About two-thirds of Pennsylvania is in Federal Milk Marketing Orders. Under the FMMO, the USDA establishes a producer minimum price for milk delivered in the FMMO.
The process of pricing begins with an understanding of the “Three Cs” of FMMO pricing:
• Commodity — A collective term for dairy-based products traded on markets around the world, such as butter, nonfat dry milk and dry whey.
• Component — Particles contained in fluid milk that are used in pricing, such as butterfat, proteins and other milk solids.
• Class — Designation of milk by its end use. Class 1 is fluid milk and milk beverages, Class 2 is soft manufactured products such as cottage cheese and yogurt, Class 3 is hard cheeses, and Class 4 includes butter and dry products such as nonfat dry milk.
Around the fifth day of each month, USDA’s Agricultural Marketing Service publishes surveyed commodity prices: cheese, butter, dry whey and nonfat dry milk, specifically. The prices are in the form of weighted averages for each commodity and become the basis for the second step in pricing milk, which is to determine the component value of milk.
For components, formulas calculate protein prices from cheese and butter prices, butterfat prices from butter prices, other solids prices from dry whey prices, and nonfat solids prices from nonfat dry milk prices.
In our next article, we will look at how the component prices described above are combined with other factors to derive class pricing. Upcoming articles will address Pennsylvania-specific milk pricing.
Carol A. Hardbarger is a consumer member of the Pennsylvania Milk Marketing Board. Her series of articles, to be published regularly in Lancaster Farming, is intended to address milk price confusion.