Dairy cattle

The complicated Federal Milk Marketing Order system obscures prices while setting them.

Suppose you are a dairy farmer and having lunch at the local coffee shop. Between your hamburger and that piece of apple pie you have been eyeing, the person at the table next to you notes that your ballcap has the logo of your dairy cooperative.

To make conversation, he says: “I see by your cap that you’re a dairy farmer. How are things going?”

“Not great,” you say. “With milk prices way below the cost of production, we’ve burned through a lot of equity the past few years just keeping the lights on. Prices are finally rising after several years, but we’re still struggling.”

Then he says: “I’m sorry to hear that. I do my part as much as I can. I eat a bowl of ice cream every day, whether I need it or not.”

Then he asks this question: “By the way, how are milk prices determined?”

Your answer: “How much time do you have? If I were to fully explain milk prices, we may have to stay around for supper, too. I’ll buy you that ice cream for dessert.”

In many ways, that’s a large part of the problem with the Federal Milk Marketing Order system that determines the minimum prices for much of the milk produced in the U.S. The 80-plus-year-old system is so complicated that milk prices appear to be primarily a product of the USDA. So many variables are involved that the typical farmer knows what his milk check is worth, but only an economist can fully explain it.

That level of complication makes complete transparency in milk prices nearly impossible.

The low prices and the lack of transparency make it exceedingly difficult to run a dairy, as the closure of 2,731 dairies last year alone illustrates. That’s a loss of 7% of the nationwide total in one year, according to USDA.

If a dairy operator doesn’t know which factors give his milk the most value, how can he, or she, manage for a better outcome?

That, plus the fact that milk prices can vary dramatically from month to month, put the entire dairy industry on a roller coaster with no control.

A working group put together by the American Farm Bureau Federation has set out to improve the marketing orders. In its report, the group offers several suggestions for improving the system in ways that shift most of the power to the farmers and away from handlers and processors.

That’s a good start. We might also suggest that a transparent and simplified system would help all sides understand where the highest value of milk is. Some farmers also see cooperatives and handlers as being at cross purposes with them, in part because they say they cannot realize the full value of their milk.

The dairy industry is constantly evolving. What might have worked as a way to attach a price to 100 pounds of milk may have been appropriate 80 years ago — or even 20 years ago — but it no longer accurately reflects the full value.

That in itself is unfair to all sides of the equation. Our hope is the Farm Bureau or another farmer-centric group can continue the work and come up with a better way to discover fair, consistent prices for milk.

We have seen the shortcomings of the current system — and the failures they helped cause.

Recommended for you