in states in the northeast and southeast United States, who predominantly produce fluid milk, more than producers in states like South Dakota and Minnesota, where the milk is largely used for manufactured dairy products such as cheese.

Marin Bozic is an assistant professor in dairy foods marketing economics in the Department of Applied Economics at the University of Minnesota. He said as Congress prepares to write the 2023 farm bill, he is proposing sweeping changes to the way milk is priced.

Bozic believes the FMMOs are no longer effective because fluid milk sales are not that strong anymore. The foundation of Bozic’s proposal looks at rebuilding trust between dairy producers and milk buyers through a Milk Check Transparency Report.

“Which is a way for dairy producers to understand better their milk check and to understand better how they are being paid verses others in the region are receiving,” he said.

Bozic said the industry also needs legislation to mandate fairness in milk contracting.

“Meaning that when a producer and their buyer have a contract for selling milk, that contract should have a certain structure and it should be in writing,” he explained.

Beyond that he says if a processor no longer wants to buy an operation’s milk, they should give at least six month’s notice so that the dairy producer can find another buyer.

Another part of his regulatory change proposal also prohibits contracts where dairy buyers require exclusivity and impose volume limits at the same time, which he says is a practice taking place today.

“If I am a buyer and you are a dairy producer I can say if you want to ship your milk to me, I am going to buy it, but you’re not allowed to work with anyone else, you only work with me and that’s OK. Then I cannot come back to you and say you can only work with me but I’m not going to buy all the milk you have I’m only going to buy a certain portion of your milk, or I am going to buy all your milk today, but you’re not allowed to grow,” he said.

He said if a processor is not allowing an operation to expand to reap efficiencies, then they have to allow the dairy producer to ship to multiple milk buyers.

South Dakota Dairy Producers Association President Marv Post said his organization is part of a coalition of Midwestern dairy groups asking for a wholesale rewrite of the FMMOs. The coalition has commissioned a study of the pricing system.

“We found out that if you change a little bit in one place, it’s such a big document that it has unintended consequences later on,” he said.

Post said the orders are outdated and need to be modernized and that came to light in 2020 during the pandemic.

“That is what has driven this after the COVID and the negative (Producer Price Differentials) that we saw for Class I milk,” he said. “So let’s take a wholesale look at it.”

The Producer Price Differential, or PPD, is the remaining market value of producer milk after accounting for the component values. To determine each FMMO PPD, the difference between the component and classified value of milk in the pool is divided by the total pounds pooled on the FMMO.

Bozic said as producers in the I-29 Corridor look to grow, new FMMOs would provide the framework for a new social contract between dairy producers and dairy manufacturers. He said this way no one would feel taken advantage of and dairy producers would be better able to manage their risk because they know what the expectations are.

Post said once the new rules are done, they need to be agreed upon by all dairy producers. In order to accomplish that, the FMMO will need to be changed so that they don’t disadvantage producers in the Midwest.

“So that it works for all parts of the country and that we can all use it in our areas,” Post added.

Bozic expects likely debate on this issue in Congress and among the industry in the next three to four months.