Dairy Farmers Face $337 Million Loss: The Impact of New FMMO Rules

LISTEN UP, DAIRY FARMERS! The new Federal Milk Marketing Order (FMMO) rules are here, and they’re shaking up the industry like never before. As of June 1, 2025, these changes have been in effect, and the early results are in: higher make allowances have slashed the prices farmers receive for their milk by a staggering $337 million in just three months. That’s right, folks—we’re talking about a 4–5% drop in class prices across the board. The Upper Midwest, Northeast, and California have taken the biggest hits, with losses of $64 million, $62 million, and $55 million, respectively. This is a game-changer, and you need to be ready to adapt.

So, what’s the deal with these make allowances? Well, transforming raw milk into dairy products like cheese and butter requires more than just milk—it involves labor, cultures, salt, energy, testing, and packaging. These costs are represented as fixed deductions per pound of product produced, known as make allowances. The larger the allowance, the lower the price returned to farmers. And with the new rules, these allowances have been increased, based on self-reported data from manufacturers. This means the selected make allowance figures may not accurately reflect the actual manufacturing costs, artificially lowering the prices dairy farmers receive.

But wait, there’s more! The return to the “higher of” Class I mover formula is another big change. This formula calculates the skim milk value in the Class I milk price using the higher of either the Class III or Class IV advanced skim milk price for the month. This change is designed to better protect dairy farmers from sharp downside risk during periods of extreme volatility, like we saw during the pandemic. However, the real value of this formula lies in its ability to provide a buffer against price declines in one of the classes. So, while the net impact of the formula shift is likely to balance out over time, farmers should not be overly concerned when, in some months, the average-of would have delivered a higher price.

And let’s not forget about the Class I location differentials. Every U.S. county is assigned a Class I location differential that reflects the region’s supply-and-demand balance and transportation costs. These differentials are added to the base Class I price to support milk production and marketing in deficit areas. In USDA’s final rule, Class I differentials increased in most counties, averaging +$1.24 per hundredweight nationwide. Farmers generally welcomed the move, as it offsets some of the negative effects of higher make allowances, though the benefits are skewed toward orders with heavier Class I utilization.

But here’s the kicker: the removal of 500-lb barrel cheese from USDA’s National Dairy Product Sales Report. Since June, USDA has only published sales volumes and prices for 40-lb blocks, which now serve as the sole value in FMMO protein price formulas. Because USDA no longer reports barrel prices, pool impacts cannot be calculated in the same way as for other amendments. However, CME spot data continues to show barrels trading at or below block prices, suggesting that the removal of barrels has provided a modest lift to Class III prices. This is particularly beneficial for orders with high manufacturing utilization, such as the Upper Midwest.

So, what’s the bottom line? The early impacts of USDA’s FMMO amendments are becoming clearer. Higher make allowances have imposed the most significant cost to dairy farmers, cutting $337 million from pool revenues and lowering class prices across the board. Gains from higher Class I differentials and the removal of barrel cheese, along with the eventual boost from updated composition factors, help offset some of those losses but do not eliminate the uneven and often regionally lopsided effects. The return to the higher-of Class I mover provides farmers with stronger protection during volatile markets, though in calmer periods its advantages can be less visible.

But don’t despair, dairy farmers! There’s hope on the horizon. The One Big Beautiful Bill Act requires USDA to conduct a mandatory biennial survey of dairy processors’ actual manufacturing costs for cheese, butter, and nonfat dry milk. While USDA has not yet released details on methodology or timing, the survey is a critical step toward grounding future make allowance decisions in verifiable data rather than limited, self-reported samples. Importantly, even once this information is available, any future adjustment to make allowances would still require a full hearing process before USDA to implement.

So, stay tuned, dairy farmers! The FMMO system continues to provide stability in milk marketing, but its reliance on limited data and the contrast between delayed implementation of composition factor updates and immediate rollout of processor-favored make allowance hikes highlight the ongoing imbalance in how risk and reward are shared. The mandated biennial cost survey from the One Big Beautiful Bill Act offers hope for a more transparent and accurate foundation for future amendments, but until then, farmers remain exposed to a pricing system built on incomplete cost data, leaving milk checks vulnerable to assumptions that may not reflect the true expenses borne by processors.