Got Milk?

The Essentials Newsletter, Thirty-seventh Edition

Admittedly, the news is quite varied and intense at the moment, so some of you may have missed the story about avian flu causing an egg shortage, which in turn, logically, has caused egg prices to rise. I wasn’t paying attention to that story so much due to the other things making headlines, but my youngest daughter had heard about it and approached me a few weeks ago about the idea of stockpiling our eggs. This both alerted me to the situation and gave me the opportunity to give my daughter a mini-lecture about the dangers of hoarding (flashbacks to toilet paper + COVID anyone?).

Since my 13-year-old daughter was more up on the egg situation than I was, I looked into it a bit. I see that prices have started to come down again. In fact, according to a report by the U.S. Department of Agriculture (USDA) issued on Friday, March 14:

“Negotiated wholesale prices for graded loose eggs continued on a sharp downward trajectory as no significant outbreaks of highly pathogenic avian influenza (HPAI) have been reported in March to date and the supply situation is rapidly improving.”

That’s good news, which will hopefully continue. But -- surprise! -- this newsletter isn’t actually about eggs. Rather it’s about eggs’ bovine-produced cousin, milk. If I’m being completely honest, it’s about more than milk. It’s about the hidden complexities behind our agricultural commodities such as milk – agriculture being a critical infrastructure I haven’t written as much about, as of late. The situation with avian flu and eggs reminded me of the few years I spent following agricultural policy while a congressional staffer many years ago.

Such work was not my favorite, no offense to anyone still involved in agricultural policy…but I did learn a few things during those years, even if seemingly obvious. The first was that each commodity has its own bespoke rules and regulations – from those related to markets or environmental impacts to tariffs and trade. Because of these specifics, understanding agricultural policy systemically is very difficult, or at least it was for me. The second was that the dairy industry is likely the most complex of them all. Dairy encompasses anything made from cows’ milk – milk itself, cream, butter, ice cream, cheese, etc.  Other products include dairy-based elements such as whey as well, but when I think of the dairy industry, I think of the “whole foods” rather than the components. To keep it simple in its complexity. Ha.

I had to gain a semblance of understanding of dairy policy because two of my bosses in Congress were from Pennsylvania, which is a major dairy-producing state. In fact, Pennsylvania’s number one industry back then (late 1990s) was agriculture and, according to the USDA’s 2024 census, it still is. The current market value of agricultural products sold was $10.3 billion in the state and the largest share of that market was from dairy products. Most of the 49,053 farms are family-owned.

One of my bosses, Congressman Sherwood, was particularly interested in diary farming and the impacts of federal dairy policy on his congressional district. When he replaced my previous boss, Congressman McDade, upon Mr. McDade’s retirement, I was on the spot to get up to speed on the topic. Not that Mr. McDade didn’t care about these issues, of course he did, but it was a matter of emphasis. Congressman Sherwood considered the issue one of his top three. No pressure.

As I rolled up my sleeves to dig into the issue, I quickly realized that math was involved – a lot of math. Besides the animal health, food safety, and environmental regulations governing dairy farms, I learned that the milk industry was subject to something called “federal milk marketing orders” (FMMOs). Such construct was created in the 1930s to create a price floor on milk and other dairy products, given some of their unique attributes compared to other commodities such as perishability and inelastic demand. According to the Congressional Research Service (CRS) in a report published in June 2022:

FMMOs are permanently authorized in the Agricultural Marketing Agreement Act of 1937, as amended, and not subject to reauthorization. FMMOs are established and amended through a formal public-hearing process that allows interested parties to present evidence regarding marketing and economic conditions in support of, or in opposition to, instituting or amending an order. Most FMMO changes are made administratively by USDA through the rulemaking process, which must then be approved by milk producers in a referendum. Congress may address issues related to the FMMO system through legislation.

Federal Milk Marketing Orders (FMMOs) are geographically defined fluid-milk demand areas. Under FMMO law and regulations, the U.S. Department of Agriculture (USDA) establishes a minimum milk price, and milk handlers, those who buy milk from producers, are required to pay at least the minimum price. Handlers are responsible for reporting milk receipts by end use to FMMO milk market administrators and maintaining adequate records so that administrators may audit and verify the accuracy of the reported uses.

The two main features of the FMMO system are classified pricing and pooling of milk. The FMMO system recognizes four different classes of milk: Class I (fluid use), Class II (soft products such as ice cream), Class III (cheese), and Class IV (butter and milk powder). Milk handlers report all milk receipts by end use, and the FMMO values this "pool" of milk receipts through formulas to compute milk class and component values. Milk handlers pay producers at least the weighted-average price of all class uses—known as a "uniform" price or "blend" price.

If you’re still with me and haven’t passed out from boredom, you’ll realize that this can be a highly fraught political process given the stakes. My boss was hearing from dairy farmers about their concerns with the FMMOs at the time and wanted to know about how to address those concerns. What we both found out is that a highly intricate process governs the pricing formulas – again, according to CRS:

Milk handlers are obligated to report milk receipts and milk end use by class to the FMMO market administrator. The total value of pooled milk receipts, as computed through classified price formulas, is the marketing order's producer-settlement fund. Each month some handlers will pay into the producer-settlement fund, and others will withdraw from the fund (see "Producer-Settlement Fund"). Each market administrator announces the uniform price for the month. Handlers pay milk producers and dairy cooperatives at least a uniform price based on a weighted average of the class prices. However, the computed uniform price paid to milk producers differs across the 11 FMMOs.

This is where the math came into play. My boss wanted me to explain the math, which I could not, but I did find people who could, including those at CRS as well as others in the industry. Another complication at the time that added to the math problem was the existence in the six Northeastern states (Maine, Massachusetts, Connecticut, Vermont, New Hampshire, and Rhode Island) of the Northeast Dairy Compact. While the NE Dairy Compact has since been congressionally dissolved, it was created for the express purpose of raising prices for dairy products above those allowable in the FMMOs. There was a ton of discussion in the Congressman’s district about the impacts of this Compact and whether or not other states should join.

I have since blocked out any deep understanding of these nuances. To be sure, the math involved in determining the prices in each FMMO never came easily to me, but I could understand the policy implications enough to help my boss formulate his response to the dairy farmers in the district. He set out to relay that response in a series of meetings on St. Patrick’s Day in 1999, almost exactly 26 years ago. I worked with his district office staff and the staff of Senator Santorum to arrange three meetings, one in each of the major counties that had significant dairy farming. We literally met in between the cows while they were being milked. It started snowing after the first meeting and my Mazda Protege got stuck (shockingly!), so some of the farmers pushed me out (my boss had already hit the road before he knew anything was amiss). I punched it and made it to the next meeting unscathed except for mud covering the diminutive car.

Congressman Sherwood did a great job listening to the dairy farmers and conveying his approach and I felt good about his preparation. After the last meeting, we pulled over on the side of the road, he in his truck and me in my Mazda, to confer. He thanked me and noted follow-up. I told him that I was intent on getting back to celebrate St. Patrick’s Day and he waved goodbye and wished me safe travels. What can I say, it was a Friday, I was single and 28, and knew I would have a great time with my circle of friends who had planned a fun night out. Alas, though, I made it back to Northern Virginia in plenty of time, but was so exhausted I uncharacteristically called it a day, curled up in my bed, and slept, dreaming of cows, FMMOs, milk prices and country roads rather than shamrocks.

I don’t know at this point whether or not the FMMO system is the right one, but I am very glad Congress disbanded the NE Dairy Compact in 2001 (after I had moved on to focus on electricity policy exclusively), which did not make sense to me from a national standpoint. As I mentioned at the outset of this newsletter, what struck me then and still does now is the deep level of complexity involved in just this one commodity. As I think about systemic risk across critical infrastructure sectors, one such risk is this complexity. Said another way, the fewer people that understand how these subsectors of critical infrastructure sectors (in this case, agriculture) work, the more risks we take that risks across the sector or across CI sectors can even be identified. It strikes me more and more that we need forums for cross-sectoral education and understanding.