(School Affiliation)
Abstract
Federal milk marketing orders (FMMO) hoist prices of fluid milk produce and decrease the values of manufactured dairy goods for example cheese and ice cream. What consequences do the prices alterations have on the welfare of a variety of groups of customers? Do the milk marketing orders favour the wealthy over the unfortunate? To vividly answer these questions it is better to have an understanding of the effect of Federal Milk marketing orders on possible Farm Milk Processing. This paper gives an overview of facts about the milk marketing orders presenting an understanding of it effects.
Introduction
Farmers and entrepreneurs considering a milk processing enterprise should not overlook implications of the Milk Marketing Orders. This publication does not attempt to explain all of the workings of the Federal Orders system; it is intended to provide an investigation and explanation of some of the impacts and ramifications of the agricultural marketing Orders on a dairy farm enterprise that might consider milk processing as a value-added enterprise.
Although often described as a complex program, the Milk Marketing Orders system is simply a way to ensure that dairy farmers are paid relatively uniform prices for their product. The agricultural marketing Orders program, in spirit, institutes a minimum wage for dairy manufacturers within a given geographic region, although, the level of that wage does differ consistent with the supply and demand market forces that farmers have to contend with on a regular basis. Owing to the exclusively consumable nature of fluid milk, and the truth that milk flows from cows to buyers on a day after day basis, the marketing scheme for the product must be susceptible to the requirements of both farmers and consumers. AMOs are employed to stabilize the procedure of buying and selling of fluid milk, in order that farmers, processors, and consumers can have a secure, dependable, and reasonable supply of milk.
Background of federal orders
The agricultural Marketing Orders system is a regulatory function administered by the USDA. The Orders have evolved significantly since their first legislative introduction in 1937. The purpose of the Orders is to stabilize markets by placing certain requirements on the pricing and handling of milk in the area it covers. An Order regulates 11 regions in the US. Regions that are not subject to a Federal Agricultural Order have a state milk marketing order, such is the case in California, or may be unregulated. Two Federal Orders actually cover different parts of Tennessee; the Appalachian Order covers the 33 easternmost counties and the South-eastern Order covers the remaining 62 westernmost counties. Regulations and the computation of prices do vary be Federal Agricultural marketing Order so potential value-added milk processing enterprises should specifically evaluate the regulations of the Order governing their particular area. The Order specific details in this paper are based on the Appalachian Order for explanation purposes.
The Federal Orders require milk handlers in a marketing area to pay dairy farmers (producers) no less than certain minimum prices for fluid milk. The price for class 2, 3 and 4 milk is the same under all Federal Orders. Class 1 prices are computed each month for each marketing area based on National Agricultural Statistics Service (NASS) released prices for milk used in manufactured products. The Federal Orders require that a plant’s usage value for milk be combined with other plants usage value (pooled) and each producer (or cooperative) be paid on the basis of a uniform/blend/average price. This blend price represents an average of the value of milk in all uses (fluid milk, cottage cheese, ice cream, cheese, butter, ect.).
The Federal Milk Marketing Orders are concerned primarily with orderly marketing of raw Grade A milk from producer to processor. Classified pricing and pooling are the two key elements for the Federal Milk Orders. A major function of the Federal Orders is computing minimum prices for raw Grade A milk that handlers must pay to dairy farmers. The Federal Milk Marketing Orders system has been developed to pool the proceeds of all qualified milk sales (regardless of the actual end use of an individual producer’s milk) in order to ensure that all producers in an area receive a uniform price for their milk – regardless of how their milk was used.
The Federal Agricultural marketing orders assure producers or their cooperative agents that they will receive a minimum blended price for their milk throughout the year and addresses consumer needs in maintaining an adequate supply of fresh fluid milk to meet their needs throughout the year. Every Milk Marketing Order includes the fundamentals of (1) a confidential price plan, (2) a scheme of minimum prices, (3) phrases of the order, and (4) stipulations for overseeing the Order.
1) Classified price plan: A classified price plan provides different classes and prices for milk of different uses. Milk employed in fluid goods is placed in Class 1, the highest priced class. Milk employed to create ice cream, yogurt, butter, cheese, non-fat dry milk, and other produced products is placed in Class 2 or other lower-priced classes.
2) System of minimum prices: Each Milk Marketing Order publishes minimum prices for the various use classes. Prices are computed for skim milk and butterfat content in the Southeast Order. Some Orders comprise the protein content of the milk as a pricing component; protein value directly effects cheese and powder yields that are critical in manufacturing markets. Because Federal Orders are designed to reflect the surplus or deficit situations of the milk supply of a geographic region, location adjustments are included in the pricing structure. The Orders provide that producers be paid a uniform or average price. This price is calculated by dividing all classified value of producer milk pooled in the Order by the total producer pounds to generate the blend price.
3) Terms of Federal Orders: The terms of an Order are developed through public participation in hearings held by AMS prior to the issuance of the Order. The public hearings offer an opportunity for all parties to bring their interests to the attention of USDA and to show the effect of any proposed Federal Milk Marketing Orders or amendments. During these hearings, producers, handlers, and consumers may present information or proposals regarding the need for a Federal Order and what its provisions should include. Dairy Programs analyze hearing records, recommend the terms and provisions of Federal Milk Marketing Orders, and describe their intent and purpose. If two-thirds of the voting producers approve a Federal Order, the Secretary then approves and issues the Order.
4) Overseing the Federal Orders: A Milk Market manager manages each Order. The duties performed by the market administrator are specified in each Order. Each month the Market Administrator computes and publishes class and uniform prices as well as other required prices. The market administrator verifies each handler's reports and payments through an audit program. The market administrator prepares statistics and information concerning operations under the Federal Order, keeps records and books that clearly reflect the transactions provided for in the Order, and disseminates this information to the public.
The market administrator also receives and investigates any complaints of violations of the Order. The market administrator's staff expenses are paid by an administrative fund derived from assessments on regulated handlers. Most Federal Orders also provide for a marketing service payment that covers the expense of providing market information and for the verification of weights, sampling, and testing of milk received from producers who are not members of qualified cooperatives that are performing such services. The cost of these services is borne by the producers.
Details of federal orders
While the Federal Orders can be very complex to understand and have numerous intricate provisions, it is important to keep in mind that the Orders essentially set a minimum price that processors will pay and that producers will receive for raw fluid milk.
The Federal Milk Marketing Orders (and all their provisions) apply to any dairy farm that will be paid for fluid milk based on the Federal milk pricing system. It is estimated that about 70 percent of all milk produced in the United States falls under the regulation of a Federal Milk Order. The regulations and provisions of these Orders have been approved by a 2/3 majority of the producers controlled and are valid to all farmers and managers who desire to or are required to partake.
Regulations of the Federal Milk Marketing Orders can affect each function involved in the movement of milk from the dairy farm to the consumer. Therefore, USDA has developed specific definitions and provisions for route disposition, supply plants, distribution plants, non-pool plants handlers, fluid milk, fluid cream, and commercial food processing establishments.
In essence, producers that participate in the Federal Order system have the assurance that they or their cooperative agent will receive a minimum blend price for their milk (based on an average of all milk uses) regardless of how it is used. Milk processors that buy milk in the Federal Order system take part in an orderly marketing system from which to buy milk, and the Southern fluid processors (who occasionally operate in deficit supply areas) are guaranteed a certain percentage of milk will be available for fluid use. Although the Federal Milk Marketing Orders influence the management activities of producers, the Federal Orders do not directly regulate producers. The Federal Orders do not restrict production or marketing of milk nor do they guarantee a market for an individual producer’s milk to a regulated handler. Federal Orders provide a legal authority for auditing regulated handlers to determine how their milk is used and to make sure that they are paying the appropriate minimum class price.
The Milk Marketing Orders program employs product price formulas to establish milk constituent values, which are coalesced to determine monthly class prices. The dynamics in the formulas are dairy product prices, which modify monthly, and make allowances and product yields, which are developed in the formulas. The dairy produce prices are those gathered by the National Agricultural Statistics Service (NASS) in USDA. NASS carries out weekly reviews of dairy product manufacturers that retail explicit products on a bulk, wholesale basis.
A dealer is obligated to pay for the categorized usage of the raw milk receipts. If the classified usage is greater than the market’s blend price, then the handler will pay the difference into the producer settlement fund administered by the Market Administrator. If the classified usage is less than the market’s blend price then the handler will draw out of the producer settlement fund. This fund allows handlers to pay producers the blend price regardless of plant’s classified usage.
Provisions for “small” farm processors
It is often a misconception that a dairy farmer can simply start a milk processing business and divert some of their milk production to the new facility. The closest option to this scenario allowed under the Federal Orders would be for the new processing business to be an “exempt, non-pool plant.” An exempt plant is a plant that is exempt from pricing and pooling provisions of any Federal Order (provided that the operator of the plant files the correct reports prescribed by the market administrator) if it has route disposition and package sales of fluid milk products of 150,000 pounds (17,442 gallons) or less during the month. Route disposition is the delivery to a retail or wholesale outlet of a fluid milk product in consumer-type packaging or dispenser units classified as Class 1 milk.
In addition, a producer-handler that processes less than 150,000 pounds of class 1 fluid milk per month is not subject to pooling by the Federal Orders. That is, if a particular dairy farm produces 300,000 pounds per month and processes 140,000, the remaining 160,000 pounds can be sold according to the Federal Orders the same as the entire 300,000 would have been sold if there was not a farm processing business. Also, a “non-pool, producer handler” plant is not subject to Federal Order pooling by the Federal Orders even if it exceeds 150,000 pounds class 1 usage per month so long as it acquires all of its raw milk from its own production unit (dairy farm). However, if the plant does not use all of the farm’s production, the amount of the farm’s production in excess of the processing will be sold at a classified usage (but could not be used in class 1, or received as pooled producer milk without incurring regulation).
Considerations for “larger” farm processors
As previously stated, 150,000 pounds of class 1 use per month is the threshold where exempt status is lost unless the producer maintains full supply of the processing operation. It is also critical to know that the producer must assume full risk, management responsibility, and liability of the processing facility in order to maintain producer handler status. If more than 150,000 pounds of milk is processed per month and the producer/processor does not produce enough farm milk, the plant is pooled because it must acquire milk from outside the farm. If this occurs, then the producer/processor will have to pay the minimum F.O. price for outside purchases and will incur assessment or credit to the settlement fund for the difference between the Federal Order calculated value of all raw milk receipts as classified and the Federal Order blend price. This would include own farm production. Additionally, there are other evaluations on pooled milk. An administrative assessment is assigned to producer milk received by a pooled processing facility to be paid by the processor. Additionally, manufacturer milk not connected to a cooperative is dependent on a Marketing Service assessment. This evaluation is borne by the manufacturers and is employed to pay for butterfat testing and payroll auditing performed by the Market Administrator’s office. The southern markets have processors subjected to transportation credit charges on all class 1 utilization, which supports bringing milk from outside the market in, during the months of July – December, the traditional short season.
Finally, if the producer or processor produces in excess of 3,000,000 pounds of class 1 usage per month, regardless of pool plant status, then they are subject to a 20cent/cwt charge on the class 1 usage to be paid to National Fluid Education Processor Education and Promotion Program for advertising and promotion (Got Milk).
If more than 150,000 pounds of milk is processed per month and the producer/processor has excess farm milk, the plant can still be classified as a non-pool “Producer Handler” exempt plant. However, it must sell its excess milk on the market at other than class 1 utilization or as pooled producer milk, which is assigned a blend value credited to the receiving handler. Blend is a composite price of 1, 2, 3 and 4 usage and, as such, the class 1 utilization of the producer/processor is no longer entirely borne individually. A producer/processor can opt to be a regulated plant, and then sale surplus as producer milk (blend) or class 1. Regardless, a report of receipts and utilization will be required by the Market Administrator, and the producer/processor will be subject to Federal Order auditing.
Effects on consumers
Now to establish the consequences of the marketing orders on consumers, we require to establish how consumers alter their expenditure of milk products in reaction to price transformations. To do this we approximated how the amount of these goods required by consumers differ with prices, embrace city-level demographic variables: traditions, home possession, employment significance, profession, age and income (Chouinard 57). The approximation model employs Information Resources, Incorporated retail grocery scanner information of weekly city–level procurements of dairy products going with demographic features of the acquisition 22 households, where we controlled the prices for taxes.
It was concurrently estimated demand functions for 14 dairy products that are milk which include non–fat, 1% milk, 2% milk, whole . Cream or creamers, which have dairy cream, including half-and-half, and coffee creamers, Spreads like butter and margarine, ice cream especially frozen yogurt and ice milk, yogurt and cheese. The demand functions demonstrate how the magnitude demanded differs as the retail prices of the diverse dairy products alter for various demographic groups.
It is not astonishing that whole milk, 2%, 1%, and non-fat milk are rival alternatives. That is, if the comparative prices alter slightly, customers will change from the currently comparatively costly milk to the at present comparatively inexpensive one. even though this result is instinctively attractive, previous studies that were unsuccessful to subdivide milk products as translucently as we do failed to discover it.
Eradicating the FMMO would influence farm prices. LaFrance (93), Cox and Chavas (21), and Kawaguchi, Suzuki, and Kaiser (43) approximated that the subordinate farm prices for fluid milk would reduce retail fluid milk prices proportionally. These same researches discovered that the extent to which the increase in milk prices for manufactured milk produce would be conveyed to retail goods differs by product, and their approximations vary slightly. We employed the average of their approximated retail price reactions and our demand system approximations to replicate how eliminating the FMMO would alter the quantities of dairy goods demanded in reaction to price changes. Chouinard et al., 26 replicated other probable retail price change scenarios too.
How much consumers are harmed by a price increase or helped by a price cut using the measure of well-being that economists call equivalent variation was calculated. The corresponding deviation for a price boost is the quantity of income that, if taken from the customer, impairs the consumer by to the extent that the price augments. Therefore, if the corresponding difference is negative, then customers are worse off after the price alters. The corresponding difference of milk marketing orders for different demographic groups was calculated.
Table 1 demonstrates how the price and quantity required vary on average transverse demographic groups for each dairy good when the federal milk marketing orders are eliminated. Since milk prices would plummet by 15.5%, the bought quantities of 1%, 2%, non–fat, and whole milk augment considerably. Since the prices go up for some manufactured goods, the matching purchased magnitudes of these products drop, but by moderately diffident amounts. Provided the approximated alterations in the purchased quantities of fresh fluid milk and manufactured dairy products in the situations when all dairy prices transform, we anticipate some dairy customers to profit and others to lose.
Table 2 demonstrates the replicated corresponding deviation effects, in dollars per week, transverse several demographic groups when we embrace all but the particular demographic variable set at their sample means. All but the wealthiest consumers would benefit from eliminating the FMMO, specifically, their corresponding difference is constructive. The simulations demonstrate that FMMO regulations are extremely regressive. We describe the regulatory load of the FMMO program as a household’s yearly corresponding deviation from eliminating the marketing orders divided by its annual income. Specifically, the regulatory load is the split by which a family’s effectual income would increase from eliminating the federal marketing orders.
Conclusion
Federal Milk Marketing Orders compute minimum blend prices to be paid to producers and their cooperative agents and assure that these parties have received this price. Classified utilization of milk plant reporting is assured through audits of the regulated handlers. While the Federal Orders include provisions for an assessment (cost) for administration of the Orders and deductions from the gross payment for fluid milk for the marketing services provided by the Orders, the Federal Orders do not include provisions for the National Dairy Promotion and Research program. The National Dairy Promotion and Research program is a separate USDA initiative begun in 1983 as a program for dairy product advertising, study, and nutrition education to augment human utilization of milk and dairy products and decrease milk surpluses. The program is funded by a mandatory 15-cent-per-hundredweight assessment on all milk produced in the contiguous 48 States and marketed commercially by dairy farmers. The National Dairy Promotion and Research Board (Dairy administer it Board). Each person making payment to a producer for milk produced in the United States and marketed for commercial use will collect the 15 cents per hundredweight assessment on all such milk handled and submit it to the Dairy Board.
A milk dispensation plant that bottles below 150,000 pounds per month can be categorized as a “non-pool exempt plant” and is not exposed to the Federal Order regulations. Anyone (farmer or otherwise) can bottle their own milk or purchase milk to bottle and be exempt from Federal Order regulations if they are under 150,000 pounds per month. In addition, if a dairy farm bottles only their own farm-produced milk, they can be classified as a “producer-handler, non-pool, exempt plant” and they are not exposed to any Federal Order regulations on condition that they utilize just their farm-generated milk. However, if the plant does not fully utilize the farm’s production, this surplus supply cannot be sold as producer milk (blend) or class 1 without gaining pool plant status.
In short, the federal milk marketing orders elevate the retail prices of fluid milk goods and decreases the prices of some manufactured dairy goods, elevating the average price of milk across dairy merchandise. Consequently, the federal milk marketing orders unreasonably harm the poorest members of society by increasing fluid milk prices, and profit the richest by decreasing the costs of such goods as triple cream cheeses.
Work cited
Beck, P., and Perloff, J. M. “A dynamic analysis of marketing orders, voting, and welfare”. American Journal of Agricultural Economics, 67(3), 487–96, 1985.
Chouinard, H. H., Davis, D. E., LaFrance, J. T., and Perloff, J. M. Milk marketing order winners and losers. Applied Economic Perspectives and Policy, 32(1), 59-76, 2010.
Cox, T.L. and Chavas, J.P. “An interregional analysis of price discrimination and domestic policy reform in the U.S. dairy industry”. American Journal of Agricultural Economics, 83(1), 89-106, 2001.
Kawaguchi, T., Suzuki, N., and Kaiser, H.M. “Evaluating class I differentials in the new federal milk marketing order system”. Agribusiness, 17(4), 527–538, 2001.
LaFrance, J.T. “Weak reparability in applied welfare analysis”. American Journal of Agricultural Economics, 75(3), 770–775, 1993.
LaFrance, J.T., and de Gorter, H. Regulation in a dynamic market: The U.S. dairy industry. American Journal of Agricultural Economics, 67(4), 821–832, 1985.
