USDA Finalizes Major Overhaul of Federal Milk Marketing Order Pricing

New Rules Aim to Modernize Milk Pricing System for the First Time in Over Two Decades

After more than a year of hearings, recommendations, and producer voting, the USDA has issued a Final Rule updating the Federal Milk Marketing Order (FMMO) pricing formulas—marking the most significant overhaul to the system since 2000. The new rules, officially announced by USDA’s Agricultural Marketing Service (AMS) in January 2025, go into effect in two phases, with most changes taking hold on June 1, 2025, and others—specifically related to skim milk composition—becoming effective December 1, 2025.

This action follows widespread industry feedback, and is the culmination of a process led by USDA and supported by industry groups such as the National Milk Producers Federation (NMPF), which advocated for changes to make the system more reflective of current processing costs, transportation needs, and market behavior.

Make Allowances Raised to Reflect Actual Processing Costs

One of the cornerstone updates involves raising “make allowances”—the amount processors subtract from milk prices to account for conversion costs. The updated allowances include:

• Cheese: $0.2519/lb

• Butter: $0.2272/lb

• Nonfat Dry Milk: $0.2393/lb

• Dry Whey: $0.2668/lb

  
  

These changes are intended to more accurately reflect the costs of manufacturing dairy products, which have risen significantly since the last update over two decades ago. A related update increases the butterfat recovery factor to 91%, which will also influence pricing structures within the system.

While the updates give processors a more realistic deduction, they are expected to slightly reduce the value paid for components like butterfat and protein under the current formulas—though the USDA notes that the overall impact on the pooled value of milk may be modestly positive.

Class III Formula Now Based Solely on Block Cheddar

Another significant update is the removal of the 500-pound barrel cheddar price from the Class III pricing formula. Moving forward, only the 40-pound block cheddar price will be used to calculate milk protein values.

This shift, outlined in the USDA Final Rule, eliminates the downward price pressure caused by barrel cheddar, which typically trades lower than block cheddar. The result is expected to be a modest improvement in protein price calculations.

“Higher-Of” Formula Returns for Class I Pricing

The Class I pricing formula is also reverting to the “higher-of” method, a change many in the industry have long pushed for. Previously, Class I prices were set using an average of Class III and IV milk prices plus a 74-cent adjuster. Under the new rule, Class I prices will instead be calculated using the higher of Class III or IV, aligning more closely with market dynamics.

In addition, USDA is introducing an Extended Shelf Life (ESL) milk adjuster, which will apply a rolling two-year average to better account for the rising presence of ESL milk in retail channels.

This change is expected to boost fluid milk prices during times of market volatility, helping dairy farmers capture more value in unpredictable price environments.

Location-Based Price Differentials See Notable Increases

To account for regional differences in transportation and market access, the USDA is also increasing Class I differentials in many areas across the U.S., with the largest adjustments concentrated in the Southeast and Northeast.

On average, location-based premiums will rise by $1.24 per hundredweight, with some locations receiving increases of up to $2.40/cwt, according to the Federal Register of the United States Government. These changes aim to better compensate producers for the costs of getting fluid milk to market, especially in regions without strong local production.

Composition Factors Updated for Skim Milk Pricing

Starting December 1, 2025, the USDA will also implement new component benchmarks for skim milk, aligning the formulas with the modern composition of milk. The new standards include:

• True protein: 3.3%

• Other solids: 6.0%

• Nonfat solids: 9.3%

  
  

These updates reflect improved animal nutrition and genetics that have boosted milk solids over the past two decades. The change will increase the value of skim components, which may help offset other price pressure from rising make allowances.

What It All Means for Producers

According to the National Milk Producers Federation, these reforms are expected to raise overall milk revenue by about $0.25 per hundredweight, though actual results will vary by region, class utilization, and market conditions. The Michigan Milk Producers Association echoed similar sentiments, noting that while some changes may reduce component values, others—like the “higher-of” mover and Class I differential increases—will help offset those losses.

Importantly, these updates are meant to bring transparency, consistency, and market alignment to a system that had not seen major structural changes in over 20 years.

Looking Ahead

While these new rules represent a significant step forward in FMMO modernization, USDA officials and industry advocates alike have suggested that ongoing evaluation will be critical to ensure the formulas remain relevant in a rapidly evolving dairy market.

For now, farmers, processors, and cooperatives alike should closely review the changes and assess how these adjustments may affect risk management strategies, milk pooling decisions, and regional pricing relationships heading into 2026 and beyond.