Order Code IB97011
CRS Issue Brief for Congress
Received through the CRS Web
Dairy Policy Issues
Updated August 1, 2000
Ralph M. Chite
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Emergency Federal Assistance for Dairy Farmers
Prohibition on Dry Ultra-Filtered Milk in Cheese Production
Dairy Price Support Program
Price Support Action and Proposals
Federal Milk Marketing Order Issues
Background
USDA Final Rule on Milk Marketing Order Reform
Background and Summary of Action
Required Consolidation of Orders
Class I Differentials: Option 1A vs. Option 1B
Legislative Action to Mandate Option 1A
Forward Price Contract Pilot Program
Replacing the Basic Formula Price (BFP)
Manufactured Dairy Product Pricing Controversy
Dairy Compacts
Background
Current Compact Issues
Extending the Sunset Date
Northeast Compact Supply Management Program
Massachusetts State Legislature Action on Rescinding Compact Membership
Proposed Southern Dairy Compact
LEGISLATION

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Dairy Policy Issues
SUMMARY
Three major dairy policy issues have
consolidate the number of marketing order
captured the attention of the 106th Congress—
regions from 31 to 11 and make major changes
federal financial assistance for dairy farmers;
to the federal pricing system. Last year,
implementation by USDA of changes to fed-
USDA released a preliminary proposal that
eral farm milk pricing regulations; and regional
included two options for pricing fluid farm
debates over the market effects of dairy com-
milk under the consolidated orders. One
pacts.
option (1A), supported by Eastern and South-
ern farm groups, left prices little changed from
To help mitigate the effects of volatile
current policy, while the other option (1B),
farm milk prices, a provision for $443 million
which USDA and Midwest dairy farmers
in emergency dairy payments is contained in
preferred, would have reduced minimum farm
the Senate-passed version of the FY2001
prices for fluid milk in many regions.
agriculture appropriations bill (H.R. 4461).
The Senate bill also contains a dairy producer
USDA originally opted for a modified
supported amendment that would prohibit
version of Option 1B in its final decision.
FDA from allowing “dry ultra-filtered (UF)
However, Congress passed a measure (H.R.
milk” as an allowable ingredient in the produc-
3428) as part of the FY2000 consolidated
tion of cheese. Conference on the measure is
appropriations act (P.L. 106-113) which
expected in September.
required USDA to adopt Option 1A as the
new method for pricing fluid farm milk, effec-
The dairy price support program, which
tive January 1, 2000. The law requires USDA
authorizes USDA to purchase surplus dairy
to reconsider how it prices farm milk used in
products to support farm milk prices, was
manufactured products by the end of 2000. It
extended one year through December 31,
also authorizes a pilot program that will allow
2000, in the FY2000 agriculture appropria-
dairy farmers and processors to enter into
tions act (P.L. 106-78). A provision in the
forward price contracts, effective August 4,
House-passed version of the FY2001 agricul-
2000 through December 31, 2004.
ture appropriations bill (H.R. 4461) would
extend the program through 2001.

The New England states have temporary
authority for a regional Northeast dairy com-
A separate milk pricing tool, federal milk
pact, which allows the region to establish
marketing orders, requires processors to pay
minimum fluid milk prices above the minimum
a minimum price for farm milk depending on
federal level. A provision in P.L. 106-113
how the milk is used. Farmer groups in the
extends authority for the Northeast compact
Upper Midwest contend that pricing policy is
through Sept. 30, 2001. Processors and Up-
in need of major reforms. Many dairy proces-
per Midwest producers oppose compacts,
sors contend that orders are market-distorting
saying that they distort dairy markets. The
and should be gradually eliminated. Eastern
Northeast Compact Commission has finalized
and Southern dairy farmers oppose major
a program that it says will discourage any
changes to the current order system.
potential overproduction of milk that might
result from the higher farm milk prices man-
On January 1, 2000, as required by law,
dated by the compact.
USDA began implementing its final rule to
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MOST RECENT DEVELOPMENTS
On, July 20, 2000, the Senate completed action on its version of the FY2001 agriculture
appropriations bill (H.R. 4461), which includes a provision for supplemental direct
payments of $443 million for dairy farmers. The House-passed version of H.R. 4461 does
not contain any emergency dairy assistance. Emergency payments of $200 million in
FY1999 and $125 million in FY2000 were provided by Congress to dairy farmers to
supplement farm income in response to volatile farm milk prices. The Senate-passed version
also contains a dairy-producer supported amendment that would prohibit the Food and
Drug Administration from issuing any regulations that would allow “dry ultra-filtered (UF)
milk” as an allowable ingredient in the production of cheese. The House-passed version also
includes an extension of the dairy price support program through 2001. (The Senate-
reported version of the bill also included an extension of the price support program, but the
provision was inadvertently deleted in the printing of the Senate-passed bill.) Conference
on the measures is expected in September.
USDA continues to implement legislative mandates (P.L. 106-113/H.R. 3428) for
modifying federal pricing policy for farm milk under federal milk marketing orders. P.L.
106-113 authorized a temporary pilot program to allow individual dairy farmers or their
cooperatives to enter into forward price contracts with processors to mitigate the effects of
farm milk price volatility. USDA issued a final rule on this pilot program on July 18, 2000.
The program will be effective from August 1, 2000, through December 31, 2004.
BACKGROUND AND ANALYSIS
Emergency Federal Assistance for Dairy Farmers
Over the course of the last two fiscal years (FY1999 and FY2000), Congress has
provided just over $21 billion in emergency spending for USDA programs, primarily to help
farmers recover from low farm commodity prices and natural disasters. The majority of these
funds has been for supplemental direct farm payments made to producers of certain
commodities, primarily grains and cotton, but also including soybeans, peanuts, tobacco and
milk. Dairy farmers received supplemental payments of $200 million in FY1999 as provided
by the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (P.L.
105-277), and $125 million as provided in the FY2000 agriculture appropriations act (P.L.
106-78).
The Senate-passed version of the FY2001 agriculture appropriations bill (H.R. 4461)
contains a provision for supplemental direct payments of $443 million for dairy farmers in
FY2000. The House-passed bill (H.R. 4461) contains no comparable provisions. Conference
on the two measures is expected in September.
The emergency dairy payments in the Senate-passed bill would be made to any producer
who received a supplemental dairy payment under the previous round of payments under P.L.
106-78. The amount of the payment would be equal to 35% of the difference between the
market value of 2000 production and the previous 5-year average value of production. The
Senate-passed bill also requires the same terms and conditions for these payments as the
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previous two rounds of payments. Payments were made on a milk producer’s first 2.6 million
pounds of milk production in either 1998 or 1997 at a payment rate of 22.5 cents per cwt.,
not to exceed $5,000 per farm.
For more information on supplemental farm assistance, see CRS Report RS20416,
Emergency Farm Assistance in FY2000 Appropriations Acts, and CRS Report RL30501,
Appropriations for FY2001: U.S. Department of Agriculture and Related Agencies.
Prohibition on Dry Ultra-Filtered Milk in Cheese Production. The Senate-passed
FY2001 appropriations bill also contains an amendment that would prohibit the Food and
Drug Administration from issuing any regulations that would allow “dry ultra-filtered (UF)
milk” as an ingredient in the production of cheese. Dry UF milk is a product, in which certain
milk proteins necessary for cheese production are selectively included and all of the water is
removed from the milk, thus making it efficient to ship long distances. Dairy farmer groups,
which support this amendment, are concerned that imports of dry UF milk would displace
domestic milk used for cheesemaking and would depress farm milk prices. Currently, neither
wet nor dry UF milk is allowed as an ingredient in U.S. cheese production. Cheese
processors had petitioned FDA for a change in standards to allow UF milk in cheese
production. Following the criticism of the proposal by dairy producer groups, processors
dropped their request for the use of dry ultra-filtered milk. The amendment to the Senate-
passed version of H.R. 4461 would also require the General Accounting Office to conduct
a study within 90 days of enactment to determine the quantity and use of imported ultra-
filtered milk.
Dairy Price Support Program
The Agricultural Act of 1949 established the dairy price support program by
permanently requiring the U.S. Department of Agriculture (USDA) to support the farm price
of milk. Since 1949, Congress has regularly amended the program, usually in the context of
multi-year omnibus farm acts and budget reconciliation acts. Current authority for the dairy
price support program is provided by the Federal Agriculture Improvement and Reform Act
of 1996 (P.L. 104-127, the 1996 farm bill).
Historically, the supported market price for milk is intended to protect farmers from
price declines that might force them out of business and to protect consumers from seasonal
imbalances of supply and demand. USDA’s Commodity Credit Corporation (CCC) supports
milk prices by its standing offer to purchase surplus nonfat dry milk, cheese, and butter from
dairy processors. Government purchases of these storable dairy products indirectly support
the market price of milk for all dairy farmers. Prices paid to the processors are set
administratively by USDA at a level that should permit them to pay dairy farmers at least the
federal support price for their milk.
During the 1980s, the dairy sector experienced a chronic surplus, much of which was
acquired by the CCC. At their peak in fiscal year 1983, government surplus acquisitions
represented about 12% of all U.S. milk output, at a net outlay cost of $2.6 billion. A series
of legislative actions since then reduced the dairy support price from its peak of $13.10 per
cwt. in 1983, to $10.10 per cwt. from 1990 through 1995, which helped reduce CCC
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Table 1. Commodity Credit Corporation Milk Price Support Operations
1979/80-1999/2000
CCC
Net Removals Milk
CCC Support
Purchases as
Marketing
Equivalent (billion
Net Outlays
Price
Percentageof
yeara
lbs.)b
(million $)
($ per cwt.)
Production
1979-80
8.2
1,280
11.49-12.36
6.4%
1980-81
12.7
1,975
13.10
9.6
1981-82
13.8
2,239
13.49-13.10
10.2
1982-83
16.6
2,600
13.10
12.0
1983-84
10.4
1,597
13.10-12.60
7.6
1984-85
11.5
2,181
12.60-11.60
8.2
1985-86
12.3
2,420
11.60
8.5
1986-87
5.4
1,238
11.60-11.35
3.8
1987-88
9.7
1,346
11.10-10.60
6.7
1988-89
9.6
712
10.60-11.10
6.7
1989-90
8.4
505
10.60-10.10
5.7
1990-91
10.4
839
10.10
7.0
1991-92
10.1
232
10.10
6.7
1992-93
7.6
253
10.10
5.0
1993-94
4.2
158
10.10
2.8
1994-95
2.9
4
10.10
1.8
1995-96
0.1
-98
10.10-10.35
0.1
1996-97
0.7
67
10.20
0.4
1997-98
0.7
291
10.20-10.05
0.4
1998-99
0.3
480(c)
10.05-9.90
0.2
1999-2000(d)
0.8
685
9.90
0.5
Source: U.S. Department of Agriculture, Farm Service Agency, selected publications.
a. The marketing year is October 1-September 30.
b. The milk equivalent is the pounds of fluid milk used to manufacture cheese and butter, on a milkfat basis.
c. Includes $200 million emergency "Market Loss" payments authorized by P.L. 105-277.
d. USDA estimate, includes $125 million in net outlays for market loss payments authorized by P.L. 106-78.
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acquisitions to under 5% of production in more recent years. Consequently, program outlays
dropped as well — to an annual average of $130 million between FY1992 through FY1998
(see table 1).
Price Support Action and Proposals
The 1996 farm bill (P.L. 104-127) retained the level of support at the then-current price
of $10.35 per cwt. for the remainder of 1996, but then required it to fall to $10.20 on January
1, 1997, to $10.05 on January 1, 1998, and to $9.90 on January 1, 1999. In order to achieve
this support price, USDA has set its product purchase prices at 65 cents per lb. for butter,
$1.01 for nonfat dry milk, $1.10 per lb. for block cheddar, and $1.07 per lb. for barrel cheese.
P.L. 104-127 originally required the dairy price support program to terminate at the end of
1999. However, a provision in the FY2000 agriculture appropriations act (P.L. 106-78),
signed into law on October 22, 1999, extended program authority through 2000. The House-
passed and Senate-reported versions of the FY2001 agriculture appropriations bill (H.R.
4461) contain an additional one-year extension of the dairy price support program, through
calendar year 2001. (Due to a technical error, the provision was inadvertently deleted from
the Senate bill following passage, and therefore does not appear in the printed version of the
bill.)
Earlier this year, legislation (H.R. 3864) was introduced to increase the level of dairy
price support from the current $9.90 per cwt. to $12.50 per cwt. and also to extend program
authority through 2002. Supporters of the bill say that the current level of support is too low
to help farmers when milk prices are volatile. Opponents contend that the higher support
price would lead to overproduction of milk and would significantly increase federal costs
through additional purchases of surplus dairy products.
Federal Milk Marketing Order Issues
Background
The farm price of approximately three-fourths of the nation’s fluid milk is regulated
under federal milk marketing orders. Federal orders, which are administered by the U.S.
Department of Agriculture (USDA), were instituted in the 1930s to promote orderly
marketing conditions by, among other things, applying a uniform system of classified pricing
throughout the market. Unlike the dairy price support program, (see “Dairy Price Support
Program” below) federal milk marketing orders are permanently authorized and therefore do
not require periodic reauthorization. Some states, California for example, have their own
milk marketing regulations in place of federal rules. Producers in federal marketing order
regions are affected by two fundamental marketing order provisions: the classified pricing of
milk according to its end use, and the pooling of receipts to pay all farmers a blend price.
Proponents of federal orders argue that orders are necessary because dairy farmers have
a competitive disadvantage vis-a-vis dairy handlers (processors) when it comes to determining
prices that farmers receive for their raw milk. Federal orders regulate handlers that sell milk
or milk products within an order region by requiring them to pay not less than an established
minimum price for the Grade A milk they purchase from dairy producers, depending on how
the milk is used. This classified pricing system requires handlers to pay a higher price for milk
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used for fluid consumption (Class I) than for milk used in manufactured dairy products such
as yogurt, ice cream, cheese, butter and nonfat dry milk (Class II, Class III and Class IV
products).
Blend pricing allows all dairy farmers in the order region to pool their milk receipts and
then be paid a single price for all milk based on order-wide usage (a weighted average of the
three usage classes). Paying all farmers a single blend price is seen as an equitable way of
sharing revenues for identical milk directed to both the higher-valued fluid market and the
lower-valued manufacturing market.
Manufactured class (Class II, III and IV) prices generally are the same in all orders
nationwide and are calculated monthly by USDA based on current market conditions. The
Class I price for milk used for fluid consumption varies from area to area and in recent years
has been a source of regional controversy. Class I prices are determined by adding to a
monthly base price, a “Class I differential” that generally rises with the geographical distance
from the Upper Midwest, traditionally a milk surplus region.
Class I differential pricing is a mechanism designed to ensure that local farmers receive
a guaranteed minimum price for their fluid milk that generally is high enough to encourage
adequate production. Local dairy farmers are protected by the minimum price rule against
lower-priced milk that might otherwise be hauled into their region.
Although a primary goal
of federal milk marketing orders is to facilitate the flow of milk from surplus production
regions to deficit regions, some dairy producer groups contend that federal order pricing
policy actually discourages such movement of milk.
In recent years, producers in the Upper Midwest (Wisconsin and Minnesota) have
maintained that federal orders are in need of reform, while many dairy processors contend that
orders are market-distorting and should be gradually eliminated. These critics contend that
the Class I differentials in some regions are too high and encourage milk production in higher
cost of production regions (particularly the Northeast and Southeast) at the expense of
traditional dairy states such as Minnesota and Wisconsin. As a result, they say, these regions
are becoming less dependent on the Upper Midwest for supplemental supplies in the short
production months. Since processors must pay as much for milk shipped in from surplus
regions as they would for local production, the critics maintain that there is no economic
incentive to bring in milk from other regions, even if that region has a lower cost of
production.
Milk producer groups in the Northeast and Southeast generally support the current order
system and want Class I differentials to remain no lower than their current levels. Eastern
producers contend that any reduction in Class I differentials would reduce their incomes and
force smaller farmers out of business. In fact, many Northeast and Southeast producers argue
that Class I differentials are not high enough, which led to the formation of the Northeast
Dairy Compact and a proposal for a Southern compact, to mandate fluid milk prices that are
higher than the minimum federally mandated level. (See "Dairy Compacts" below for more
information on the Northeast and Southern dairy compacts.) For more detail on how federal
milk marketing orders operated prior to the implementation of the new modifications
discussed below, see CRS Report 97-322, Federal Milk Marketing Orders: A Primer.
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USDA Final Rule on Milk Marketing Order Reform
Background and Summary of Action. Although Upper Midwest farm groups sought
legislative changes to the federal order pricing system in the first half of the 1990s, the lack
of consensus among regions precluded any mandated changes to federal orders in the omnibus
1996 farm bill. However the 1996 farm law (P.L. 104-127) did require USDA to reduce the
number of milk marketing orders — to at least 10 but no more than 14 from the current 31
orders — and originally gave USDA until April 4, 1999 to administratively achieve this goal.
(The deadline date was extended until October 1, 1999 by the FY1999 omnibus
appropriations act (P.L. 105-277). When USDA released its final decision on March 31,
1999, it not only proposed a consolidation of orders from 31 to 11, but also proposed
comprehensive changes to milk pricing policy by revising how Class I (fluid) milk should be
priced and devising a substitute for the basic formula price for farm milk. The text of the final
decision can be found in the Federal Register of April 2, 1999, or on the USDA website at.
[http://www.ams.usda.gov/fmor/final_order.htm].
The final decision had to be approved by two-thirds of voting farmers in each of the
consolidated regions before it could become effective, which farmers did in all of the
consolidated regions in early August 1999. If farmers had rejected the final decision, it would
have meant the end of federal milk marketing order regulation in that region. Once the final
decision was approved by farmers, it was published in the Federal Register and became a final
order or rule, which USDA planned to implement on the statutory implementation date of
October 1, 1999. However, a legal challenge posed by Northeast dairy farmers and affirmed
by a Vermont federal district court temporarily postponed the implementation of a final
decision. Current law extends USDA’s deadline date for implementation by the duration of
any injunction or restraining order.
Following the legal challenge, Congress agreed to legislation (H.R. 3428) as part of the
FY2000 consolidated appropriations bill (P.L. 106-113, H.R. 3194) which was signed into
law on November 30, 1999. It required USDA to implement an alternative option (1A) that
maintains minimum prices for fluid-use farm milk close to their current levels. (See
"Legislative Action to Mandate Option 1A" below for more information.)
Required Consolidation of Orders. USDA’s final decision reduces the number of
marketing orders from 31 to 11 orders, effective January 1, 2000. In considering what
regions should be combined, USDA said it looked for overlapping areas of milk supply and
considered whether the proposed merged regions have other common features, such as the
types of manufactured products produced. (See the maps on the following pages for a
comparison of the 31 regions prior to January 1, 2000, with the new 11 consolidated regions.)
The consolidated region into which a current order is merged is important to producers
in that order because of the way farm milk is priced. In general, under federal order blend
pricing, the more milk that is used for fluid consumption (Class I use) in an order, the higher
that order region’s average farm (blend) price will be. Therefore, if Order A, for example, is
consolidated with other orders that have a lower Class I utilization rate than Order A, then
Order A’s blend price will fall when it is consolidated. Likewise, if Order A is consolidated
with regions with a higher Class I use than Order A, then farmers in Order A will have a
higher blend price when consolidated.
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Currently, California, the largest dairy producing state, has a state milk marketing order
that is separate from federal orders. The 1996 farm bill allowed California to have its own
federal order if California dairy producers petitioned for and approved such an order. As
amended by the FY1999 Omnibus Appropriations Act, current law gave California until
October 1, 1999 to become a federal order if the state wanted to also retain its quota system.
Under California's quota system, each farmer is assigned a quota for production and receives
one price for production within quota and a lower price for production above quota. To
date, California continues to maintain its own state marketing order and is not part of the
federal order system.
Class I Differentials: Option 1A vs. Option 1B. The most controversial portion of
order reform was in establishing the level of Class I differentials within each of the
consolidated orders. Class I differentials are what is added to the base price of milk in a region
to determine what the minimum price is processors must pay for milk used for fluid
consumption. USDA's differential pricing structure is based on the “location value” of milk --
that is, calculating how far a milk consumption region is from a milk production region, and
establishing a minimum price that will attract sufficient milk to the market. This system has
been in operation for many years and, prior to the recent reforms, was based on the premise
that the Upper Midwest is the only surplus production region in the country. Upper Midwest
producer groups have long sought a revision of differentials saying that the level of
differentials encourage local production in many regions of the country at the expense of milk
produced in the Upper Midwest.
When USDA issued its proposed rule in 1998, it offered two options. Option 1B,
USDA's preferred option, would have reduced Class I differentials in many regions, which the
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Department said would make farm milk pricing more market-oriented. USDA also offered
an Option 1A which would keep the Class I differentials at close to current levels. Option 1A
was identified by USDA as being the most like the current pricing structure, except for some
adjustments to reflect that there is more than one surplus market. Option 1B would result in
lower Class I differentials for many regions, because this option recognizes that there are
closer markets than in Option 1A from which milk can be drawn when supplies are low.
Many farm groups from Eastern states expressed strong disapproval of Option 1B,
while producer groups in the Upper Midwest generally supported it. USDA’s final decision
was a modified version of the original Option 1B offered by USDA in its preliminary decision
last year. For most regions, the pricing decision issued by USDA would have provided a
differential that is higher than under the earlier proposed Option 1B, but still below then
current differentials. However, subsequent legislation prohibited USDA from implementing
this option.
Legislative Action to Mandate Option 1A. On November 29, 1999, the President
signed into law the FY2000 consolidated appropriations act (P.L. 106-113, H.R. 3194) that
among many provisions requires USDA to implement Option 1A as part of its final decision.1
This provision was widely supported by dairy farmer groups in most regions outside of the
Upper Midwest. Upper Midwest dairy farm groups, dairy processors, and consumer groups
generally supported USDA's final decision (modified Option 1B) and strongly opposed a
legislative mandate for Option 1A. Upper Midwest Senators filibustered the measure as it
came to the Senate floor because of the dairy provisions. However, a cloture motion was
approved (87-9) on November 19, 1999, allowing the Senate to complete action on the
measure the same day. Although the Administration opposed a legislative mandate for Option
1A, the President signed the measure, since the dairy provisions were one component of a
wide-ranging budget agreement between congressional leaders and the Administration on
FY2000 spending and other matters. As a result, USDA was required to adopt Option 1A
as part of its final decision and to implement the revised final rule, without a comment period
or another farmer referendum, on January 1, 2000.) (See Table 2 for a comparison of class
1 differentials in effect prior to January 1, 2000 to USDA’s “final” decision and the
differentials now in effect as mandated by the legislation.)
Other dairy provisions enacted as part of H.R. 3194 include a two-year extension of the
Northeast dairy compact (see “Dairy Compacts” below) and a requirement that USDA re-
examine its proposed formula for pricing farm milk used for cheese and butter (see
“Manufactured Dairy Product Pricing Controversy” below).

1H.R. 3194 (P.L. 106-113) is a consolidation of the five appropriations bills for FY2000 that were not
yet enacted as of early November, and several other authorizing measures. Regular appropriations
for FY2000 agriculture spending were not part of this agreement, since a separate agriculture spending
bill (P.L. 106-78) was enacted earlier. Section 1000(a)(8) of H.R. 3194 provides that upon enactment
of H.R. 3194, all language in H.R. 3428 is to be considered enacted as well. H.R. 3428 contains
provisions which mandate Option 1A and extend authority for the Northeast dairy compact, among
other dairy provisions.
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Table 2. Comparison of Pre-Reform Class I Differentials to USDA’s
Preferred Modified Option 1B, and Option 1A As Mandated by Legislation,
Grouped by Pre-Consolidated Order Regions
Dollars per hundredweight ($ per cwt.)
Order Region
1999
Modi- Man-
Order
1999
Mod-
Man-
Diffe-
fied
dated
Region
Diffe-
ified
dated
rential
Option Option
rential
Option Option
1B
1A
1B
1A
NORTHEAST
UPPER MIDW.
New England
3.24
2.75
3.25
Chicago Regional
1.40
1.95
1.80
NY-NJ.
3.14
2.50
3.15
Upper Midwest
1.20
1.60
1.70
Middle Atlantic
3.09
2.20
3.00
CENTRAL
Unreg. NY & NE
2.54
2.05
2.55
Iowa
1.55
1.95
1.80
Neb.-
1.75
2.00
1.85
APPALACHIAN
W. Iowa
Carolina
3.08
2.55
3.10
E. South Dakota
1.50
1.60
1.75
Tennessee Valley
2.77
2.25
2.80
Central Illinois
1.61
2.00
1.80
Louisv-Lex.-Evans.
2.11
1.95
2.20
S. Ill.-E. Missouri
1.92
2.10
2.00
SOUTHEAST
3.08
2.90
3.10
Southwest Plains
2.77
1.95
2.60
FLORIDA
E. Colorado
2.73
1.55
2.55
Upper Florida
3.58
3.80
3.70
W. Colorado
2.00
2.20
2.00
Tampa Bay
3.88
4.20
4.00
Greater Kans. City
1.92
1.90
2.00
Southeast. Fla.
4.18
4.29
4.30
SOUTHWEST
MIDEAST
Texas
3.16
2.10
3.00
Michig-Up. Penin
1.35
1.50
1.80
New Mex-W. Tex.
2.35
1.75
2.25
S. Michigan
1.85
1.85
1.80
WESTERN
E. Ohio-W. PA
2.00
2.00
2.00
SW Idaho-E. Oreg
1.50
1.35
1.60
Ohio Valley
2.04
2.00
2.00
Great Basin
1.90
1.50
1.90
Indiana
1.90
2.00
2.00
ARIZ-LAS VEG.
2.52
1.55
2.35
PACIFIC NW
1.90
1.45
1.90
Source: U.S. Department of Agriculture. Federal Milk Marketing Order Reform. Regulatory Impact Analysis,
March 1999.
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Forward Price Contract Pilot Program. Another provision in the enacted legislation
authorizes a temporary pilot program to allow individual dairy farmers or their cooperatives
to enter into forward price contracts with processors for certain uses of milk. A forward
price contract allows buyers and sellers of a commodity to negotiate a price for the
commodity on a future delivery date and insulates both parties from price volatility. Under
current law, a processor must pay a producer no less than the blend price (a weighted-average
market price) each month for any milk the processor purchases. Some say that this
discourages the use of forward price contracts for milk that is covered by federal orders. The
adopted pilot program will allow producers and cooperatives to enter into forward price
contracts for all milk used for manufactured products. The contracted price will be the
relevant price that the processor must pay, regardless of what the blend price is at the time
of delivery. Some farm groups are concerned that forward pricing might harm the
effectiveness of the federal order system, if large quantities of milk are priced outside of the
mandated minimum pricing requirements of orders. Other farm groups view forward pricing
as a desirable risk management tool. By law, the forward pricing program must terminate on
December 31, 2004.
USDA issued final regulations for the forward price contract pilot program on July 18,
2000, which makes the program operational from August 1, 2000, through December 31,
2004. The final rule removed a controversial provision from the preliminary rule that would
have given dairy farmers up to 3 days after signing a forward contract to decide whether to
void the contract. Dairy processors sought for the deletion of this provision, contending that
the three-day waiting period was excessive and that it would have required processors to
absorb any price risk during that period. Some dairy farmer groups countered that the three-
day period was a reasonable period of time. Another controversial provision that was
removed in the final rule was a proposed 6-month limit to the term of any forward contract.
The National Milk Producers Federation, the largest trade group representing dairy farmer
cooperatives, supported the 6-month provision, but some producer and processor groups
contended that the contract term should be longer.
Replacing the Basic Formula Price (BFP). USDA's final decision also includes a
replacement for the current basic formula price (BFP), which has served as the base price for
all milk prices under the federal order system. The BFP is based on market prices paid by
processors for unregulated Grade B milk in the Upper Midwest (U-M), updated by monthly
changes in prices for manufactured dairy products, particularly cheese. The BFP has served
as the Class III price, or the minimum price for all farm milk used for storable manufactured
dairy products (butter, cheese, and nonfat dry milk), and the base price for milk used in Class
II (other manufactured) products and Class I (fluid) milk. Since the amount of Grade B
production has dwindled significantly over the years, USDA sought an alternative pricing
measure that reflects changes in market supply and demand.
USDA’s final rule contains a four-class pricing plan that establishes a Class III price for
cheese and a separate Class IV price for milk used for butter and powdered milk. Each of
these two class prices are now to be computed based on the value of the components going
into the production of these products. For example, the Class III cheese price is to be based
on the value of protein, butterfat and lactose, the principal components of cheese. This
method recognizes that the butter/powder market and the cheese market are two distinct
markets and therefore should be priced separately.
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Under the order system prior to implementation of the final rule, the minimum price paid
by processors for milk used for fluid consumption (Class I) each month was equal to the basic
formula price plus the regional Class I differential. The final decision continues the method
of adding the Class I differential to a base price. However, the base price under the new
system is now based on the higher of the Class III (milk used for cheese) or Class IV (milk
used for butter/powder) price in each month. Under the old pricing system, the direction of
farm milk prices was heavily dependent on the direction of prices in the cheese market. The
newly implemented method of using the higher of the Class III or Class IV price will mean
that if butter/powder prices are strong while cheese prices are weak, farm milk prices will not
be as adversely affected as they are under the old system.
Manufactured Dairy Product Pricing Controversy. Another source of controversy
in USDA's final decision surrounds the new method by which USDA computes the Class III
price, that is, the minimum farm price of milk used for cheese. In determining the Class III
price, the final rule requires USDA to use a monthly survey of the wholesale price of cheese
and determine the farm value of the milk that went into the manufacturing of the cheese.
Before determining the farm value, the formula subtracts from the wholesale price of cheese
a so-called "make allowance," which represents the cost to processors for converting the milk
into cheese. There is an inverse relationship between the cheese make allowance and the
Class III price; that is, the higher the make allowance is set, the lower the minimum Class III
price paid to farmers will be. Many farm groups contend that USDA's final decision has set
the make allowance for cheese too high, thus meaning lower minimum prices paid to farmers
for milk used for cheese. Since the higher of the Class III or Class IV price is also used as
the base price for Class I milk, it might also mean lower prices for Class I milk as well, farm
groups contend.
A provision in H.R. 3428, enacted as part of the FY2000 consolidated appropriations
act (P.L. 106-113, H.R. 3194) requires USDA to re-evaluate its make allowance for both
cheese (Class III) and for butter and nonfat dry milk (Class IV), and use formal rulemaking
to develop its pricing policy. In the meantime, the law allows USDA to maintain the cheese
make allowance at the final decision level of 17.02 cents per lb. (An earlier bill (H.R. 1402)
passed by the House on September 22, would have required USDA to use a cheese make
allowance of 14.7 cents per lb. in the interim, but this provision was dropped in the enacted
version of H.R. 3194.) P.L. 106-113 requires USDA to publish a final decision on the Class
III and Class IV milk pricing formulas on December 1, 2000, and implement the decision on
January 1, 2001. USDA has accepted industry proposals for modifying the Class III and IV
pricing methods and held a hearing to gather additional public comments on May 8, 2000.
Dairy Compacts
Background

The 1996 farm bill gave the Secretary of Agriculture the power to grant the New
England states the authority to enter into a regional dairy compact. Under the authorizing
statute, this authority ends at the same time as the adoption of the required consolidation of
federal milk marketing orders, which was set in current law as October 1, 1999. The
legislatures of the six New England states agreed to enter into a dairy compact that would
create an interstate commission with the power to set a minimum price paid by dairy
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processors to dairy farmers in the six New England states at a level above the federal
minimum price. However, any proposed interstate compact had to be approved by Congress,
as required by the interstate commerce clause of the U.S. Constitution.
New England farm groups support the compact because they believe that the current
minimum milk prices dictated by federal milk marketing orders are not sufficient to cover the
cost of producing milk on family-sized farms, thus forcing many dairy farmers out of business.
The strongest opponent of the Northeast compact has been Upper Midwest dairy producer
groups which maintain that the compact artificially encourages the production of milk within
the compact region at the expense of other parts of the country that have lower production
costs and can sell at lower prices. In addition, opponents maintain that the compact could set
a precedent for other regions and industries to protect themselves from competition, an action
which critics maintain is anti-consumer and market-distorting.
In late May 1997, New England dairy farmers gave nearly unanimous approval to a
compact commission-proposed minimum price of $16.94 per cwt. for Class I milk in the
compact region. (This compares with an average minimum fluid milk price of $14.82 for the
first 8 months of 1997 in the New England milk marketing order; a 1996 average of $16.88;
and a 1995 average of $14.87.) The $16.94 floor price became effective on July 1, 1997 and
currently serves as the floor price for farm milk used for fluid consumption in the Northeast
compact region.
Following the creation of the Northeast compact, many other states expressed interest
in either joining the Northeast compact or forming a new, separate compact in the South.
Current law allows New York, Pennsylvania, New Jersey, Delaware, and Maryland to join
the Northeast compact as long as their membership is approved by their respective state
legislatures and by the Congress. All five state legislatures have approved membership;
congressional approval is pending. Fourteen other states, mainly in the South, have approved
membership of their states in a new Southern dairy compact, which is also awaiting
congressional approval.
Current Compact Issues
Extending the Sunset Date. The 1996 farm bill (P.L. 104-127) required the
Northeast dairy compact to terminate upon implementation of federal milk marketing order
reforms. P.L. 104-127 mandated an April 4, 1999 deadline date for these reforms. However,
a provision in the Omnibus Consolidated and Emergency Appropriations Act, 1999 (P.L. 105-
277) extended the deadline date for reform to October 1, 1999, which in effect extended the
life of the dairy compact until that date. On September 28, 1999, a federal judge granted a
temporary restraining order requested by Northeast dairy farm groups to prohibit USDA
from implementing its final rule for federal milk marketing order pricing reform on October
1. Since the termination of the dairy compact is directly tied to the implementation date of
order reform, the compact did not terminate on October 1.
A provision in the dairy legislation (H.R. 3428) that was enacted as part of the FY2000
consolidated appropriations act (P.L. 106-113, H.R. 3194) extends authority for the
Northeast dairy compact by 2 years until September 30, 2001. The measure does not address
the extension of membership in the compact to the five states (NY, NJ, PA, DE and MD),
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which have approved membership in the compact at the state legislature level. Congressional
approval is required before these states can join the Northeast compact.
Northeast Compact Supply Management Program. The Northeast Dairy Compact
Commission has issued proposed regulations for a supply management program that the
Commission says will help prevent potential overproduction of milk in the Northeast region.
Critics of the dairy compact contend that the higher mandated farm milk prices under the
compact encourage farmers in the region to overproduce milk, which they say depresses milk
prices for dairy farmers in other regions. The proposed rule would provide for an assessment
of 5 cents per hundredweight (cwt.) on all farm milk sold within the compact region. At the
end of the year, the annual funds collected would be refunded to any compact eligible
producer who increased his annual milk production by less than 1%. One-half of the total
amount refunded would be divided equally among all eligible compact producers; the other
half would be distributed based on the total volume of milk produced during the year. A
hearing on the proposed rule was held on April 5, 2000. In May, farmer members of the
compact voted to approve the rule. The rule has been finalized and was printed in the
Federal Register on July 7, 2000. Supporters of the assessment say that it will control
potential excess production of milk in the Northeast and help limit the purchase of surplus
dairy products by USDA. Opponents contend that the supply management program will be
ineffective, and that it is designed more to fend off criticism of the compact as its sunset date
approaches later next year.

Massachusetts State Legislature Action on Rescinding Compact Membership. The
Massachusetts State Senate voted in late May 2000 as part of the state’s annual budget plan
to withdraw Massachusetts from the Northeast dairy compact and instead allocate $3 million
annually for a trust fund to benefit state dairy farmers. However, the withdrawal provision
was deleted from the state budget in conference committee. Supporters of the provision to
remove Massachusetts from the compact contended that consumers in the state are
contributing significantly more to the compact than the benefits accruing to Massachusetts
dairy farmers. Major Northeast dairy farmer groups spoke out in opposition to the rescinding
provision. If Massachusetts were to leave the compact, it could potentially threaten the
membership of Connecticut and Rhode Island, since current law requires a member state to
be contiguous to another member state.
Proposed Southern Dairy Compact. H.R. 1604 and S.J. Res. 22, as introduced in late
April 1999, would grant congressional approval for a new Southern dairy compact. The
following states already have enacted legislation approving membership in a Southern dairy
compact: Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana, Mississippi, Missouri,
North Carolina, Oklahoma, South Carolina, Tennessee, Virginia, and West Virginia. Other
states likely to consider membership are Texas and Florida. Congressional approval for the
Southern compact was considered during conference deliberations on the FY2000 agriculture
appropriations bill. A threatened filibuster by Upper Midwest legislators forestalled this
action. Authority for a Southern compact also was not included in the subsequent dairy
legislation (H.R. 3428) adopted by Congress that extended the authority of the Northeast
compact for 2 years.
For more background on the Northeast dairy compact, see CRS Report 96-814, The
Northeast Interstate Dairy Compact.
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LEGISLATION
P.L. 106-78/H.R. 1906 (Skeen)
The FY2000 Appropriations Act for the U.S. Department of Agriculture and Related
Agencies. Among emergency provisions in the measure: 1) Section 805 authorizes the
Secretary to provide $125 million to compensate dairy producers for economic losses
incurred during 1999, and, 2) Section 807 extends authority for the dairy price support
program for one additional year, through December 31, 2000. Conference agreement
approved by the House on October 1, 1999 and the Senate on October 13, 1999. Signed
into law on October 22, 1999.
P.L. 106-113, H.R. 3194 (Istook)/H.R. 3428 (Blunt)
Like H.R. 1402, H.R. 3428 requires the Secretary to adopt Option 1A as the pricing
structure for fluid-use milk under federal milk marketing orders and provides temporary
authority for forward price contracting between dairy producers and processors. The bill also
provides a two-year extension of authority for the Northeast dairy compact until September
30, 2001 and requires USDA to reconsider its method for determining the cheese and
butter/powder make allowance, but maintains the make allowances at the proposed levels in
the interim. H.R. 3428 was introduced November 17, 1999; referred to the Committee on
Agriculture, and subsequently included in a consolidated budget package (H.R. 3194)
approved by Congress.
Section 1000(a)(8) of H.R. 3194 (a comprehensive FY2000 appropriations bill) provides
for the enactment of H.R. 3428 upon enactment of H.R. 3194. The conference agreement
to H.R. 3194 was approved by the House on November 18, 1999 and the Senate on
November 19, 1999. Signed by the President on November 29, 1999.
H.R. 4461 (Skeen), and Senate Amendment to H.R. 4461 (Cochran)
The House and Senate versions of bills which make appropriations for agriculture, rural
development and related agencies for FY2001. The Senate-passed version of H.R. 4461
provides supplemental spending of $443 million in income assistance payments to dairy
farmers. No comparable provisions are in the House bill. The House-passed and Senate-
reported versions of H.R. 4461 also contain a one-year extension of authority for the dairy
price support program. (Due to a technical error, the provision for extension of the price
support program was inadvertently deleted in the printed version of the Senate-passed bill.
H.R. 4461 reported to the House (H.Rept. 106-619) on May 16, 2000. Passed the House by
a vote of 339-82 on July 11, 2000. S. 2536 reported to the Senate (S.Rept. 106-288) on
May 10, 2000. Text of S. 2536, as amended, substituted for the text of H.R. 4461, and
passed by the Senate on July 20, 2000 by a vote of 79-13.
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