Milk market dynamics form two roads to the future; here’s what dairy farmers should be aware of

By SHERRY BUNTING  /  Special for Farmshine

WASHINGTON —In part one of this two-part series, we looked at the implementation of the Federal Milk Marketing Order (FMMO) final decision that is set to begin this month in preparation for the June advanced Class I base price mover announcement, along with the new ESL Adjustment, on May 21, as well as the class and component price announcement for June milk on July 2.

Milk market dynamics are rapidly changing to form essentially two roads to the future. As new pricing formulas go into effect, here are a few things for dairy farmers to be aware of.

1) The updated skim milk composition factors are a positive change that will be delayed. This piece of the FMMO decision will benefit dairy farmers by raising the standardized skim component percentages for Class I in all FMMOs and for all class prices in the four fat/skim-priced FMMOs. However, USDA will delay this piece for six months to be implemented for milk marketed in December and the advanced skim milk pricing factors for January’s Class I mover.

This update pertains to skim composition, so it will not affect butterfat values as all classes of milk in all FMMOs already pay for fat based on actual test.

When implemented at the end of this year, the updated skim composition factors may change how skim component value is reflected on milk checks. For example, a farm making milk with protein over 3.3 may see some of their current bonus or basis become part of the Class III index price, reducing their basis.

Those making milk with protein below 3.3 may see this reflected as a negative value relative to the Class III index price. In multiple component pricing Orders 1, 30, 32, 33, 51, 124, and 126, producers are already paid, and will continue to be paid, on their actual pounds of skim components, except for Class I, which pays on the updated standardized skim milk composition. When pool dollars run short, adjustments are made within the producer price differential (PPD).

2) Class III and IV advanced skim pricing factors have ‘conveniently’ closed their long-running gap… just in time for the USDA decision to reinstate the ‘higher-of’ method for pricing Class I skim milk effective June 1. This now-narrowed-spread turns the table for the ‘higher-of’ method after the mostly wider spreads created disorderly marketing and over $1 billion in net revenue losses for farmers during the six years (May 2019 to May 2025) that the ‘average-plus-74-cents’ method was in use.

3) The new ESL Adjustment is a wild card that will be factored-into Class I payments and pool revenue for fluid milk products labeled good for 60 days or more. The ESL Adjustment adds the equivalent of a second Class I ‘mover,’ beginning with the May 21 announcement for June’s Class I sales. The ESL Adjustment will use the advanced Class III and IV skim milk pricing factors from June 2022 to May 2024, and will base the adjustment on the difference between the ‘higher-of’ and the ‘average-plus-74-cents’ methods. Over time, this adjustment can be either a positive or negative number and will change month-to-month.

4) Butterfat value has plummeted as the U.S. butter price has fallen $1.16 per pound below the rising global butter price. Add to this the additional nickel per pound to be deducted for the updated butter make (or take) allowance.

5) The collective updates on all make (or take) allowances for butter, cheddar cheese, nonfat dry milk, and dry whey will be subtracted at the component price level, which will indirectly subtract roughly $1.00 per cwt from the Class III index price and roughly 75 cents from Class IV. These values represent just the increase in the credit to processors, not the entire make (or take) allowance that is already in place. These updated ‘makes’ (aka processor credits) are embedded in the class and component prices, not shown as milk check deductions.

6) The elimination of the 500-lb barrel cheese price has been questioned by some as reports show barrels trading higher than blocks. This was true on the CME daily spot cash market for much of 2024 and for many weeks during February, March and April of 2025. However, it is important to understand that under the current FMMO formula, this barrel cheese price was adjusted to 38% moisture, plus 3 cents, before weighing it in with the 40-lb block cheddar price to calculate protein price. This meant the actual adjusted barrel price remained mostly below the unadjusted block price in 2025.

The elimination of barrel prices is expected to be a positive change for dairy farmers. However, it could become neutral to negative in the future as USDA Dairy Market News reported on April 18 that cheese manufacturers are building block cheddar inventories through April. This is not surprising given the expanded cheese processing capacity, cheese export uncertainty, and softer foodservice demand, as well as processors preparing to mediate block-only protein pricing, which processors opposed during the FMMO hearing. While current retail cheese demand is strong, it won’t be enough on its own to absorb the large expansion in U.S. cheese production if new and old capacities run full.

Future impacts to watch

As the marketplace and industry goals change, along with the FMMO pricing formula changes, many questions surface.

How will the implementation of the FMMO decision ultimately affect dairy farmer milk revenue? How will the changes affect the competitive positions of smaller, traditional processing plants and the farms that ship to them? Will we see the new ESL Adjustment pick winners and losers in the fluid milk category?

Will consumers support more rapid dairy industry consolidation based on the new shifts in global markets and sustainability paradigms? Or will enough consumers turn inward to support local farms and local plants that support local economies, local jobs, local environments, and local communities?

Will smaller farms and processing plants find freedom within this changing structure to work together to access those consumers, and will those consumers pay more for fresh products produced locally or regionally vs. the low-cost-global-producer model of consolidating market power?

The global dairy industry at-large is placing big bets on the U.S. as the low-cost producer of important higher-value dairy products like cheese. By prioritizing external revenue streams through sustainability metrics that may not treat the dairy cow fairly in terms of climate impact, the industry seeks to meet its goals to grow international markets and ship more cheese, butter and other higher-value products at low-cost-producer-prices around the world.

Meanwhile, small and mid-size dairy farms and processors may have a tougher time operating in that high-speed fast-lane and will increasingly seek ways to operate in the space of fresh, local, quality, family-farm products and messages that the surveys show U.S. consumers crave — as long as they are able to transcend the industry gatekeepers to access those consumers.

We may see some gloves come off where these two competing visions of dairy’s future meet. Expect more crossover marketing between simple, local, natural and/or organic vs. complex, global, convenient and/or ultra-processed.

Instead of picking a lane, diversify with consumer outreach. For some, that is freezer beef sales, for others it’s a food or ice cream trailer, still others build in the farm tours or on-farm events, or maybe just a presence online or sharing the farm on social media. Bottomline: stay connected because the future brings new challenges and opportunities.

Will the FMMO system survive the changes ahead? Does it offer the right structure for creative solutions to the challenges that will emerge? How will it all shake out as the new Federal Order regime gets underway this month?

Whatever the answers to those questions, remember that dairy fat and protein are increasingly important in the human diet, and none of the knockoffs will ever deliver like the dairy cow, which by the way, consumers genuinely love seeing and hearing about. There will always be multiple roads to the future for dairy farmers. Stay aware, stay connected, dig in, pursue the paths that fit the farm, experiment small but dream big, and see what the farm’s next-generation has in the idea-bank. They likely have a different outlook that can fuel some good discussion, maybe even forge a path not yet traveled.