Agricultural Segments

• Pages: 17-81

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CHAPTER II

AGRICULTURAL SEGMENTS

Each segment of agriculture in the United States—such as dairy,

crops, and livestock—is subject to a unique set of regulations that are

foundational to individual market structures. Overlaid onto this relatively

stable regulatory matrix are rapidly changing market dynamics, such as

consumer preferences, advancements in technology, as well as evolving

case law in agriculture and related areas such as retail activity and

intellectual property. For these reasons, it is imperative to understand the

basic regulatory structure and key marketplace developments in each

area.

A. Dairy

Milk and related dairy products are an essential part of food

production in the United States. These products remain subject to

extensive pricing regulation. This section provides an overview of the

pricing regulations that govern the Federal Milk Marketing Orders

(FMMOs) issued by the USDA, as well as the broader economic goals

that the FMMOs were designed to achieve. In the simplest terms, as

described by the USDA, the objective of the FMMO program is to

establish and maintain “orderly marketing conditions.”1 To understand

precisely what this statement means, it is helpful to first review some key

features of t he dairy industry.

Overview of Dairy Industry

The dairy industry starts with the farmer. Farmers produce raw milk

and sell it to processors, who then turn it into dairy products for retail

consumption. Farmers can sell their milk directly to processors, or they

can join dairy cooperatives and work together to sell their milk.

1. Dairy Federal Milk Marketing Orders – Program Overview, U.S. DEP’T

OF AGR IC., available at https://www.ams.usda.gov/rules-regulations/moa/

dairy.

18 Agriculture and Food Handbook

Regardless of how they choose to market, farmers (or their coops)

ultimately negotiate a final price for their raw milk (if above the

minimum regulatory price) with their customers (i.e., milk processors).

Their customers are, in turn, free to purchase milk supplies from other

farmers who might offer a better price to them.

Once processors purchase raw milk, it can be processed into a

variety of dairy products for consumers. The FMMO system defines four

broad classes of dairy products that range from more perishable to more

storable. Class I products include all fluid milk products like skim milk,

2 percent milk, whole milk, and cream. Class II products include ice

cream, cottage cheese, and yogurt. Class III products include all varieties

of hard cheese. Class IV products include predominantly butter and dry

milk. Sometimes products in Class II-IV are referred to collectively as

“storable” dairy products. An important feature of the four classes of

milk is that they are valued differently by end consumers. Generally fluid

milk products, for example, have the highest value.2 As a consequence,

processors of fluid milk pay more for raw milk supplies than non-Class I

processors (e.g., ice cream, cheese, and butter processors).

Finally, an important feature of milk production is that it is highly

seasonal. Milk production peaks during the spring (April through June)

when cows are producing milk at high rates and then dips during the fall

and winter.3

2. CONG. RESEARCH SERV., R45044, FEDERAL MILK MARKETING ORDERS:

AN OVERVIEW 6 (Dec. 13, 2017), (“Class I fluid milk usually recei ves the

highest minimum pric e under the federal order syst em. This helps to

encourage the moveme nt of milk from milk-surplus are as into milk-

deficit areas and ensure sufficient supply of fluid milk to meet peak

demand. Some dairy analysts believe that fluid milk wou ld still typically

carry a premium in the absence of marketing orders, reflecting

transportation and other costs.”), available at https://www.e verycrsreport

.com/reports/R45044.html#_Toc526152159.

3. U.S. DEP’T OF AGRIC., RBS RESEARCH REPOR T 188, COST OF BALANCING

MILK SUPPLIE S: NORTHEAST REGIONAL MARKET (2001) [hereinafter

BALANCING MILK SUPPLIES], available at https://www.rd.usda.gov/files/

rr188.pdf.

Agricultural Segments 19

Objectives of the Federal Milk Marketing Orders

The seasonality of milk production and the differentiated values of

different classes of dairy products historically have given rise to

complications in the marketplace that can destabilize supply and demand

and, in turn, prices. For example, during the high milk production season

in the spring, the marketplace is flush with milk supplies, but the demand

for fluid milk does not reflect a similar peak. Instead, high demand tracks

the school year, which does not correlate perfectly with the high milk

production season. This mismatch can lead to farmers competing

vigorously against one another for customers and destabilizing prices.

Likewise, during the low production season in the fall and winter,

demand for fluid milk from school systems is high, and the lack of

supply can threaten the important demands of school milk. Additionally,

regardless of season, the high value of fluid milk relative to storable

dairy products can generally lead to allegedly destructive price

competition between farmers who want to secure customer relationships

with higher priced Class I processors.4 The USDA regulations are

designed to prevent potential marketplace instability in both prices and

supply.5

The implementation of state marketing orders and subsequent

FMMOs,6 as well as the legal protection afforded dairy cooperatives to

4. See WILLIAM W. TYLER , A STORY OF MILK: HOW THE UNITED STATES

DEPARTMENT OF AGRICULTURE INSURES AN ADEQUATE SUPPLY

THROUGH MINIMUM PRICES TO DAIRY FARMERS (1967).

5. To understand the role of regulation in stabilizing prices, see ALDEN C.

MANCHESTER & DON P. BLAYNEY, Milk Pricing in the United States, 761

Agric. Info. Bull., U.S. DE P’T OF AGRIC. (2001), available at

https://www.ers.us da.gov/webdocs/pub lications/42300/15268_aib761_1_.

pdf?v=41055; Dairy Federal Milk Marketing Order – Overview, U.S.

DEP’T OF AGRIC., available at https://www.ams.usda.gov/rules-

regulations/moa/dairy (“Federal orders serve to maintain stable marketing

relationships for all handlers and producers supplying marketing areas,

thus facilitating the complex process of marketing fresh milk.”).

6. Federal orders are authorized under the Agricultural Marketing

Agreement Act of 1937, 7 U.S.C. §§ 671-74 (as amended). The Act is

enabling legislation; that is, federal orders are not mandated. Dairy

producers must request and approve an order thro ugh a hearing and

referendum process.” See Ed Jesse & Bob Cropp, Basic Milk Pricing