HARRISBURG, Pa. — One of the most revealing parts of the June 3 Pennsylvania Milk Board (PMB) over-order premium (OOP) hearing focused on where the state’s Class I value goes in the federal milk pricing system.

Economist Sara Dorland testified as an expert witness for the Pennsylvania Association of Milk Dealers (PAMD), arguing that while Pennsylvania bottlers are paying more under the June 2025 Federal Milk Marketing Order (FMMO) changes, larger negative location adjustments shift more of that value into federal pool distribution in producer price differential (PPD) calculations to manufacturing milk and out-of-state producers.

She said USDA’s revised Class I differential map “surprised the industry when the first settlement month arrived.”

Follow the money

Dorland testified that producers serving Pennsylvania fluid plants are often reimbursed outside the processor’s Class I differential zone and described the practice as “commonplace” among PAMD member plants.

Using the example of a Philadelphia bottling plant in a higher zone purchasing milk from Lancaster County in a lower zone, she said: “There’s a gap, and that money gets distributed to everybody in the pool.”  

However, the testimony begs the questions: If pricing outside a processor’s Class I differential zone is commonplace, what marketing and pooling decisions create the gap?

Throughout both written and oral testimony, the issue was framed in terms of producer location. Yet the FMMO system applies the Class I differentials and location adjustments based on where producer milk is received, pooled, and priced, not on a dairy farm’s physical location. Milk may be received, diverted, transferred and pooled through various marketing arrangements before reaching its final destination.

What appears to have changed since June 2025 is the relationship between Class I differentials on the new map and the marketing structures developed under the old map.

PAMD’s expert witness estimated that cooperatives market about 76% (7.4 bil. pounds) of Pennsylvania milk production, while the state’s Class I market accounts for about 17% of state milk output. She emphasized that Pennsylvania is both a major milk-producing state and a major fluid milk consumption market located in the Northeast corridor and with over 13 million consumers within the state itself generating significant Class I value.

The milk dealers see the OOP as a necessary tool for them to continue attracting milk as they say an increasing share of the federal value is being redistributed through the pool, instead of remaining tied to Pennsylvania’s fluid market.

For years, concerns have been raised that milk produced on Pennsylvania farms can be pooled through out-of-state supply plants and pooling arrangements and then ultimately serve the Pennsylvania fluid market, reducing state OOP obligations.

Are some of those same marketing structures now vulnerable to how the new federal Class I map pools the added differential value? The PMB hearing did not address this, but testimony begs the question.

The Pennsylvania OOP

Parallel questions surround the debate over Senate Bill 689, which would authorize PMB to collect OOP at retail and distribute it “equitably” to producers statewide.

Drew Frommelt, dairy economics and analysis manager for Dairy Farmers of America (DFA), argued that OOP dollars paid by Pennsylvania consumers should be collected at retail and distributed more uniformly among Pennsylvania dairy farmers. He testified that the current wholesale-based OOP structure creates incentives for processors to move milk across state lines rather than incur the full premium obligation. DFA testimony declined to endorse a specific OOP level, arguing that structural reform should come first.

The milk dealers took a different view, arguing that Pennsylvania’s fluid market is already losing more value through federal pooling and redistribution and that the state should preserve one of the few pricing tools tied directly to Pennsylvania’s fluid market.

Who is the ‘producer’?

Pennsylvania’s OOP was added to state law in 1988 to benefit dairy farmers during a severe drought, but the legal definition of ‘producer’ also includes cooperatives.

During cross-examination, Frommelt acknowledged that Pennsylvania OOP revenue is collected and distributed by the cooperative, along with other marketplace premiums, across DFA’s Northeast Area extending from Maine to Ohio.

“We put the premiums together, but I’m not going to describe how we decide what those premiums are used to cover. That’s a business decision that’s made by the cooperative leadership, just that we do pull them together with other premiums and distribute it to all of our members,” he said.  

Frommelt also testified that DFA represents 971 Pennsylvania member farms and owns 10 processing plants in Pennsylvania, with at least three of them involved in Class I.

When questioned about class breakdown among those plants and whether milk supplies are tight, Frommelt declined to answer, saying “current supply and demand dynamics within the Northeast for DFA is proprietary information.”

DFA’s multiple roles, including as cooperative and processor, were also explored in cross-examination. Asked what part of DFA he was representing, Frommelt said he was there “representing all of DFA and all of the business functions.”

As Pennsylvania consumers continue paying among the nation’s highest retail milk prices while Pennsylvania dairy farmers receive lower average mailbox prices than neighboring states and are exiting the industry at a faster rate, a move to collect the state OOP at retail through Senate Bill 689 would keep all of it in-state for distribution.

The question is whether cooperatives would continue to qualify under the current definition of “producer” for the purposes of receiving and distributing OOP funds, and could this continue to dilute how it reaches the Pennsylvania dairy farmers that the state created the OOP in 1988 to help.

As policymakers debate the future of the OOP, it still comes down to: Who captures the value? Where does the money go? Who controls the decisions? And specifically, who is the ‘producer’ the OOP was intended to benefit?