Federal Milk Marketing Orders Impact on DRP Insurance

As of June 1, 2025, major updates to the Federal Milk Marketing Orders (FMMOs) have been implemented. This marks the most comprehensive overhaul in two decades.These reforms were approved by farmers across all 11 federal milk marketing regions. The goal is to modernize milk pricing structures to better reflect market conditions and production realities. 

FMMOs and Dairy Revenue Protection (DRP) insurance interact in complex ways, particularly concerning Class III milk prices. Here's a breakdown of the relationship: 

FMMOs and Class III Milk Pricing:

• FMMOs establish minimum prices for milk based on its end use (classified pricing).
• Class III milk is specifically for use in cheese production.
• The Class III price is determined by a formula that incorporates wholesale prices of cheese, dry whey, and butter.
• Recent FMMO reforms have updated the Class III price formula by:
  • Increasing assumed skim milk composition factors: This aims to better reflect actual milk protein and other solids content.
  • Removing the 500-pound barrel cheddar cheese price from the calculation: Relying solely on the 40-pound block price aims to improve accuracy and stability.
  • Adjusting manufacturing allowances (make allowances): These increases account for processing costs but can potentially reduce the farmer's pay price. 

 DRP and Class III Milk:

• DRP is a crop insurance program designed to protect dairy producers against unexpected declines in milk revenue.
• Producers with a DRP contract receive the FMMO milk price (which includes Class III).
• If the FMMO milk price falls below the contracted trigger price, farmers receive a DRP payment.
• DRP offers both a Class Pricing option, based on a combination of Class III and Class IV prices, and a Component Pricing option, based on component values (butterfat, protein, other solids).
• The actual milk revenue for DRP payout calculation under the Class Pricing option is determined by multiplying actual Class III and Class IV prices, pricing elections, covered milk production, and a yield adjustment factor.  

Interaction and Potential Impacts:

• Impact on Class III price and DRP trigger: Changes to the FMMO Class III price formula, like increased make allowances, can potentially lower the Class III price. This could affect the trigger price for DRP policies using the Class Pricing option.
• Basis risk: If Class III prices decrease but other factors maintain mailbox prices, this could increase basis risk for DRP and other risk management tools.
• Payout probability: If lower milk prices due to FMMO changes aren't offset by other factors, the Dairy Margin Coverage milk margin could tighten, potentially increasing the likelihood of DMC payouts for those with coverage.
• Market dynamics: The FMMO reforms are expected to shift milk pricing and market dynamics, requiring dairy professionals to adapt their strategies. 

In essence, FMMOs set the minimum prices for milk, including Class III, which are used as a basis for determining DRP insurance payouts. Changes to the FMMO formulas, particularly those impacting Class III, can directly affect the DRP program by influencing trigger prices and revenue calculations.  

If you are interested in DRP milk insurance, please call Mark Chilson, SFB insurance relationship manager at 715-672-2422.

Equal Opportunity Provider. Insurance products offered are: not a deposit, not insured by the FDIC or any federal government agency, not guaranteed by any financial institution, may lose value.