The United States just restructured how it prices milk. Here’s what changed, how the system works, and why Indian dairy exporters and policy thinkers should pay attention.
🧭 First, What Are Federal Milk Marketing Orders (FMMOs)?
The U.S. Federal Milk Marketing Order (FMMO) system is a set of government regulations that govern the pricing and sale of milk across various regions in the United States. It was introduced during the Great Depression and is administered by the U.S. Department of Agriculture (USDA).
In short, FMMOs set a minimum milk price, based on:
- The end-use of the milk (e.g., for drinking, cheese, butter)
- The components in the milk (protein, butterfat, and solids)
- The location where the milk is delivered
Milk is divided into four classes:
- Class I: Fluid milk (for direct consumption)
- Class II: Soft products (yoghurt, ice cream)
- Class III: Cheese
- Class IV: Butter and milk powder
This is very Different from India’s open market model, where price discovery is driven by cooperative policies, private contracts, and government interventions, such as the Minimum Support Price (MSP) for other commodities — but not milk.
🧑🌾 What Changed in June 2025?
The FMMO system was modernised on June 1, 2025, after a multi-year industry consultation. U.S. dairy producers voted to approve new rules that update outdated pricing formulas and cost assumptions.
Here are the five significant changes:
| # | Change | What It Means |
|---|---|---|
| 1 | Higher Make Allowances | Processors keep more of the price to cover costs |
| 2 | Barrel Cheese Removed from Pricing | More stable protein prices using only block cheese |
| 3 | Class I Formula Updated | Skim milk is priced more favourably for producers |
| 4 | Location Differentials Increased | Farmers in some U.S. regions now get paid more |
| 5 | Milk Composition Adjusted | New values better reflect modern milk nutrition |
📉 1. Higher Make Allowances – Less for Farmers
Processors in the U.S. are allowed”to subtract a ‘make allowance” from the milk price to cover their manufacturing costs (e.g., converting milk to cheese or butter).
These allowances have now been increased, meaning:
- Farmers will be paid less for each kilo of protein or fat
- Class III (cheese) and Class IV (butter/powder) prices will drop slightly
- Pressure on farmers’ margins will rise—unless offset by global price increases
This is similar to India, where dairies negotiate “procurement price” after subtracting chilling, transport, and overhead costs.
🧀 2. Barrel Cheese Removed – More Consistent Protein Pricing
U.S. cheese pricing used to average two types of cheddar: blocks 40 pounds) and barrels of 500 pounds.
Now only block cheddar is used—removing volatility caused by barrel prices, which often lag or behave differently.
“For Indian exporters of cheese or dairy ingredients, U.S. price benchmarks may become more predictable.”
💰 3. Class I Pricing Back to ‘Higher Of’
Previously, the U.S. averaged Class III and IV prices to calculate the price of fluid milk. That’s pricing that’s now been replaced with the higher of the two.
This benefits producers, especially during periods of volatility, such as 2020, when prices diverged wildly due to COVID-19 and government dairy purchases.
For India, where milk is mostly consumed as fluid, this change reinforces the importance of resilient pricing for drinkable milk.
📍 4. Regional Pricing (Class I Differentials) Increased
In the U.S., milk prices are adjusted by location to account for:
- Distance from processing centres
- Market demand for fluid milk
- Supply shortages or surpluses
New rules increase these location bonuses, especially in the Southeast and Northeast, where milk is more costly to source.
| Region | Average Increase (USD/cwt) |
|---|---|
| Southeast | $1.74 |
| Northeast | $1.64 |
| West | $0.42 |
“For Indian logistics planners, this is equivalent to factoring in milk transportation distance and cost-to-serve into procurement.”
🧪 5. Milk Composition Adjustments (From Dec 31, 2025)
The U.S. has updated the “assumed nutritional makeup” of skim milk, adjusting it to reflect current realities in terms of:
- True protein
- Other solids
- Nonfat solids
This will slightly improve payouts for farmers under specific pricing models and India’s growing focus on component-based milk testing.
🌍 Why Indian Dairy Leaders Should Care
✅ For Exporters
Changes in U.S. prices have a direct influence on global SMP and cheese markets. Indian dairy exports to Southeast Asia or Africa are benchmarked against those of the U.S. and the EU.
✅ For Policymakers
This reform demonstrates how the government can balance producer and processor interests with data-backed formula updates—a potential model for India’s policy design.
✅ For Cooperatives & Startups
Understanding the cost-to-price ratio and regional milk flow logic in the U.S. can help Indian startups improve their supply chain design, especially in deficit states like Bengal or the Northeast.
🧠 Conclusion: Modernisation with Lessons for India
The U.S. dairy system is not perfect, but the FMMO reform demonstrates a structured, transparent, and data-driven approach to milk pricing—something India can study as its dairy economy matures.
“As Indian dairies expand globally and benchmark against world markets, understanding systems like FMMO is not optional—it’s essential.”
