Federal Milk Marketing Order Class I Pricing

The 2018 Farm Bill also contained changes in how Federal Milk Marketing Order prices are set. Federal Milk Marketing Orders set minimum prices that processors must pay farmers for their milk. Four product classes exist, each with its own minimum price.

Class I, fluid milk;

Class II, soft, high-moisture cheeses, such as cottage cheese, frozen desserts, sour cream, yogurt, puddings and infant formula;

Class III, most spreadable and hard cheeses; and

Class IV, butter, powder, evaporated and condensed milk

Only classes III and IV are traded on the Chicago Mercantile Exchange. This complicates hedging strategies since class I pricing has been based on the higher of class III or IV pricing. Therefore, farmers trying to hedge their milk price wouldn’t know whether the class I milk price would be driven primarily by class III or IV in the future.

To address this issue, Federal Order pricing provisions have been amended to change the class I price mover to the average of the monthly class III and IV prices, rather than the higher of the two. To compensate for the fact that this average will always be lower than the higher of the two, an adjustment factor of $0.74 per hundredweight (cwt) will be added to the average of the two classes.

The exact impact this change will have on farm milk prices is dependent on the relative value of Class III and Class IV milk going forward, but the intent is that these slight adjustments to the farm price will make hedging strategies easier. The USDA has until the end of March 2019 to implement this change.

This information is taken from Farm Credit East Knowledge Exchange, January 2019, Volume 13 Issue 1

1 Comment

  1. I think it a disgrace that prices of Class 1 and Class II milk is allowed to fall when the global price of cheese and/or powder falls

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