Regulatory Economic Impact Analysis of the California FMMO Final Decision i

 

Regulatory Economic Impact Analysis of the 

Final Decision to Establish a

California Federal Milk Marketing Order

Agricultural Marketing Service, Dairy Program - Economics Division, March 2018
Regulatory Economic Impact Analysis of the California FMMO Final Decision i

 

Table of Contents

I. PURPOSE OF THE REGULATORY IMPACT ANALYSIS .............................................................1

A. Scope of Analysis................................................................................................................................1

B. Methods of Analysis............................................................................................................................3

II. AN EXAMINATION OF THE FINAL DECISION ............................................................................4

A. Classification.......................................................................................................................................4

B. Pricing .................................................................................................................................................5

C. Milk Pooling........................................................................................................................................6

D. Out-of-State Milk................................................................................................................................7

E. Producer-Handlers...............................................................................................................................8

F. Fortification Allowances......................................................................................................................8

G. Transportation Allowances and Credits..............................................................................................8

H. Quota...................................................................................................................................................8

III. ANALYSIS OF THE IMPACTS..........................................................................................................9

A. Introduction........................................................................................................................................9

B. Impacts on Dairy Farmers..................................................................................................................9

C. Impacts on Fluid Milk Processors and Dairy Product Manufacturers..............................................13

E. Impacts on International Trade.........................................................................................................16

F. Summary...........................................................................................................................................16

IV. APPENDIX A: ABBREVIATIONS ....................................................................................................17

V. APPENDIX B: TABLES.......................................................................................................................18

TABLE B1—Statistical uniform prices at 3.5% BF, changes from the baseline ..................................18

TABLE B2—Blend prices at test, changes from the baseline ...............................................................18

TABLE B3—Dairy product prices, changes from the baseline.............................................................18

TABLE B4—All-milk price, changes from the baseline.......................................................................18

TABLE B5—Milk production, changes from the baseline....................................................................19
Regulatory Economic Impact Analysis of the California FMMO Final Decision ii

TABLE B6—Milk marketings, changes from the baseline ...................................................................19

TABLE B7—Producer revenue, changes from the baseline..................................................................19

TABLE B8—FMMO component prices, changes from the baseline ....................................................20

TABLE B9—FMMO class prices at 3.5% BF, changes from the baseline ...........................................20

TABLE B10—California FMMO class prices at 3.5% BF, changes from the baseline........................20

TABLE B11—FMMO class prices at test, changes from the baseline..................................................21

TABLE B12—California class utilization, changes from the baseline..................................................22

TABLE B13—National class utilization, changes from the baseline....................................................22

TABLE B14—FMMO Class I revenue/handler costs, changes from the baseline................................22

TABLE B15—U.S. dairy product imports, changes from the baseline.................................................22

TABLE B16—U.S. dairy product exports, changes from the baseline .................................................22

TABLE B17—Value of U.S. dairy product imports, changes from the baseline ..................................22

TABLE B18—Value of U.S. dairy product exports, changes from the baseline...................................23

VI. APPENDIX C: TECHNICAL SUPPLEMENT TO THE MILK POOLING ANALYSIS ..................24

VII. APPENDIX D: TECHNICAL SUPPLEMENT TO THE CONSUMER WELFARE ANALYSIS ...29
Regulatory Economic Impact Analysis of the California FMMO Final Decision 1

 

Regulatory Economic Impact Analysis of the Final Decision to Establish a 

California Federal Milk Marketing Order

Agricultural Marketing Service, Dairy Program - Economics Division

I. PURPOSE OF THE REGULATORY IMPACT ANALYSIS

From September 22, 2015, to November 18, 2015, the Agricultural Marketing Service (AMS) held a 

hearing to consider and take evidence on proposals to establish a Federal Milk Marketing Order (FMMO) 

for the state of California. Based on the evidentiary record, USDA issued a recommended decision 

proposing the establishment of a California FMMO and requested public comment on the proposed order. 

Twenty-three public comments on the proposed order provisions and five concerning the economic 

analysis were received.

On March 28, 2018, USDA released a final decision addressing the public comments received regarding 

order provisions. This analysis examines the economic impact the final decision proposed for a 

California FMMO could have on the state’s dairy industry, as well as the milk supply, product demand, 

product prices, and milk allocation throughout the United States. Consumer welfare and producer

revenue changes are also examined.

The AMS Dairy Program Regional Econometric Model has been updated to include 2015 data and is 

based on the USDA Agricultural Baseline Projections to 2026 published in February 2017.

1 The 

Regional Econometric Model was also revised to address concerns expressed in the public comments

received on the previous economic impact analysis and on the model. The updated data, new USDA

baseline, and model changes responsive to comments make the results presented here not directly 

comparable to the results found in previous impact analyses of the proposals and of the recommended 

decision.

2

A. Scope of Analysis

The impacts of promulgating a California FMMO are estimated as deviations from the Regional 

Econometric Model baseline, which is aligned with the USDA Agricultural Baseline Projections to 2026. 

Assumptions for the cost of feed are provided by the USDA Baseline Projections. 

The Regional Econometric Model simultaneously forecasts annual regional milk production, regional 

fluid milk and national manufactured dairy product consumption, regional dairy class utilization, national 

 1

 U. S. Department of Agriculture, Office of the Chief Economist, World Agricultural Outlook Board, Interagency 

Agricultural Projections Committee- Long-term Projections Report OCE-2017-1, February 2017.

https://www.ers.usda.gov/webdocs/publications/82539/oce-2017-1.pdf?v=42788 2

 Preliminary Economic Impact Analysis of the Proposals –

https://www.ams.usda.gov/sites/default/files/media/Preliminary%20Impact%20Analysis%20-%20Final.pdf

Regulatory Economic Impact Analysis of the Recommended Decision -

https://www.ams.usda.gov/sites/default/files/media/RegulatoryImpactAnalysisoftheRecommendedDecision.pdf
Regulatory Economic Impact Analysis of the California FMMO Final Decision 2

dairy product prices, and regional farm milk prices from 2016 through 2026. The explanation of the 

operation and assumptions of the Econometric Model Documentation is available on the AMS Dairy

Program website.3

The Regional Econometric Model baseline operates under the following assumptions: 

• Milk is produced in all 50 States. The states are grouped into 14 milk supply regions.

• Milk produced in each supply region is allocated to one or more of the 12 marketing areas (10 

existing FMMO pools, the proposed California pool, and an unregulated “pool”).4

• Regional cow numbers are functions of the all-milk price, feed costs, slaughter cow prices, non-farm 

earnings, and other variables. 

• Milk production per cow is estimated as a function of all-milk prices, feed costs, and other variables. 

• Milk marketings are estimated as milk production less farm use. 

• The classified (or class) prices are calculated by the FMMO end-product price formulas, which 

determine component values based on wholesale commodity prices for butter, nonfat dry milk, 

cheddar cheese and dry whey.

• The blend price at test reflects the total marketwide pool value and is calculated from the class prices, 

component levels, and class utilization of the respective FMMO and proposed California FMMO.

• The all-milk price for the supply region reflects the historical relationship to the regulated blend price 

of the FMMO that most closely matches the geographic area of the supply region.

• Only the regulated prices for 11 of the FMMO pools are estimated (10 existing FMMOs and the

proposed California FMMO). Prices for the unregulated milk are not estimated independently due to 

a lack of data. 

• A modified California State Order (CSO) statewide blend price is used in the model baseline as the 

California statistical uniform price. The CSO uses an 8.7 percent solids nonfat test to compute its 

standardized CSO prices; in the model baseline and in this analysis, the statistical uniform solids 

nonfat percentage for California is set at 8.685 to keep the component tests comparable with those 

used in the FMMOs.

• Producer revenues are the product of milk marketings and the all-milk price.

• Milk movements among milk supply regions are functions of relative blend prices between FMMOs.

• Milk movements are summed to create pools for all FMMO marketing areas, the proposed California

FMMO, and an unregulated “pool.”

• Regional demands for fluid milk per capita consumption are functions of the Class I price, income, 

and population under five years of age. 

• Milk supplies for manufactured milk products are based on total pooled milk minus volumes 

demanded for Class I products. 

• Classifications of manufactured milk within the pools are functions of ratios of the wholesale prices 

to their respective class prices and other variables. 

• Fluid use for the unregulated milk is classified as Class I and its estimation is driven by income.

• The Class II, III, and IV utilizations for unregulated milk in the Former Western and Unregulated 

West regions are proportional to the average class utilizations of FMMO 30. 

• The unregulated milk not produced in the Former Western and Unregulated West regions is 

proportional to the average Class II, III and IV utilizations across all FMMOs.

 3

 Regional Econometric Model documentation: 

https://www.ams.usda.gov/sites/default/files/media/FinalDecisionEconometricModelDocumentation.pdf 4 In FMMO terms, a pool is all the milk regulated by a FMMO. Therefore, unregulated milk is not a "pool" by 

definition. However, the unregulated milk is grouped together as a unit for modeling purposes.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 3

• Manufacturing milk not pooled under a proposed California FMMO that was previously pooled under 

the CSO is assumed to be used in the same class as it would have been under the CSO and is included 

with the other unregulated milk in the appropriate class.

• National demands for manufactured dairy products per capita consumption are functions of respective 

prices, per capita income, and other factors. 

• A two-step process is used to estimate ending stocks. First, average stock values of the monthly 

ending stocks from the last half or last quarter of each year are estimated as functions of the product 

price. Second, year-end stocks are estimated from average stocks. 

• Imports above the tariff rate quota and commercial exports for American cheese, other cheese, butter, 

nonfat dry milk and dry whey are estimated as functions of the difference between the domestic 

product price and the free-on-board international price.

5

• Observed butterfat and other milk components tests are used for FMMOs where such data are

available. Otherwise, default standards are used for comparisons. 

The Regional Econometric Model generates long-term baseline supply, demand, and price projections 

consistent with USDA’s official baseline projections. The model’s baseline projections for 2016 are 

adjusted to reflect observed data for 2016. The model considers movements of milk among FMMOs, but 

not within a FMMO. The FMMO minimum prices are used for all the pools. The unregulated milk prices 

are not estimated due to a lack of data, but FMMO minimum prices are assumed for this milk. The effects 

of seasonal changes in production, consumption, and price are not analyzed in this annual model. 

The Regional Econometric Model structure used for this analysis is fundamentally the same as the model 

used for the previous impact analyses of the hearing proposals and of the recommended decision for a 

proposed California FMMO. The model equations have been updated to include 2015 data and the model 

is based on the USDA Agricultural Baseline Projections to 2026 published in February 2017.

Furthermore, upon release of the recommended decision and its accompanying Regulatory Economic 

Impact Analysis (REIA-R), AMS solicited comments from the public on its econometric model. Some of 

the concerns put forth in the comments were addressed by adjusting how the model calculates the

unregulated manufacturing milk class utilizations and the amounts of milk that a handler may elect not to

pool in California under a FMMO.

6 The equations for the milk-not-pooled analysis were updated to 

include 2016 data. Thus, the results presented herein are not comparable to those found in the previous 

analyses. 

B. Methods of Analysis

Baseline estimates are constructed assuming that if a California FMMO is established, for modeling 

purposes, the FMMO regulations are assumed to supersede the CSO beginning January 1, 2018. 

This analysis estimates the potential impacts resulting from adoption of the provisions contained in the 

final decision for a proposed California FMMO. Deviations from the baseline of current CSO policy are 

identified and modeled. The analysis assumes that all other model parameters would remain unchanged 

during the comparison period. The impacts of the proposed California FMMO are then compared to the 

 5 Free-on-board international prices are exogenous to the model and do not change between the model baseline and 

the impact analysis of the proposed California FMMO. Thus changes in domestic prices from the baseline cause 

changes in imports and exports. It is beyond the scope of the current model to project international prices and the 

interaction of the domestic and international dairy markets.

6 See the model documentation and Appendix C: Technical supplement to the Milk Pooling Analysis for more 

details.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 4

model’s baseline projections for the period 2018 through 2026. The results of this comparison are found 

in Appendix B, Tables 1-18. 

The following indicators are evaluated:

• Changes in the uniform price, all-milk price, and producer revenues, which indicate a farmer’s 

ability and willingness to produce milk, and

• Changes in milk marketings, Class I use, and other class prices, which measure the adequacy of 

milk supplies to meet fluid needs and the effect on consumer expenditures for fluid and 

manufactured dairy products.

 

II. AN EXAMINATION OF THE FINAL DECISION

The final decision proposes a California FMMO that includes the following features:

• Uniform FMMO product classification provisions and end-product pricing formulas.

7

• Performance-based pooling standards tailored to the California market. 

• Uniform FMMO definition of producer-handlers. 

• Uniform FMMO accounting for fortification of fluid milk products.

• A provision to allow for an authorized deduction from producer payments for the administration 

of the California quota program by CDFA. The quota program would operate independently of

the proposed California FMMO.

This section highlights the differences between the existing CSO and the proposed California FMMO,

and describes the methodology of determining the potential impact that could occur as a result of adopting 

the proposed California FMMO. Instances where certain features of the proposed California FMMO

could not be modeled are noted. 

A. Classification

The proposed California FMMO would adopt the uniform classification provisions of the 10 existing

FMMOs. 

The table below provides an approximate comparison of CSO classes and the uniform FMMO classes.

CSO Class California FMMO 

Class

Class 1 Class I

Class 2 & 3 Class II

Class 4b Class III

Class 4a Class IV

 7 “Uniform” in this and other similar cases refers to provisions that are uniform across all Federal milk marketing 

orders.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 5

Under the proposed California FMMO, the classification of certain products would change to align with 

uniform FMMO classification:

• Reassigning buttermilk from CSO Class 2 to FMMO Class I.

8

• Reassigning half and half from CSO Class 1 to FMMO Class II.

• Reassigning eggnog from CSO Class 2 to FMMO Class I. This change is not accounted for in the 

model due to lack of available data.

• Reassigning dry or condensed nonfat solids used in fortifying fluid milk products from CSO 

Class 1 to FMMO Class IV.

• Assigning the Class I skim volume increase attributable to fortifying fluid milk products with dry 

products to FMMO Class I.

• There are instances where the CSO classifies products based on product type and location of 

where the product is sold. The proposed California FMMO would classify all products based 

solely on product type. This change is not accounted for in the model due to lack of available 

data.

B. Pricing

The proposed California FMMO would replace current CSO classified price formulas with uniform endproduct pricing formulas currently used in the 10 existing FMMOs. In this analysis, FMMO pricing 

formulas are used to calculate the Class I, II, III and IV prices. Therefore, the component and Class II, 

III, and IV prices under the proposed California FMMO are uniform with the existing FMMOs. In this 

analysis, Class I prices are computed using the same base price used in the existing FMMOs and adjusted 

based on the Class I differential of the county where the plant is located. 

No specific adjustments are made to any potential premiums in response to changes in regulated prices 

under the proposed California FMMO because of the lack of public premium data in California. Changes 

in premiums are captured to some extent by changes in the all-milk price.

Under the proposed California FMMO, producer prices would be computed the same as current FMMOs 

under multiple component pricing using the protein, other solids, and butterfat prices from the Class III 

price formulas and a producer price differential. The producer price differential would be announced at 

the principle pricing point of Los Angeles County, California ($2.10), and adjusted based on the location 

of the plant using the uniform FMMO Class I differentials. The Class I price in this analysis is shown for 

the principle pricing point. California FMMO statistical uniform prices at 3.5 percent butterfat and blend 

price at test have been calculated.

9

 

 8 All buttermilk is assumed to move to Class I under FMMO classification. A small volume of buttermilk is 

classified as Class II when labeled as baking buttermilk with > 2% added starch or sold in bulk to a commercial food 

processing establishment, but there were no data available on this volume. The volume is likely to be small and to 

have negligible impact on the results. 9 The blend prices are a weighted average of the class prices, weighted by their utilization, for all FMMOs. The 

statistical uniform price is calculated as either the Class III price plus the producer price differential (PPD) (for 

FMMOs 1, 30, 32, 33, 124, 126, and the proposed 51) or as 0.965 times the uniform skim price plus 3.5 times the 

uniform butterfat price (for FMMOs 5, 6, 7, and 131). Therefore, using the actual test or the standardized 3.5 test 

can make a large difference in the resulting number. The utilization changes can also impact the results. Utilization 

is influenced by many factors such as blend prices and milk movements. See model documentation for further 

information.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 6

C. Milk Pooling

Currently the CSO requires almost all California Grade A milk received at a California plant to be pooled. 

The proposed California FMMO contains performance-based pooling standards conceptually similar to 

the 10 existing FMMOs, but tailored for the California market. The pooling provisions are designed to 

determine those producers whose milk is consistently available to supply the Class I market, and therefore 

should share in the revenues from the market. There would be no regulatory producer payment difference 

given to milk based on the location of the dairy farm where it was produced.

The proposed California FMMO would fully regulate all Class I distributing plants when their total route 

disposition and packaged transfers are at least 25 percent of the milk received at the plant and 25 percent 

of total route disposition and transfers are to outlets in the California marketing area. Handlers have the 

option to pool their Class II, III and IV milk receipts if a minimum of 10 percent of the Grade A milk 

received at the plant is shipped to qualified pool distributing plants.

Additionally, during the months of April through February, milk pooled by handlers under the proposed

California FMMO may not exceed 125 percent of the producer milk receipts the handler pooled during 

the previous month. For March, the limit would be 135 percent. (New handlers on the order and handlers 

with significantly changed milk supply conditions can be exempted from this limitation based on a 

determination made by the market administrator.)

The pooling provisions in the proposed California FMMO are similar to those in the Upper Midwest 

FMMO, which, like California, has a high share of manufacturing milk. In the proposed California 

FMMO, the pooling decision lies with the handlers. This is a significant change, since under the current 

CSO nearly all milk must be pooled. Since no California data are available to estimate the volume of 

milk that handlers would elect to pool, a separate pooling analysis was conducted to estimate monthly 

volumes of milk-not-pooled using data from the Upper Midwest. (See Appendix C: Technical 

Supplement to the Milk Pooling Analysis.) 

The current pooling standards in the Upper Midwest were first put in place in December 2006, so monthly 

data from January 2007 through December 2016 was used to estimate how manufacturers’ pooling 

decisions respond to the class-to-uniform price relationship. The analysis also accounted for the 

differences in Class I differential surfaces with the proposed California FMMO having a wider range 

from high to low, $0.50 per cwt, compared to the $0.20 per cwt range in the Upper Midwest FMMO.

This milk pooling analysis found that manufacturers in the Upper Midwest chose to pool less Class II, III, 

or IV milk when the respective price was high relative to the uniform price. That is, handlers collectively 

elect to pool less milk when their pool draw is lower and they elect to pool more milk when their pool 

draw is higher. Under the CSO nearly all milk produced in California is pooled. On average, the analysis 

found that approximately 41.6 percent of the manufacturing milk pooled on the CSO would not be pooled 

because of class-to-uniform price relationships. On a classified-use basis, the analysis estimated 32.7

percent of Class II, 42.4 percent of Class III, and 41.8 percent of Class IV milk currently pooled under the 

CSO would not be pooled because of price. 10 Under the CSO nearly all milk produced in California is 

 

10 The following econometric relationships were found between milk-not-pooled and the monthly class-uniform 

price difference in the Upper Midwest FMMO (‘milk-not-pooled’ includes only milk that is ‘normally’ pooled):

Class II milk not pooled/Class II milk pooled = 1.009297 - (0.62034x (Uniform Price – Class II Price))

Class III milk not pooled/Class III milk pooled = 0.33371 - (0.65422x (Uniform Price – Class III Price))

Class IV milk not pooled/Class IV milk pooled = 1.297897 - (0.59969x (Uniform Price – Class IV Price))
Regulatory Economic Impact Analysis of the California FMMO Final Decision 7

pooled; under the proposed California FMMO handlers have the option to pool manufacturing milk. 

Therefore the volume of milk estimated to be pooled is less than the volume of milk estimated to be

produced in California.

The Regional Econometric Model assumes California manufacturers would respond to these class-touniform price relationships under the proposed California FMMO in a similar manner as manufacturers in 

the Upper Midwest. The Regional Econometric Model uses this analysis to estimate the amount of

California milk that would not be pooled under the proposed FMMO as the pooling of manufactured milk 

would no longer be mandatory. Most of the milk that handlers are projected not to pool is Class III and 

Class IV, as shown in the table below.

California Milk-Not-Pooled Under the Final Decision

In the Regional Econometric Model, estimated California milk-not-pooled volumes are included with the 

unregulated milk volumes (see model documentation for more details).

D. Out-of-State Milk

The CSO does not have the authority to regulate interstate commerce; therefore milk produced outside of 

the state is ineligible to participate in the CSO.

The proposed California FMMO recommends performance-based pooling standards tailored to the 

California market. Milk meeting these standards would be eligible for pooling regardless of its origin. 

Therefore, milk produced outside of California could become eligible to participate in the proposed 

California FMMO and receive the order’s blend price. Volumes of out-of-state milk entering California 

are assumed to remain at current levels. 

The following assumptions are made in the Regional Econometric Model:

• The most recent three-year average of out-of-state milk movements is used for the forecast 

period.

• The model baseline assigns the out-of-state milk sold into California, but not regulated by the 

CSO, to the unregulated milk volume.

11

• Under the proposed California FMMO, this unregulated out-of-state milk moving into California 

is pooled as Class I milk on the proposed California FMMO.

 

There is greater than 99.99 percent statistical confidence that there is a positive relationship between the price 

difference and the amount of milk pooled, for each class. The ‘R-squared’ of the equations are 0.6244, 0.5003, and 

0.3574 for the Class II, III, and IV pooling equations, respectively. 11 Published CDFA data include out-of-state Class 1 milk sold into California in its CSO Class 1 sales data. The 

Regional Econometric Model baseline removes those out-of-state Class 1 volumes from the California data and 

includes them with the unregulated milk.

Class Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

CA Class II Milk Not Pooled Mil. LBS 777 786 774 824 844 859 868 856 905 833 774 905

CA Class III Milk Not Pooled Mil. LBS 9151 9641 10211 10225 10339 10578 10783 10537 10545 10223 9151 10783

CA Class IV Milk Not Pooled Mil. LBS 5269 5424 5071 5555 6048 6322 6572 7576 7647 6165 5071 7647
Regulatory Economic Impact Analysis of the California FMMO Final Decision 8

E. Producer-Handlers

The proposed California FMMO recommends FMMO producer-handler provisions contained in some of 

the existing FMMOs. Under the proposed California FMMO, producer-handlers who have Class I 

packaged sales of less than 3 million pounds per month and do not take delivery of more than 150,000 

pounds of milk from other regulated handlers would be exempt from pricing and pooling provisions. 

Handlers not meeting this standard would not be granted producer-handler status under the proposed 

California FMMO. 

This analysis assumes smaller producer-handlers, referred to as Option 66 producer-handlers by the CSO, 

would meet the FMMO producer-handler definition and therefore would not be subject to the pricing and 

policy provisions of the order. The analysis also assumes current CSO producer-handlers exceeding the 3 

million pound per month threshold, referred to as Option 70 producer-handlers by the CSO, would 

become fully regulated handlers, and accordingly, all their milk sales would be priced and pooled under 

the proposed California FMMO. 

F. Fortification Allowances

Currently, handlers regulated by the CSO receive a credit against their pooling obligations for fortifying 

fluid milk products with either condensed skim milk or nonfat dry milk.

Under the proposed California FMMO, California handlers would no longer receive credits for fluid milk 

fortification. Instead, accounting for fortification would be uniform with existing FMMOs. The 

classification of the fluid milk equivalent of the milk solids used to fortify fluid milk products would be 

classified as Class IV and the increased volume of Class I product due to fortification would be classified 

as Class I. 

G. Transportation Allowances and Credits

Currently, the CSO provides for transportation credits to handlers on plant-to-plant milk movements and 

transportation allowances to producers for milk movements between farms and Class 1, 2 or 3 plants.

The proposed California FMMO does not contain a transportation credit or transportation allowance 

program. In the baseline analysis, the values of the CSO transportation credit and allowance programs 

are deducted from the pool; but they are not subtracted from the market-wide pool value before 

calculating the uniform prices for a proposed California FMMO.

H. Quota

The California quota program is a state-administered program that entitles the quota holder to an 

additional $0.195 per pound of solids-not-fat (SNF) above the CSO overbase price. The money to pay the 

quota premium is deducted from the CSO market-wide pool before the CSO overbase price is calculated. 

The proposed California FMMO leaves the quota program, including both regular and exempt quota,

entirely within the jurisdiction of CDFA. Recognition of quota under the proposed California FMMO is 
Regulatory Economic Impact Analysis of the California FMMO Final Decision 9

through an “authorized deduction” from payments due to producers.12 Therefore in this analysis, the 

quota premium is not removed from the market-wide pool before the California FMMO blend price is 

computed.

The proposed California FMMO would have uniform producer prices. Separate quota and non-quota 

producer prices would not be announced and consequently they are not calculated in this analysis. In the 

proposed California FMMO, funds for the California quota program would be collected and transferred to 

quota holders as determined by CDFA. No additional revenue would be added or subtracted from the 

California market-wide pool due to the quota payments. That is, the total revenue for California dairy 

producers and the average California all-milk price would be uniform, whether or not it is allocated 

between quota-holders and non-quota-holders.

III. ANALYSIS OF THE IMPACTS

A. Introduction

This section summarizes the estimated impacts from the adoption of the proposed California FMMO. 

These impacts are described as deviations from the Regional Econometric Model baseline based on the 

USDA Agricultural Baseline Projections to 2026.

The structure of the Regional Econometric Model used in this analysis is fundamentally the same as for 

the Regulatory Economic Impact Analysis of the Recommended California FMMO (REIA-R). However, 

the results presented here are not comparable to the results presented in the REIA-R for several reasons:

1. A new USDA baseline was published in February 2017, with estimates to 2026. The baseline 

utilized in the REIA-R was based on the USDA baseline to 2025 published in February 2016. 

2. The specification of the model equations were updated and re-estimated to include 2015 data.

3. The calculations for class utilization of unregulated manufacturing milk were adjusted to better 

reflect more realistic estimations of Class utilization of unregulated milk.

4. The milk-not-pooled analysis was revised to better reflect expected pooling decisions in 

California under the proposed FMMO.

B. Impacts on Dairy Farmers

Changes in statistical uniform blend prices at 3.5 percent butterfat (3.5 percent BF) and at test are used to

evaluate the impact of the California FMMO on dairy farmers (Tables B1 and B2, respectively).

13 Also, 

changes in dairy product prices (Table B3), all-milk prices (Table B4), milk production (Table B5), total 

milk marketings (Table B6), and producer revenue (Table B7) in the 14 supply regions are examined. 

 12 An “authorized deduction” is a deduction from a handler’s payment to a producer or cooperative association,

authorized by the producer or the cooperative or by other legal authority that is not counted against the handler’s 

obligation to pay a minimum value to the producer. Examples include payment of promotional assessments or for 

reasonable hauling charges. 13 A modified California State Order (CSO) statewide blend price is used in the model baseline as the California 

statistical uniform price. The statistical uniform solids nonfat percentage for California is set at 8.685, comparable 

with those used in the FMMOs
Regulatory Economic Impact Analysis of the California FMMO Final Decision 10

The analysis shows that adoption of the proposed California FMMO would increase the California 

statistical uniform milk price at 3.5 percent BF in each year analyzed, except for 2019. The statistical 

uniform milk price averages $0.04 per hundredweight (cwt) higher under the proposed California FMMO 

for the 9-year period, 2018 through 2026 (Table B1).

14 

The Upper Midwest FMMO statistical uniform price also increases over the baseline in each year 2018-

2026, with an average increase of $0.20 per cwt. The Florida FMMO statistical uniform price averaged 

$0.04 per cwt over the baseline for the 9-year forecast period, but was lower for 2024 and 2026. The 

remaining FMMOs’ statistical uniform prices average lower than the baseline over the forecast period

with the adoption of the proposed California FMMO, ranging from -$0.02 per cwt in the Southwest 

FMMO to -$0.23 per cwt for the Arizona FMMO. However, statistical uniform prices for all regions 

show an increase over the baseline for 2018.

Under the proposed California FMMO, California blend prices at test for 2018-2026 show an average 

annual increase over the baseline of $0.45 per cwt (Table B2). The Appalachian, Upper Midwest and 

Southeast FMMOs also have higher blend prices at test each year 2018-2026, and average higher than the 

baseline over the forecast period by $0.35, $0.17, and $0.10 per cwt, respectively. The impact on the 

Appalachian Order for blend price at test may be somewhat overstated due to a limitation in the current 

model specification.15

The Florida and Southwest FMMOs show annual average blend price increases of $0.06 and $0.04 per 

cwt, respectively, over the forecast period. However, in several years, the blend prices in these two 

FMMOs show a decrease with the implementation of a proposed California FMMO. The blend prices at 

test increase over the baseline in 2018 for the remaining FMMOs but average lower over the 8-year 

period, from -$0.16 per cwt in the Central FMMO to -$0.30 per cwt in the Mideast FMMO.

Changes in the blend price also reflect changes in prices for the different classes of milk. Driving the 

changes in classified milk prices are the changes in the national average dairy product prices due to 

adoption of a proposed California FMMO (Table B3). Cheddar cheese and dry whey prices increase 

$0.0288 and $0.0064 per pound (annual average), respectively, over 2018-2026. In contrast, butter and 

nonfat dry milk prices decrease an average of $0.0948 and $0.0435 per pound, respectively, over 2018-

2026. Nationally more milk goes into butter and nonfat dry milk production compared to cheese and 

whey production, leading to decreased prices for butter and nonfat dry milk nationally. Consequently, 

less milk is utilized in Class III and more milk is utilized in Class IV nationally (Table B13). California 

shows declines in Class II, III and IV utilization due to milk that handlers are estimated to elect not to 

pool under the proposed California order (Table B12).16

In addition, blend prices are affected by class prices, fat content, and class utilization. Changes from the 

baseline in average utilizations and component tests are shown in the two tables below. The changes 

represent the annual average for the 2018-2026 forecast period. Forecast California utilization and 

 14 The California FMMO statistical uniform price is computed as the FMMO Class III price plus the California 

FMMO producer price differential (PPD). 

15 Under the proposed California FMMO, Class II, III, and IV pounds increase in relation to the baseline for the 

Appalachian order. The model does not explicitly account for diversion limits, which would in practice, likely 

prevent that additional milk from being pooled. The higher butterfat content of manufacturing milk in the 

Appalachian order increases the total butterfat for the pooled milk of that order. Therefore, the model results most 

likely overstate the impact to the Appalachian order blend price at test and the all-milk price due to the higher 

butterfat percentage of pooled milk.

16 California milk volumes estimated to not be pooled are accounted for in the unregulated milk volume.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 11

component test changes account for both milk that elects not to pool under the proposed California 

FMMO and the resulting change in class utilizations. Therefore, forecast California utilization and 

component test changes are not included in the tables presented here because they are not comparable to 

the other FMMOS.

Average Forecast Utilization Changes, 2018-202617

Forecast changes from baseline for fat, SNF, protein and other solids tests in pooled milk with the 

adoption of the proposed California FMMO are shown below. Changes in the average tests reflect 

changes in pool utilization, not in the average tests of producer milk. 

Average Fat, SNF, Protein and Other Solids Tests Changes, 2018-2026

Adoption of the proposed California FMMO is estimated to increase the United States all-milk price in 

each year forecast, averaging $0.08 per cwt higher over the 2018-2026 period (Table B4). The 

Appalachian, Florida, Southeast, Southwest, Upper Midwest, California, the Former Western region

(covering parts of Utah, Idaho, and Nevada), and Hawaii and Alaska regions all average higher all-milk 

 17 The California FMMO is proposed to be 7 CFR part 1051.

Class I Class II Class III Class IV

Northeast (1) 0.01 0.00 -0.12 0.11

Appalachian (5) -3.32 1.70 0.53 1.08

Florida (6) -0.57 0.42 -0.06 0.21

Southeast (7) -1.66 0.51 0.62 0.52

Upper Midwest (30) -0.12 0.01 0.16 -0.05

Central (32) 0.33 -0.14 0.26 -0.45

Mideast (33) 0.09 -0.12 -0.05 0.08

Pacific Northwest (124) 1.19 -0.12 -0.87 -0.20

Southwest (126) -0.92 0.43 0.03 0.47

Arizona (131) 0.13 -0.10 0.87 -0.90

Percentage points change in utilizations

Federal Order

Northeast (1) 0.00 0.0000 0.0000 0.0000

Appalachian (5) 0.18 - - -

Florida (6) 0.07 - - -

Southeast (7) 0.09 - - -

Upper Midwest (30) 0.00 0.0005 0.0000 0.0005

Central (32) -0.02 0.0018 0.0000 0.0018

Mideast (33) 0.00 0.0005 0.0000 0.0005

Pacific Northwest (124 -0.03 0.0020 0.0000 0.0020

Southwest (126) 0.04 -0.0042 0.0000 -0.0042

Arizona (131) 0.04 -0.0035 - -

Percentage points change in average test

 Fat SNF Protein 

 Other 

Solids 

Federal Order
Regulatory Economic Impact Analysis of the California FMMO Final Decision 12

prices for 2018-2026. The forecasted increases in all-milk prices range from $0.04 per cwt in the 

Southwest region to $0.43 per cwt in California. The remaining 6 regions show annual average decreases

from the baseline ranging from -$0.11 per cwt in the Unregulated West to -$0.27 per cwt in the Mideast 

region. 

The higher milk prices forecasted with adoption of a proposed California FMMO encourage increased 

U.S. milk production over the baseline, with an annual average increase of 545 million pounds for 2018-

2026 (Table B5). Eight regions show higher milk production over all the forecast years, led by California 

with an average increase of 383 million pounds, followed by the Upper Midwest with an annual average 

increase of 143 million pounds. The increase in milk production in the Appalachian, Florida, Southeast, 

Southwest, Former Western and Hawaii-and-Alaska regions is estimated to average between 1 and 113

million pounds annually. Six regions (Northeast, Central, Mideast, Pacific Northwest, Arizona and 

Unregulated West) show an average annual decrease in milk production over the forecast period, ranging 

from 67 million pounds (Mideast) to 2 million pounds (Unregulated West) below baseline estimates.

The impact of the proposed California FMMO on milk marketings (Table B6), which are defined as milk 

production less farm use of milk, follows the same pattern as estimated milk production. 

Adoption of the proposed California FMMO would increase U.S. producer revenue by an average of $284

million per year (Table B7) over the 9-year forecast period. This impact reflects the combined impact of 

the various changes on prices and production forecast from implementation of the proposed California 

FMMO. Adoption of FMMO classified prices in a California FMMO leads to higher classified prices in 

California which in turn leads to increased California milk production (Table B5). Adoption of the 

FMMO Class III price in California, which is higher than the current CSO Class 4b price, would reduce 

the amount of pool milk used for cheese and whey production in California (Table B12) that is priced as 

Class III through the California FMMO. 

The reduction of cheese and whey production that is priced and pooled through the proposed California 

FMMO contributes to a national increase in their product prices and consequently an increase in the 

FMMO Class III price (Table B9). Further decreases are seen nationally in Class III utilization (Table

B13) due to the increased FMMO Class III price. The higher FMMO Class III price shifts milk supplies 

nationally from making cheese to increased butter and nonfat dry milk production. The increased national

butter and nonfat dry milk production leads to decreased prices for these products nationally (Table

B3). It is important to note that the changes in utilization forecast should not be interpreted as reductions 

or increases in production. Rather, they are reductions or increases from the forecasted growth of 

production and utilizations in the baseline18 with the implementation of the proposed California FMMO. 

The combined result of the proposed California FMMO is a $284 million average annual increase in U.S. 

producer revenue (Table B7). This change in average annual revenue is largely accounted for by the 

following impacts. The annual average change in consumer expenditure on domestically produced dairy 

products is $6 million lower with the proposed California FMMO, compared to the baseline. It is an 

aggregation of the change in consumer expenditure on Class I, II, III and IV products from the baseline, 

calculated using the model results. Similarly, the model projects the quantity of dairy products exported

to add another $13 million in annual average U.S. dairy revenues compared to the baseline. 

Manufacturers’ annual average gross returns are reduced by $177 million, due to margin reductions for 

Class III and IV products. The change in manufacturers’ gross returns are estimated as the projected 

 18 The AMS Dairy Program Regional Econometric Model estimates supply and demand through a simultaneous

dynamic regional econometric model. The product supplies are balanced against demand for dairy products 

iteratively until an equilibrium is reached year-by-year.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 13

change in American cheese, other than American cheese, butter, nonfat dry milk and whey consumed 

domestically and exported, valued at their projected domestic product prices, less the changes in Class III 

and Class IV milk cost at class prices.

C. Impacts on Fluid Milk Processors and Dairy Product Manufacturers

To evaluate the impact of adoption of the proposed California FMMO on fluid milk processors and dairy 

product manufacturers, dairy product prices (Table B3), FMMO component prices (Table B8), FMMO 

class prices at 3.5 percent BF (Table B9), CA to FMMO class prices at 3.5 percent BF (Table B10), 

FMMO class prices at test (Table B11), and national class utilization (Table B13) are considered. 

The adoption of the proposed California FMMO is forecast to increase national cheddar cheese and dry 

whey prices and decrease national prices for butter and nonfat dry milk for the analysis period of 2018-

2026 (Table B3). These increases lead to a sharp increase in the forecast average protein price, $0.21 per 

pound above the baseline for the forecast period (Table B8). In contrast, the average butterfat price 

declines $0.11 per pound, on average, for 2018-2026. Nonfat solids prices decrease $0.04 per pound on 

average over the baseline while other solids prices are forecast to be $0.01 per pound higher, on average.

The estimated changes in dairy product prices result in reductions in butterfat and nonfat solids prices that

in turn lead to lower FMMO Class II and Class IV prices at 3.5 percent butterfat (Table B9). The Class 

III price is driven upward by the higher protein price and marginally higher other solids price. The 

proposed California FMMO is forecast to lower Class II, III and IV prices at 3.5 percent butterfat in 

California compared to the baseline (Table B10).19

Class I prices at test are forecast to increase in each of the existing FMMOs with the adoption of the

proposed California FMMO, from a $0.45 per cwt average increase in three FMMOs (Florida, Southeast, 

and Southwest) to an average $0.52 per cwt increase in the Upper Midwest (Table B11). Class II prices 

are estimated to be lower on average for all FMMOs with the adoption of the proposed California 

FMMO, ranging from $1.03 per cwt lower in the Northeast FMMO to $2.08 per cwt lower in the Florida 

FMMO, for 2018 - 2026.

Class III prices at test increase in most FMMOs, ranging from an average increase of $0.03 per cwt in the 

Appalachian to $0.29 per cwt in the Upper Midwest. Class III prices at test increase $0.28 per cwt on 

average in four other FMMOs (Central, Mideast, Pacific Northwest and Southwest). However, the 

Arizona FMMO20 Class III price is estimated to decrease annually $0.04 per cwt, on average, with the 

adoption of the proposed California FMMO.

In contrast, Class IV prices at test in the existing FMMOs are forecasted to decrease from the baseline 

with the adoption of the proposed California FMMO. Class IV prices, on average, decrease $2.47 per cwt 

in the Upper Midwest FMMO to $0.47 per cwt lower in the Arizona FMMO.

 

In California, adoption of the proposed California FMMO would decrease the California Class I price at 

test by $1.08 per cwt on average (Table B11). Conversely, California Class II prices at test are forecast to

 19 This analysis compares the CSO Class 1 price to the FMMO Class I price; a weighted average of the CSO Class 2 

and 3 prices to the FMMO Class II price; the CSO Class 4b price to the FMMO Class III price; and, the CSO Class 

4a price to the FMMO Class IV price. 20 The Arizona Class III price decreases due to its higher Class III fat test, which is more adversely affected than 

other regions by the lower butter price.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 14

increase $1.64 per cwt on average over 2018-2026. California Class III and Class IV prices at test are 

forecast to increase $0.31 per cwt and $1.07, respectively, on average for the 9-year period. 

Minimum class prices at test are the regulated prices fluid milk processors and dairy product 

manufacturers must pay, and are examined to better assess handler impacts (Table B11). The changes in 

the underlying prices (fat, skim, and component prices) and the class prices at 3.5 percent BF are uniform

in all FMMOs (Table B8 and B9). Impacts on class prices at test (B11) in the various FMMOs differ 

based on the differences in class use component levels among the orders. 

For the proposed California FMMO, milk pooled annually in Classes II, III and IV decreases by an 

average of 1.100, 9.274, and 6.291 billion pounds, respectively (Table B12). The decreases in these class 

utilizations largely reflect milk produced and processed in California that, under the proposed California 

FMMO, would no longer be pooled. At the national level, both Class I and Class III average annual 

utilization are forecast to decrease, averaging 210 and 345 million pounds lower, respectively (Table

B13). National utilization of Classes II and IV are estimated to increase an annual average of 602 million 

and 505 million pounds, respectively. The national class utilization includes estimates for utilization of 

unregulated milk.

Class I revenues are estimated to increase in all FMMOs, including a proposed California FMMO, over 

the forecast period (Table B14). The largest annual average increase is in California with $42.1 million. 

The Northeast FMMO has the second largest average annual increase with $36.4 million. The Arizona 

FMMO has the smallest annual average increase with $3.9 million. The difference in the magnitude of 

the average impact is influenced by the relative change in Class I prices and the relative change in the 

amount of Class I milk pooled.

D. Impacts on Consumer Welfare 

The proposed California FMMO has consumer welfare implications for dairy product consumers. This 

analysis estimates consumer welfare impacts through changes in consumer surplus. Consumer surplus is 

defined as “the difference between what a consumer pays for a unit of a good and the maximum amount 

the consumer would be willing to pay for that unit.”21 Consumer surplus changes in the United States 

were estimated using price and utilization factors that were forecast by the Regional Econometric Model.

The consumer surplus calculation accounted for welfare changes from changes in the consumption of 

domestically produced and imported dairy products.

To evaluate the total impact to consumers for the period 2018-2026, consumer surplus changes were 

estimated for butter, nonfat dry milk, American cheese, other than American cheese, dry whey, frozen 

products, other Class II products and fluid milk and aggregated.

In order to derive these changes in prices and consumption, a 100 percent same-year price pass-through 

from wholesale prices-to-retail prices was assumed, consistent with economic theory and a review of the 

economic literature. The 100 percent pass-through assumption means that the retail price and quantity 

changes should be equal to the wholesale price and quantity changes calculated in the Regional 

Econometric Model. The 100 percent pass-through assumption considerably simplifies the calculation of 

consumer surplus changes and helps to overcome issues related to aggregation of dairy products, lack or 

usability of some of the dairy retail prices, and the fact that some of the dairy products are marketed 

 

21 https://www.whitehouse.gov/omb/circulars_a004_a-4
Regulatory Economic Impact Analysis of the California FMMO Final Decision 15

mostly as ingredients.

22 Forecast changes in wholesale product prices (Table B3) and regional average 

Class I utilization were considered to determine the impact to consumers. As explained earlier, cheddar 

cheese and dry whey prices are forecast to increase on average $0.0288 and $0.0064 per pound, 

respectively, over the period 2018-2026. Butter and nonfat dry milk prices are estimated to decrease an 

average of $0.0948 and $0.0435 per pound, respectively, over the period 2018-2026. The table below

contains projections of change in consumer surplus by product over the period 2018-2026.

Change in Consumer Surplus, by Product and Total, 2018-2026

The analysis forecasts a $106 million annual average decrease in domestic consumer surplus. The change

in consumer surplus from fluid milk consumption is projected to be negative for all projected years, 

averaging almost $119 million annually. The consumer impact from Class II products (frozen and other 

Class 2) and dry whey are negligible. The change in consumer surplus attributed to American cheese and 

other than American cheese are negative for all of the projected years annually averaging $144 and $171

million, respectively. The impact of butter and NDM on consumer surplus are positive and annually 

average $256 million and $73 million, respectively, over 2018-2026. The decrease in consumer surplus 

from fluid milk and cheese consumption dominates the increase in consumer surplus from butter and 

nonfat dry milk consumption. 

Because fluid milk is sold in regional markets, the consumer surplus from fluid milk consumption is 

disaggregated by region. The table below provides detailed changes forecast to occur to consumer 

surplus by region from fluid milk consumption with the implementation of the proposed California 

FMMO. 

 22 Appendix D: Technical Supplement to the Consumer Welfare Analysis contains details on data, econometric 

analysis, results that validate the choice of a 100 percent same-year wholesale to retail price pass-through for dairy 

products, and a review of studies analyzing wholesale to retail price transmission and underlying assumptions for 

dairy products. Multiple economic studies analyzed both farm-to-retail and wholesale-to-retail price transmission 

and indicate that a 100 percent same-year price pass-through from wholesale to retail is a reasonable analytical

assumption. 

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026

Average Consumer 

Surplus Change

Fluid Mil. $ -185.3 -40.9 -41.2 -67.8 -76.6 -109.0 -101.4 -188.2 -256.9 -118.6

Frozen Mil. $ 0.0 0.1 -0.7 1.2 1.5 1.3 2.5 4.4 3.7 1.5

Other Class 2 Mil. $ 0.0 0.0 -0.4 0.7 1.0 0.9 1.6 2.9 2.4 1.0

American Cheese Mil. $ -216.5 -70.1 -94.6 -107.2 -117.2 -140.8 -136.6 -208.2 -205.3 -144.1

Other than American Cheese Mil. $ -157.7 -171.9 -63.6 -134.3 -133.6 -167.0 -175.7 -244.0 -297.6 -171.7

Dry Whey Mil. $ -3.1 -2.0 -1.1 -2.1 -2.0 -2.6 -2.5 -3.4 -3.8 -2.5

Butter Mil. $ 164.2 199.5 167.5 208.5 221.0 273.7 278.2 362.3 425.8 255.6

Nonfat Dry Milk Mil. $ 22.7 28.1 26.8 49.4 62.6 78.2 101.9 135.0 149.3 72.7

Total Mil. $ -375.7 -57.2 -7.4 -51.5 -43.4 -65.3 -31.8 -139.3 -182.4 -106.0
Regulatory Economic Impact Analysis of the California FMMO Final Decision 16

Change in Consumer Surplus for Fluid Milk, by Region and Total, 2018-2026

California is estimated to gain the most in consumer surplus from fluid milk consumption, $55.5 million 

on average annually over the forecast period. The unregulated region also is forecasted to gain in 

consumer surplus with the implementation of the proposed California FMMO.

E. Impacts on International Trade

Because of the bulky and perishable nature of packaged fluid milk, most international trading of dairy 

products is in manufactured products. The adoption of the proposed California FMMO decreases imports 

of butter (Table B15) and increases exports of butter and nonfat dry milk (Table B16) due to decreases in 

butter and nonfat dry milk prices (Table B3). 

With adoption of the proposed California FMMO, the value of United States total dairy product exports is 

estimated to increase an average $12.5 million per year, largely due to increased butter exports (Table

B18). The value of dairy products imported into the United States is estimated to increase $15.6 million 

per year, with most of the increase arising from increased other-than-American cheese imports (Table

B17). Altogether, net exports decline approximately $3 million annually through the forecast period 

(Tables B17 and B18). However, because international prices are held constant in the model, the forecast 

trade impact should be interpreted as the upper limit. It is reasonable to assume that cheese and dry whey 

manufacturers in the United States will continue to export at the higher product prices, although in lower

quantities to trade partners having relatively low transportation costs and/or a preference for cheese and 

dry whey produced in the United States. 

F. Summary

This analysis finds that throughout 2018-2026, adoption of the proposed California FMMO could

increase California blend prices at test, which would increase the California all-milk price and California 

milk production, in turn increasing California producer revenues. The increase in California production 

causes an increase in U.S. milk production, which has variable impacts on product prices and blend prices 

across the United States. 

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026

Average Consumer 

Surplus Change

NE Mil $. -50.9 -24.9 -25.3 -30.0 -31.7 -37.6 -36.3 -51.8 -53.1 -37.9

AP Mil $. -22.6 -11.0 -11.3 -13.4 -14.2 -16.9 -16.4 -23.4 -24.1 -17.0

SE Mil $. -22.6 -10.9 -11.2 -13.4 -14.2 -16.5 -16.1 -23.2 -23.8 -16.9

FL Mil $. -13.1 -6.4 -6.6 -7.7 -7.9 -9.1 -8.6 -12.2 -12.3 -9.3

UM Mil $. -21.4 -11.4 -11.3 -13.6 -14.3 -17.0 -16.4 -23.2 -24.1 -17.0

CE Mil $. -28.7 -14.5 -14.7 -17.4 -18.4 -22.0 -21.3 -30.4 -31.6 -22.1

ME Mil $. -36.4 -18.5 -18.7 -22.0 -22.8 -26.9 -25.8 -36.4 -37.4 -27.2

PN Mil $. -11.6 -5.8 -5.9 -6.9 -7.2 -8.4 -8.0 -11.2 -11.6 -8.5

SW Mil $. -24.2 -11.5 -11.9 -14.1 -14.8 -17.6 -16.9 -24.2 -24.7 -17.8

AZ Mil $. -7.0 -3.4 -3.4 -4.0 -4.1 -4.9 -4.7 -6.6 -6.8 -5.0

CA Mil $. 45.7 62.4 64.2 60.9 60.0 56.3 57.4 46.7 45.6 55.5

UNREG Mil $. 7.4 15.0 14.9 13.7 13.0 11.6 11.9 7.8 -53.1 4.7

Total Mil $. -185.3 -40.9 -41.2 -67.8 -76.6 -109.0 -101.4 -188.2 -256.9 -118.6
Regulatory Economic Impact Analysis of the California FMMO Final Decision 17

IV. APPENDIX A: ABBREVIATIONS

AP: Appalachian 

AMS: Agricultural Marketing Service

AZ: Arizona

CA: California

CD: Class Draw

CDFA: California Department of Food and Agriculture

CE: Central

CSO: California State Order

FL: Florida

FMMO: Federal Milk Marketing Order

FW: Former Western

HIAK: Hawaii and Alaska 

ME: Mideast

NE: Northeast

PN: Pacific Northwest

PPD: Producer Price Differential

REIA-F: Regulatory Economic Impact Analysis of the Final Decision

REIA-R: Regulatory Economic Impact Analysis of the Recommended Decision

SE: Southeast

SW: Southwest

UM: Upper Midwest

UNREG: Unregulated milk

UW: Unregulated West

U.S.: United States

USDA: United State Department of Agriculture
Regulatory Economic Impact Analysis of the California FMMO Final Decision 18

V. APPENDIX B: TABLES

TABLE B1—Statistical uniform prices at 3.5% BF1

, changes from the baseline

1 For pooled milk

TABLE B2—Blend prices at test1, changes from the baseline

1 For pooled milk

TABLE B3—Dairy product prices, changes from the baseline

TABLE B4—All-milk price1

, changes from the baseline

1For all milk

Federal Milk Marketing Order Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Northeast (1) $/CWT 0.07 -0.16 -0.11 -0.17 -0.17 -0.20 -0.24 -0.26 -0.34 -0.17 -0.34 0.07

Appalachian (5) $/CWT 0.23 -0.08 -0.04 -0.06 -0.08 -0.10 -0.15 -0.09 -0.20 -0.06 -0.20 0.23

Florida (6) $/CWT 0.29 0.01 0.05 0.04 0.02 0.01 -0.04 0.02 -0.05 0.04 -0.05 0.29

Southeast (7) $/CWT 0.21 -0.07 -0.02 -0.04 -0.05 -0.05 -0.08 -0.03 -0.12 -0.03 -0.12 0.21

Upper Midwest (30) $/CWT 0.38 0.08 0.13 0.14 0.16 0.19 0.18 0.30 0.26 0.20 0.08 0.38

Central (32) $/CWT 0.21 -0.05 -0.02 -0.06 -0.07 -0.09 -0.13 -0.12 -0.20 -0.06 -0.20 0.21

Mideast (33) $/CWT 0.06 -0.15 -0.11 -0.18 -0.20 -0.24 -0.29 -0.33 -0.42 -0.21 -0.42 0.06

Pacific Northwest (124) $/CWT 0.14 -0.09 -0.06 -0.11 -0.12 -0.13 -0.17 -0.16 -0.23 -0.10 -0.23 0.14

Southwest (126) $/CWT 0.19 -0.08 -0.03 -0.06 -0.06 -0.06 -0.07 -0.02 0.00 -0.02 -0.08 0.19

Arizona (131) $/CWT 0.03 -0.16 -0.12 -0.20 -0.21 -0.26 -0.31 -0.35 -0.45 -0.23 -0.45 0.03

California (51) $/CWT 0.21 -0.01 0.01 0.02 0.03 0.04 0.00 0.06 0.02 0.04 -0.01 0.21

Federal Milk Marketing Order Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Northeast (1) $/CWT 0.05 -0.19 -0.14 -0.20 -0.21 -0.25 -0.29 -0.32 -0.40 -0.22 -0.40 0.05

Appalachian (5) $/CWT 0.41 0.19 0.20 0.23 0.27 0.32 0.33 0.58 0.63 0.35 0.19 0.63

Florida (6) $/CWT 0.31 0.06 0.14 0.15 0.11 0.04 -0.06 -0.05 -0.19 0.06 -0.19 0.31

Southeast (7) $/CWT 0.30 0.03 0.05 0.05 0.04 0.01 0.01 0.15 0.22 0.10 0.01 0.30

Upper Midwest (30) $/CWT 0.38 0.06 0.10 0.11 0.12 0.16 0.14 0.25 0.21 0.17 0.06 0.38

Central (32) $/CWT 0.17 -0.10 -0.07 -0.13 -0.16 -0.21 -0.26 -0.29 -0.42 -0.16 -0.42 0.17

Mideast (33) $/CWT 0.01 -0.22 -0.17 -0.26 -0.28 -0.34 -0.39 -0.46 -0.59 -0.30 -0.59 0.01

Pacific Northwest (124) $/CWT 0.03 -0.20 -0.14 -0.20 -0.21 -0.22 -0.26 -0.26 -0.35 -0.20 -0.35 0.03

Southwest (126) $/CWT 0.26 -0.03 0.00 -0.01 0.00 0.00 -0.01 0.06 0.12 0.04 -0.03 0.26

Arizona (131) $/CWT 0.08 -0.14 -0.10 -0.16 -0.18 -0.22 -0.26 -0.28 -0.39 -0.18 -0.39 0.08

California (51) $/CWT 0.60 0.38 0.42 0.42 0.44 0.45 0.42 0.47 0.42 0.45 0.38 0.60

Product Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Cheddar Cheese $/LBS 0.0449 0.0144 0.0190 0.0215 0.0235 0.0277 0.0269 0.0415 0.0395 0.0288 0.0144 0.0449

Butter $/LBS -0.0675 -0.0790 -0.0659 -0.0802 -0.0831 -0.1026 -0.1001 -0.1249 -0.1498 -0.0948 -0.1498 -0.0659

Nonfat Dry Milk $/LBS -0.0221 -0.0248 -0.0243 -0.0380 -0.0417 -0.0455 -0.0537 -0.0659 -0.0759 -0.0435 -0.0759 -0.0221

Dry Whey $/LBS 0.0083 0.0054 0.0028 0.0052 0.0051 0.0061 0.0060 0.0088 0.0095 0.0064 0.0028 0.0095

Milk supply region Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

United States $/CWT 0.28 0.05 0.08 0.06 0.06 0.06 0.03 0.06 0.01 0.08 0.01 0.28

Northeast $/CWT 0.05 -0.17 -0.13 -0.18 -0.19 -0.22 -0.25 -0.28 -0.36 -0.19 -0.36 0.05

Appalachian $/CWT 0.39 0.17 0.19 0.21 0.25 0.29 0.30 0.53 0.57 0.32 0.17 0.57

Florida $/CWT 0.29 0.06 0.13 0.14 0.10 0.03 -0.05 -0.04 -0.18 0.05 -0.18 0.29

Southeast $/CWT 0.28 0.03 0.05 0.04 0.04 0.01 0.01 0.14 0.20 0.09 0.01 0.28

Upper Midwest $/CWT 0.35 0.06 0.09 0.10 0.11 0.15 0.13 0.24 0.20 0.16 0.06 0.35

Central $/CWT 0.15 -0.09 -0.07 -0.12 -0.15 -0.19 -0.23 -0.26 -0.38 -0.15 -0.38 0.15

Mideast $/CWT 0.01 -0.20 -0.16 -0.23 -0.25 -0.30 -0.35 -0.41 -0.53 -0.27 -0.53 0.01

Pacific Northwest $/CWT 0.03 -0.19 -0.13 -0.19 -0.20 -0.21 -0.24 -0.25 -0.33 -0.19 -0.33 0.03

Southwest $/CWT 0.24 -0.03 0.00 -0.01 0.00 0.00 -0.01 0.06 0.10 0.04 -0.03 0.24

Arizona $/CWT 0.07 -0.13 -0.09 -0.15 -0.17 -0.20 -0.23 -0.26 -0.36 -0.17 -0.36 0.07

California $/CWT 0.57 0.37 0.40 0.40 0.42 0.43 0.40 0.45 0.40 0.43 0.37 0.57

Former Western $/CWT 0.49 0.31 0.34 0.34 0.36 0.36 0.33 0.38 0.33 0.36 0.31 0.49

Unregulated West $/CWT 0.12 -0.07 -0.05 -0.09 -0.11 -0.14 -0.17 -0.19 -0.28 -0.11 -0.28 0.12

Hawaii and Alaska $/CWT 0.22 0.23 0.26 0.29 0.32 0.36 0.38 0.46 0.51 0.33 0.22 0.51
Regulatory Economic Impact Analysis of the California FMMO Final Decision 19

TABLE B5—Milk production, changes from the baseline

TABLE B6—Milk marketings, changes from the baseline

TABLE B7—Producer revenue, changes from the baseline

Milk supply region Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

United States Mil. LBS 151 384 422 500 565 624 684 748 830 545 151 830

Northeast Mil. LBS 0 6 -18 -26 -38 -46 -54 -62 -70 -34 -70 6

Appalachian Mil. LBS 16 12 0 7 8 9 9 16 20 11 0 20

Florida Mil. LBS 2 5 6 7 8 8 7 6 4 6 2 8

Southeast Mil. LBS 57 6 9 8 8 2 1 27 36 17 1 57

Upper Midwest Mil. LBS 0 102 94 115 135 157 192 215 274 143 0 274

Central Mil. LBS 0 12 5 -1 -10 -22 -38 -58 -80 -21 -80 12

Mideast Mil. LBS 2 -39 -42 -54 -63 -75 -90 -107 -137 -67 -137 2

Pacific Northwest Mil. LBS 1 -6 -9 -11 -13 -14 -16 -17 -20 -11 -20 1

Southwest Mil. LBS 0 27 25 26 26 26 28 28 36 25 0 36

Arizona Mil. LBS 3 -3 -5 -9 -13 -19 -25 -32 -43 -16 -43 3

California Mil. LBS 48 225 292 354 409 462 510 547 597 383 48 597

Former Western Mil. LBS 21 37 63 84 110 135 161 188 215 113 21 215

Unregulated West Mil. LBS 1 1 0 -1 -1 -2 -3 -4 -5 -2 -5 1

Hawaii and Alaska Mil. LBS 0 1 1 1 1 2 2 2 2 1 0 2

Milk supply region Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

United States Mil. LBS 151 384 422 500 565 624 684 748 830 545 151 830

Northeast Mil. LBS 0 6 -17 -26 -38 -46 -54 -62 -69 -34 -69 6

Appalachian Mil. LBS 16 12 0 7 8 9 9 16 20 11 0 20

Florida Mil. LBS 2 5 6 7 8 8 7 6 4 6 2 8

Southeast Mil. LBS 57 6 9 8 8 2 1 26 36 17 1 57

Upper Midwest Mil. LBS 0 102 94 115 135 157 192 215 274 143 0 274

Central Mil. LBS 0 12 5 -1 -10 -22 -38 -57 -79 -21 -79 12

Mideast Mil. LBS 2 -39 -41 -54 -63 -75 -89 -107 -136 -67 -136 2

Pacific Northwest Mil. LBS 1 -6 -8 -11 -12 -13 -15 -17 -20 -11 -20 1

Southwest Mil. LBS 0 27 25 26 26 26 28 28 36 25 0 36

Arizona Mil. LBS 3 -3 -5 -9 -13 -19 -25 -32 -43 -16 -43 3

California Mil. LBS 48 224 291 353 408 461 508 546 596 382 48 596

Former Western Mil. LBS 21 37 63 84 109 135 160 187 214 112 21 214

Unregulated West Mil. LBS 1 1 0 -1 -1 -2 -3 -4 -5 -2 -5 1

Hawaii and Alaska Mil. LBS 0 1 1 1 1 2 2 2 2 1 0 2

Milk supply region Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

United States Mil. $ 648 177 274 242 261 265 203 303 184 284 177 648

Northeast Mil. $ 15 -52 -43 -61 -66 -78 -90 -99 -124 -66 -124 15

Appalachian Mil. $ 21 10 9 11 12 15 15 25 28 16 9 28

Florida Mil. $ 8 3 5 5 5 3 1 0 -3 3 -3 8

Southeast Mil. $ 21 2 3 3 3 1 0 10 14 6 0 21

Upper Midwest Mil. $ 157 45 61 71 81 106 105 167 163 106 45 167

Central Mil. $ 26 -13 -11 -22 -30 -41 -55 -67 -100 -35 -100 26

Mideast Mil. $ 3 -53 -44 -64 -72 -89 -106 -130 -171 -81 -171 3

Pacific Northwest Mil. $ 3 -21 -16 -23 -24 -27 -32 -33 -44 -24 -44 3

Southwest Mil. $ 46 -1 5 2 4 6 3 19 33 13 -1 46

Arizona Mil. $ 4 -7 -6 -10 -12 -15 -19 -22 -31 -13 -31 4

California Mil. $ 252 201 234 250 271 288 287 323 313 269 201 323

Former Western Mil. $ 92 63 76 80 90 96 96 109 107 90 63 109

Unregulated West Mil. $ 1 0 0 0 -1 -1 -1 -1 -2 -1 -2 1

Hawaii and Alaska Mil. $ 0 0 0 0 0 1 1 1 1 0 0 1
Regulatory Economic Impact Analysis of the California FMMO Final Decision 20

TABLE B8—FMMO component prices, changes from the baseline

1 $/1,000 somatic cell count

TABLE B9—FMMO class prices at 3.5% BF, changes from the baseline1

1

Changes in the Class Fat Prices would be the same for each class of Fat.

TABLE B10—California FMMO class prices at 3.5% BF, changes from the baseline

Component Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Butterfat $/LB -0.08 -0.10 -0.08 -0.10 -0.10 -0.12 -0.12 -0.15 -0.18 -0.11 -0.18 -0.08

Nonfat Solids $/LB -0.02 -0.02 -0.02 -0.04 -0.04 -0.05 -0.05 -0.07 -0.08 -0.04 -0.08 -0.02

Protein $/LB 0.23 0.15 0.15 0.17 0.18 0.22 0.21 0.29 0.32 0.21 0.15 0.32

Other Solids $/LB 0.01 0.01 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.00 0.01

Somatic Cell Adjuster 1/ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

FMMO class prices Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Class I Price $/CWT 0.45 0.14 0.17 0.20 0.22 0.26 0.25 0.40 0.37 0.27 0.14 0.45

Class I Fat Price $/LB -0.08 -0.10 -0.08 -0.10 -0.10 -0.12 -0.12 -0.15 -0.18 -0.11 -0.18 -0.08

Class I Skim Price $/CWT 0.77 0.49 0.47 0.56 0.59 0.72 0.70 0.96 1.04 0.70 0.47 1.04

Class II Price $/CWT -0.48 -0.55 -0.49 -0.67 -0.71 -0.83 -0.89 -1.10 -1.29 -0.78 -1.29 -0.48

Class II Skim Price $/CWT -0.20 -0.22 -0.22 -0.34 -0.37 -0.41 -0.48 -0.59 -0.68 -0.39 -0.68 -0.20

Class III Price $/CWT 0.45 0.14 0.17 0.20 0.22 0.26 0.25 0.40 0.37 0.27 0.14 0.45

Class III Skim Price $/CWT 0.77 0.49 0.47 0.56 0.59 0.72 0.70 0.96 1.04 0.70 0.47 1.04

Class IV Price $/CWT -0.48 -0.55 -0.49 -0.67 -0.71 -0.83 -0.89 -1.10 -1.29 -0.78 -1.29 -0.48

Class IV Skim Price $/CWT -0.20 -0.22 -0.22 -0.34 -0.37 -0.41 -0.48 -0.59 -0.68 -0.39 -0.68 -0.20

CA class prices Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

CA Class I price $/CWT 0.22 -0.10 -0.07 -0.04 -0.02 0.02 0.01 0.17 0.15 0.04 -0.10 0.22

CA Class II price $/CWT -0.01 -0.09 -0.03 -0.21 -0.26 -0.38 -0.44 -0.65 -0.84 -0.32 -0.84 -0.01

CA Class III price $/CWT -0.10 -0.39 -0.37 -0.22 -0.15 -0.05 -0.07 0.22 0.26 -0.10 -0.39 0.26

CA Class IV price $/CWT -0.24 -0.32 -0.26 -0.44 -0.49 -0.61 -0.67 -0.88 -1.07 -0.55 -1.07 -0.24
Regulatory Economic Impact Analysis of the California FMMO Final Decision 21

TABLE B11—FMMO class prices at test, changes from the baseline

Order 1: 

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

NE Class I price $/CWT 0.59 0.29 0.30 0.36 0.39 0.46 0.45 0.65 0.67 0.46 0.29 0.67

NE Class II price $/CWT -0.66 -0.76 -0.66 -0.88 -0.93 -1.10 -1.15 -1.43 -1.68 -1.03 -1.68 -0.66

NE Class III price $/CWT 0.40 0.07 0.11 0.13 0.15 0.17 0.17 0.29 0.24 0.19 0.07 0.40

NE Class IV price $/CWT -0.52 -0.60 -0.54 -0.73 -0.77 -0.90 -0.96 -1.19 -1.40 -0.85 -1.40 -0.52

Order 5:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

AP Class I price $/CWT 0.59 0.29 0.30 0.36 0.39 0.46 0.45 0.65 0.67 0.46 0.29 0.67

AP Class II price $/CWT -0.98 -1.14 -0.98 -1.27 -1.33 -1.59 -1.64 -2.03 -2.41 -1.48 -2.41 -0.98

AP Class III price $/CWT 0.27 -0.07 0.00 -0.01 0.00 -0.01 -0.01 0.07 -0.02 0.03 -0.07 0.27

AP Class IV price $/CWT -0.60 -0.69 -0.61 -0.81 -0.86 -1.01 -1.06 -1.32 -1.55 -0.94 -1.55 -0.60

Order 6:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

FL Class I price $/CWT 0.58 0.28 0.30 0.35 0.38 0.45 0.44 0.63 0.65 0.45 0.28 0.65

FLClass II price $/CWT -1.40 -1.63 -1.39 -1.77 -1.85 -2.24 -2.26 -2.81 -3.35 -2.08 -3.35 -1.39

FL Class III price $/CWT 0.44 0.13 0.16 0.19 0.21 0.24 0.24 0.38 0.35 0.26 0.13 0.44

Fl Class IV price $/CWT -1.15 -1.34 -1.15 -1.46 -1.54 -1.85 -1.88 -2.33 -2.77 -1.72 -2.77 -1.15

Order 7:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

SE Class I price $/CWT 0.58 0.28 0.29 0.35 0.38 0.45 0.44 0.63 0.65 0.45 0.28 0.65

SEClass II price $/CWT -0.99 -1.15 -0.99 -1.28 -1.35 -1.61 -1.66 -2.06 -2.44 -1.50 -2.44 -0.99

SE Class III price $/CWT 0.37 0.04 0.09 0.11 0.12 0.13 0.13 0.25 0.19 0.16 0.04 0.37

SE Class IV price $/CWT -0.92 -1.07 -0.93 -1.19 -1.26 -1.50 -1.54 -1.91 -2.27 -1.40 -2.27 -0.92

Order 30:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

UM Class I price $/CWT 0.63 0.34 0.34 0.41 0.43 0.52 0.51 0.72 0.75 0.52 0.34 0.75

UMClass II price $/CWT -0.94 -1.10 -0.94 -1.22 -1.28 -1.53 -1.57 -1.95 -2.32 -1.43 -2.32 -0.94

UM Class III price $/CWT 0.48 0.15 0.18 0.22 0.24 0.28 0.27 0.42 0.40 0.29 0.15 0.48

UM Class IV price $/CWT -1.70 -1.98 -1.68 -2.10 -2.20 -2.67 -2.67 -3.32 -3.96 -2.47 -3.96 -1.68

Order 32:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

CE Class I price $/CWT 0.61 0.31 0.32 0.38 0.40 0.49 0.47 0.68 0.70 0.48 0.31 0.70

CE Class II price $/CWT -0.85 -0.99 -0.85 -1.11 -1.17 -1.39 -1.44 -1.78 -2.11 -1.30 -2.11 -0.85

CE Class III price $/CWT 0.47 0.14 0.18 0.21 0.23 0.26 0.26 0.41 0.38 0.28 0.14 0.47

CE Class IV price $/CWT -0.62 -0.71 -0.63 -0.84 -0.89 -1.04 -1.10 -1.36 -1.60 -0.98 -1.60 -0.62

Order 33:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

ME Class I price $/CWT 0.60 0.31 0.31 0.38 0.40 0.48 0.47 0.67 0.70 0.48 0.31 0.70

ME Class II price $/CWT -0.76 -0.89 -0.77 -1.01 -1.06 -1.26 -1.31 -1.62 -1.92 -1.18 -1.92 -0.76

ME Class III price $/CWT 0.46 0.14 0.17 0.20 0.22 0.26 0.25 0.40 0.37 0.28 0.14 0.46

ME Class IV price $/CWT -0.59 -0.68 -0.60 -0.81 -0.86 -1.00 -1.06 -1.31 -1.55 -0.94 -1.55 -0.59

Order 124:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

PN Class I price $/CWT 0.60 0.30 0.31 0.37 0.39 0.47 0.46 0.66 0.68 0.47 0.30 0.68

PN Class II price $/CWT -0.95 -1.10 -0.95 -1.23 -1.29 -1.54 -1.58 -1.97 -2.33 -1.44 -2.33 -0.95

PN Class III price $/CWT 0.48 0.13 0.17 0.20 0.22 0.26 0.25 0.41 0.37 0.28 0.13 0.48

PN Class IV price $/CWT -0.55 -0.63 -0.56 -0.75 -0.80 -0.94 -0.99 -1.23 -1.45 -0.88 -1.45 -0.55

Order 126:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

SW Class I price $/CWT 0.58 0.28 0.29 0.35 0.37 0.44 0.43 0.62 0.64 0.45 0.28 0.64

SW Class II price $/CWT -0.93 -1.08 -0.93 -1.21 -1.27 -1.52 -1.56 -1.93 -2.29 -1.41 -2.29 -0.93

SW Class III price $/CWT 0.47 0.14 0.18 0.21 0.23 0.26 0.26 0.41 0.38 0.28 0.14 0.47

SW Class IV price $/CWT -0.59 -0.68 -0.60 -0.80 -0.85 -0.99 -1.05 -1.30 -1.53 -0.93 -1.53 -0.59

Order 131:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

AZ Class I price $/CWT 0.59 0.29 0.30 0.36 0.39 0.46 0.45 0.65 0.67 0.46 0.29 0.67

AZ Class II price $/CWT -1.10 -1.27 -1.10 -1.41 -1.48 -1.77 -1.81 -2.25 -2.67 -1.65 -2.67 -1.10

AZ Class III price $/CWT 0.22 -0.12 -0.05 -0.06 -0.06 -0.08 -0.08 -0.02 -0.13 -0.04 -0.13 0.22

AZ Class IV price $/CWT -0.26 -0.29 -0.27 -0.41 -0.44 -0.49 -0.57 -0.69 -0.81 -0.47 -0.81 -0.26

Order 51:

Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

CA Class I price $/CWT -0.88 -1.21 -1.23 -1.17 -1.16 -1.10 -1.13 -0.93 -0.91 -1.08 -1.23 -0.88

CA Class II price $/CWT 1.98 1.85 1.99 1.78 1.76 1.57 1.55 1.28 1.00 1.64 1.00 1.99

CA Class III price $/CWT 0.26 -0.02 0.01 0.17 0.25 0.36 0.35 0.65 0.70 0.31 -0.02 0.70

CA Class IV price $/CWT 1.42 1.26 1.59 1.30 1.14 0.95 0.93 0.56 0.45 1.07 0.45 1.59
Regulatory Economic Impact Analysis of the California FMMO Final Decision 22

TABLE B12—California class utilization, changes from the baseline23

TABLE B13—National class utilization, changes from the baseline

TABLE B14—FMMO Class I revenue/handler costs, changes from the baseline

TABLE B15—U.S. dairy product imports, changes from the baseline24

TABLE B16—U.S. dairy product exports, changes from the baseline25

TABLE B17—Value of U.S. dairy product imports, changes from the baseline

 23 The changes in the California class utilization represent the changes in pooled milk. Currently under the CSO, 

almost all Grade A milk produced in California is required to pool. Under the Final California FMMO, Class II, III, 

and IV milk is not required to pool. This difference in pooling requirements is one factor for forecast changes in 

California class utilization.

24 Products only with a change in quantity from the baseline are included. 25 Products only with a change in quantity from the baseline are included.

Class Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

CA Class I Mil. LBS 698 665 682 681 678 678 675 675 665 678 665 698

CA Class II Mil. LBS -1091 -1099 -1085 -1110 -1122 -1137 -1118 -1067 -1068 -1100 -1137 -1067

CA Class III Mil. LBS -8206 -8430 -8935 -9158 -9293 -9511 -9860 -9867 -10210 -9274 -10210 -8206

CA Class IV Mil. LBS -5716 -5904 -5575 -5813 -6235 -6474 -6556 -7312 -7033 -6291 -7312 -5575

Class Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

National Class I Mil. LBS -61 -166 -141 -165 -196 -227 -263 -302 -369 -210 -369 -61

National Class II Mil. LBS 489 502 504 577 617 617 669 744 700 602 489 744

National Class III Mil. LBS -422 -127 -103 -312 -306 -300 -405 -582 -551 -345 -582 -103

National Class IV Mil. LBS 150 179 166 405 457 541 690 897 1060 505 150 1060

Federal Milk Marketing Order Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Northeast (1) Mil. $ 48.8 23.8 24.2 28.7 30.3 36.1 34.8 49.6 50.9 36.4 23.8 50.9

Appalachian (5) Mil. $ 20.9 8.4 7.6 8.5 7.9 8.9 6.6 11.2 9.3 9.9 6.6 20.9

Florida (6) Mil. $ 12.0 5.0 5.0 5.9 6.0 7.0 6.4 9.5 9.3 7.3 5.0 12.0

Southeast (7) Mil. $ 22.6 6.7 9.2 11.3 11.7 14.0 13.0 20.2 19.5 14.2 6.7 22.6

Upper Miwest (30) Mil. $ 21.4 8.7 9.9 12.2 12.6 15.3 14.3 21.2 21.3 15.2 8.7 21.4

Central (32) Mil. $ 28.7 11.7 13.3 16.1 16.8 20.2 19.2 28.4 28.6 20.3 11.7 28.7

Mideast (33) Mil. $ 33.3 14.0 12.9 14.8 14.2 16.7 14.1 22.5 21.4 18.2 12.9 33.3

Pacific Northwest (124) Mil. $ 10.9 4.6 4.2 4.7 4.4 4.9 3.7 6.0 5.2 5.4 3.7 10.9

Southwest (126) Mil. $ 23.1 9.8 9.6 11.1 11.1 13.0 11.5 17.6 16.9 13.7 9.6 23.1

Arizona (131) Mil. $ 6.5 2.7 2.6 3.1 3.1 3.7 3.4 5.2 5.1 3.9 2.6 6.5

California (51) Mil. $ 49.6 29.5 33.0 36.7 38.1 42.8 42.5 53.4 53.2 42.1 29.5 53.4

Product imported Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

American Cheese Mil. LBS 0.003 0.001 0.003 0.000 0.000 0.000 0.000 0.002 0.004 0.002 0.000 0.004

Other than American Cheese Mil. LBS 1.243 2.344 2.378 2.928 3.354 3.905 4.408 5.290 6.276 3.569 1.243 6.276

Butter Mil. LBS -0.001 -0.009 -0.011 -0.018 -0.039 -0.040 -0.067 -0.064 -0.071 -0.036 -0.071 -0.001

Product exported Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

American Cheese Mil. LBS -13.477 -4.287 -5.533 -6.583 -7.334 -8.607 -8.365 -13.477 -13.102 -8.974 -13.477 -4.287

Other than American Cheese Mil. LBS -11.738 -12.320 -4.452 -9.098 -8.734 -10.469 -10.612 -14.165 -16.587 -10.908 -16.587 -4.452

Dry Whey Mil. LBS -6.853 -4.454 -2.331 -4.301 -4.197 -5.087 -5.009 -7.151 -7.589 -5.219 -7.589 -2.331

Butter Mil. LBS 16.568 23.176 20.322 25.465 29.812 35.435 38.626 45.251 52.833 31.943 16.568 52.833

Nonfat Dry Milk Mil. LBS 23.490 26.626 25.880 40.700 44.429 48.561 57.028 69.569 80.056 46.260 23.490 80.056

Product imported Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Other Class II Total Solids Mil. $ 0.000 -0.001 0.009 -0.016 -0.019 -0.017 -0.031 -0.054 -0.045 -0.019 -0.054 0.009

Frozen Mil. $ 0.000 0.000 0.002 -0.003 -0.003 -0.003 -0.006 -0.011 -0.010 -0.004 -0.011 0.002

American Cheese Mil. $ 1.470 0.472 0.627 0.700 0.767 0.904 0.878 1.358 1.296 0.941 0.472 1.470

Other than American Cheese Mil. $ 13.510 16.460 9.529 14.719 15.259 17.750 18.657 23.630 27.169 17.409 9.529 27.169

Butter Mil. $ -2.980 -3.502 -2.664 -2.608 -2.575 -2.549 -2.538 -2.384 -1.948 -2.639 -3.502 -1.948

Nonfat Dry Milk Mil. $ -0.066 -0.074 -0.073 -0.114 -0.125 -0.136 -0.161 -0.198 -0.228 -0.131 -0.228 -0.066
Regulatory Economic Impact Analysis of the California FMMO Final Decision 23

TABLE B18—Value of U.S. dairy product exports, changes from the baseline

Product exported Units 2018 2019 2020 2021 2022 2023 2024 2025 2026 Average Min Max

Other Class II Total Solids Mil. $ 0.000 -0.002 0.015 -0.026 -0.034 -0.031 -0.059 -0.108 -0.094 -0.038 -0.108 0.015

Frozen Mil. $ 0.000 -0.001 0.013 -0.022 -0.028 -0.025 -0.047 -0.086 -0.074 -0.030 -0.086 0.013

American Cheese Mil. $ -18.592 -5.812 -7.652 -8.976 -9.839 -11.461 -11.036 -17.555 -17.196 -12.013 -18.592 -5.812

Other than American Cheese Mil. $ -21.844 -22.946 -8.064 -16.261 -15.560 -18.193 -18.060 -23.743 -26.956 -19.070 -26.956 -8.064

Dry Whey Mil. $ 1.278 0.799 0.426 0.702 0.649 0.744 0.739 0.909 0.900 0.794 0.426 1.278

Butter Mil. $ 29.590 40.239 35.316 44.477 51.644 62.555 67.437 80.879 96.455 56.510 29.590 96.455

Nonfat Dry Milk Mil. $ -13.395 -15.116 -14.372 -17.726 -15.490 -8.947 -9.832 -15.363 -12.397 -13.626 -17.726 -8.947
Regulatory Economic Impact Analysis of the California FMMO Final Decision 24

 

VI. APPENDIX C: TECHNICAL SUPPLEMENT TO THE MILK POOLING ANALYSIS

This supplement is intended to provide more detailed technical information for interpreting and 

understanding the milk pooling analysis (section C) in the Regulatory Economic Impact Analysis of the 

Final Decision (REIA-F).

The Final Decision sets pooling provisions for a proposed California FMMO that are conceptually similar 

to the current 10 FMMOs, but tailored for the California market. The pooling provisions are performance 

based and designed to admit to the pool those producers who consistently supply the Class I market, and 

therefore should be allowed to share in the revenues from the market. Since pooling would be optional 

for manufacturing milk, the REIA-F estimates how much milk would pool under a CA FMMO as 

compared to the baseline.

In the Regional Econometric Model, the milk-not-pooled under each current FMMO is implicitly 

determined based on the difference between the regional milk production and total milk pooled under 

each FMMO. Therefore, direct estimation of the milk-not-pooled in current FMMOs is not 

necessary. Since the current California State Order (CSO) requires nearly all Grade A milk production to 

be pooled, there is no way to implicitly estimate the volume of milk that would not be pooled under a CA 

FMMO. Therefore, the REIA-F includes an explicit estimation of the potential milk-not-pooled for a CA 

FMMO, as compared to the baseline under the current CSO’s mandatory pooling policy.

To estimate milk-not-pooled under a CA FMMO, equations for each manufacturing class are estimated 

using monthly data from the Upper Midwest. The pooling provisions in the Final Decision for the CA 

FMMO and Class I utilization in California are most similar to those in the Upper Midwest. Although 

not a perfect comparison, the Upper Midwest data provide the most comparable analysis of decisions on 

not pooling milk relative to the other current FMMOs based on (1) its long history of milk not pooling 

and (2) the similarities in the structure of the Upper Midwest and California dairy industries. 

Furthermore, given these similarities, under the Final Decision provisions some manufacturing milk is 

expected not to pool under the proposed California FMMO. The analysis used Upper Midwest data from 

January 2007 to December 2016. This time period was selected to reflect the change in the Upper 

Midwest’s repooling standards that were effective December 1, 2006. 

The equations for each class of manufacturing milk that would not pool are estimated separately, where α 

is the intercept adjuster and β is the parameter estimate. The Class Draw per hundredweight (CD) 

represents the amount a handler would draw from the pool (if CD is positive) or pay into the pool (if the 

CD is negative). The CD is calculated—for Class II, III, and IV—as the statistical uniform price minus 

the respective class price. 

Class Milk Not Pooled

Class Milk Pooled = αα + ββ ∗ CCCCCCCCCC DDDD DD EQ 1.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 25

The results of the estimation are as follows (tables 1-3):

Table 1. Class II Monthly Milk-Not-Pooled Estimation Results

(R-Square: 0.6244)

Parameter Estimate Std. Error t-Value Pr>|t|

α 1.009297 0.0629 16.05 <.0001

β -0.62034 0.0440 -14.10 <.0001

Table 2. Class III Monthly Milk-Not-Pooled Estimation Results

(R-Square: 0.5003)

Parameter Estimate Std. Error t-Value Pr>|t|

α 0.33371 0.0214 15.60 <.0001

β -0.65422 0.0597 -10.96 <.0001

Table 3. Class IV Monthly Milk-Not-Pooled Estimation Results

(R-Square: 0.3574)

Parameter Estimate Std. Error t-Value Pr>|t|

α 1.297897 0.1252 10.36 <.0001

β -0.59969 0.0732 -8.20 <.0001

Pooling decisions under FMMOs are made monthly whereas the Regional Econometric Model is an 

annual model. A way to incorporate the monthly estimated equations into an annual Regional 

Econometric Model is needed. Singularly using an annual number to calculate pooling decisions overly 

smooths the data. To mitigate this, it is necessary to make an assumption about the distribution of 

monthly values for the prices given an annual average. To accomplish this, for each month we calculate 

the distribution of deviations from the annual CD. For the time period January 2007 through December 

2016, we calculate the deviations from the annual CD as compared to the monthly CD to generate a 

distribution of the deviations (i.e. Monthly Class II Draw minus Annual Class II Draw). Using a 

distribution of the deviations allows the monthly information to be incorporated into the annual model 

(through weighted iteration across the distribution of deviations) while avoiding issues with temporal 

aggregation and seasonality. These issues are avoided because the monthly data are not used 

chronologically nor as an absolute number, but rather through the deviations from the annual data across 

the ten years. 

The histograms in Figures 1-3 display the distribution of CD values from January 2007 through 

December 2016. The histograms have 10 bins (range of CDs) and each bin is centered at the midpoint of 

the deviations from the annual CD average. The height of the bins represents the frequency of the 

deviations. 
Regulatory Economic Impact Analysis of the California FMMO Final Decision 26

Figure 1. Class II CD 

Figure 2. Class III CD

Figure 3. Class IV CD 

0

5

10

15

20

25

30

35

Frequency

Bins

Mid-point of the CD range, $/cwt

Class II CD

0

5

10

15

20

25

30

35

Frequency

Bins

Mid-point of the CD range, $/cwt

Class III CD

0

5

10

15

20

25

30

35

Frequency

Bins

Mid-point of the CD range, $/cwt

Class IV CD
Regulatory Economic Impact Analysis of the California FMMO Final Decision 27

Table 4 gives selected summary statistics for the bins for the different CDs. Each bin has a proportional 

weight given the frequency of monthly occurrences over the respective period. When the annual CD 

price increases or decreases, the model assumes that the monthly distribution of CD prices increases or 

decreases by the same amount. 

Table 4. CD Bin Summary Statistics for Deviations from the Annual Price

Class II Class III Class IV

Midpoint for Lowest Bin -3.17 -0.60 -3.12

Midpoint for Highest Bin 2.27 1.04 2.70

Midpoint Bin Difference 0.61 0.18 0.65

The distributions of the deviations from the annual CDs allow for the monthly pooling decision to be 

incorporated into the annual REIA-F. The parameter estimates from equation 1 are used, respectively, in 

Equation 2 below. 

The CD for each class is modified to include a location adjustment. The four location adjustments (-

$0.30, -$0.20, -$0.10, $0.00) are included to cover the $0.50 price surface spread in California (as 

compared to $0.20 price spread in the Upper Midwest, which is implicit in the data). Since the Upper 

Midwest data includes a $0.20 spread, the location adjustment covers the additional $0.30 spread in 

California. Hence the location adjustment zone of $0.0 would cover the spread of $1.90-$2.10. These 

location adjustments are then weighted by the amount of milk in each class in each zone that would be 

eligible to pool.26 

The location adjustments and the estimated equations in equation 1, in conjunction with the forecast 

prices in the CA FMMO would account for the milk that may never pool under a CA FMMO.27 However, 

in the context of the impact analysis, all milk no longer pooling was once pooling on the CSO. 

Each combination of location adjustment and deviation bin are iterated through all 40 possibilities (10 

years, 4 location zone adjustments for each year).

For each class and iteration:

1. The location adjustments and the deviations for each bin are added to the CD; 

2. The parameter estimate multiplied by the modified CD are weighted by the deviation bin weight;

3. The bin-weighted modified CD is then weighted by the percent of total milk at each location 

adjustment. 

 

 26 Regulated distribution plants would have to pool all of the milk received at that plant (regardless of use). 27 This assumes that there would be plants not pooling in the CA FMMO similar to the case in the Upper Midwest 
Regulatory Economic Impact Analysis of the California FMMO Final Decision 28

The iterations are then summed to get the weighted milk-not-pooled, milk pooled percentage. 

� � ff(xxnn) = �

�ααnn + ββnn ∗ �CCCCCC nn + bbnn,ii + zznn,ll� ∗ δδnn,ii� ∗ γγnn,ll, xxnn > 0

0, xxnn ≤ 0

4

ll=1

10

ii=1

where:

i = the number of bins

n = the three classes (Class II, Class III, Class IV)

l = the four location zone adjustments (-0.30, -0.20, -0.10, 0)

αn = the intercept adjuster for each CD equation

βn = the parameter estimate for each CD equation

CDn = the annual average CD price for the nth class

bn,i = the price deviation from the annual average for the nth class and the ith bin

zn,l = the location adjustment from the base location for the nth class and the lth location

δn,i = the weight associated with the nth class and the ith bin

γn,l = the weight associated with the nth class and the lth location

By iterating through all 40 options, the range of possibilities for monthly deviations from the annual CD 

(including any location adjustment effects) is covered. This method of capturing monthly data in an 

annual model by iterating monthly deviations was used for the MILC program in the Annual Econometric 

Model28 (utilized in the 2007 Hearing on Class III and IV Prices29). 

Once each milk-not-pooled percentage for each class is calculated, it is multiplied by the total pooled 

milk for each class in the CA FMMO order. For each class, this CA milk-not-pooled is then moved into 

its respective class as unregulated milk.

 28 https://www.ams.usda.gov/sites/default/files/media/nateconbase2016Dairy%20Hearing%20Analysis.pdf

29 https://www.ams.usda.gov/rules-regulations/moa/dairy/hearings/class-III-and-IV-prices

EQ 2
Regulatory Economic Impact Analysis of the California FMMO Final Decision 29

VII. APPENDIX D: TECHNICAL SUPPLEMENT TO THE CONSUMER WELFARE 

ANALYSIS 

Impact of policy changes affecting the wholesale prices of dairy products on consumers is measured as 

the change in consumer surplus given changes in retail prices and quantities.30 Consumer surplus is 

defined as the difference between what a consumer pays for a unit of a good and the maximum amount 

the consumer would be willing to pay for that unit. The Regional Econometric Model does not directly 

forecast changes in consumer retail prices. In order to conduct a consumer impact analysis of a policy 

change affecting wholesale prices of dairy products, one needs to define the relationship between the 

retail price of dairy product and the wholesale dairy prices. 

The methodology to analyze the retail price of dairy products is discussed first. The agricultural 

economics literature studying the price transmission in agricultural commodities under various market 

structures and scenarios is extensive. The 100 percent price transmission of changes in wholesale price to 

retail price under perfect competition is a widely accepted result (Chouinard et al. 2008). A study specific 

to the dairy industry estimated pass-through rates of 73% to 103% in the U.S. processed cheese market 

under Bertrand-Nash equilibrium (Kim and Cotterill 2008). Looking at the European market, Ferrucci et 

al. (2012) found a full pass through from dairy commodity wholesale price to retail prices occurs after 4 

quarters. In the United States, evidence specific to the dairy sector suggests that up to six months is 

required for retail dairy product prices to adjust fully to changes in wholesale prices (Lamm and Westcott 

1981).31

For the purposes of defining relationship between wholesale and retail prices of dairy products, we divide 

main dairy products into two categories: (1) dairy products that are mostly sold as a consumer packaged 

goods (i.e. final product); (2) dairy products that are used predominantly as inputs. Fluid milk, frozen 

products, other Class II products, cheese and butter fall into the first category, while dry whey and nonfat 

dry milk (NFDM) fall into the latter category.32

The reason for this distinction is lack of available data of retail prices for dry whey and nonfat dry milk. 

We acknowledge that both cheese and butter are heavily used as inputs in processed food production. 

This analysis measures changes in the welfare of consumers that buy cheese and butter as final goods. 

The analysis implicitly assumes that butter and cheese that are not retailed as a final product: (1) 

 30 The methodology used in calculations of consumer surplus are standard in economics. Examples can be found in 

most Intermediate Economics textbooks, for example Paul A Samuelson, William D. Nordhaus “Economics” Sixth 

Edition, Chapter 5, p.91.

31 See also Capps and Sherwell (2007) and Leibtag (2009). 32 Other Class II total solids and frozen total solids use Consumer Price Indices (CPIs) in the model as their proxy 

prices. The CPIs were converted to a 2016 base year using the following calculated prices and conversion factors:

• The simple average of Dairy Market News (DMN) National Dairy Bi-Weekly market report in 2016 of ice 

cream, Greek yogurt and yogurt. 

• A 40 percent market share for Greek yogurt based on the Yogurt Market (Product-Traditional, Australian, 

Icelandic, Greek, Non-dairy, and Kids; Packaged Containers – Cups, Pouch, Tubs, and Bottles)) – North 

America Industry Analysis, Size, Share, Growth, Trends, and Forecast 2016-2024. 

http://www.transparencymarketresearch.com/yogurt-market.html. Hence, the Greek yogurt price is 

weighted by 40 percent. 

• Conversion factors for ice cream total solids were sourced from Weights, Measures, and Conversion Factors 

for Agricultural Commodities and Their Products. http://www.carolinafarmstewards.org/wpcontent/uploads/2015/05/Weights-Measures-and-Conversion-Factors-for-Agricultural-Commodities-andTheir-Products.pdf). 

• Conversion factors for yogurt total solids were sourced from Evaluation the Effect of Milk Total Solids on 

the Relationship between Growth and Activity of Starter Cultures and Quality of Concentrated Yogurt. 

http://www.idosi.org/aejaes/jaes2(5)/20.pdf
Regulatory Economic Impact Analysis of the California FMMO Final Decision 30

constitute a small share of costs in a large number of processed foods; (2) these processed food products 

have many substitutes; (3) the expenditure on these processed food products as a share of total 

expenditure is small. Therefore, the wholesale price changes in butter and cheese that are not used as 

final goods also follow a 100 percent price transmission.

As part of the consumer impact analysis, we developed a price transmission model for fluid milk, Class II 

dairy products, American cheese and AA grade butter. The empirical analysis uses monthly retail and 

wholesale data to validate the choice of an assumption that a full price transmission from wholesale to 

retail prices occurs within a year. 

For the retail price of fluid milk, two data sources are used: (1) Monthly U.S. city average whole milk 

price per gallon from July 1995 to December 2016 provided by BLS. (2) Monthly whole milk retail price 

per gallon from January 1999 to May 2015 obtained from California Department of Food and 

Agriculture.33 For the retail price of Class II products we use data from AMS Dairy Market News. The 

retail price series used are for non-organic ice cream in 48-64 ounce containers and non-organic Greek 

yogurt in 32 once containers.34 Both series are monthly and span from March 2012 to December 2016. 

The ice cream and yogurt price series were converted to one pound basis and are averaged to obtain a 

single retail price series for Class II products. 

Data sources for the retail prices of American cheese are: (1) The BLS monthly data for retail list price of 

cheddar cheese from January 2000 to December 2016. The data series provided by BLS are U.S. City 

averages of the listed price. (2) The USDA AMS weekly advertised retail sales prices to consumers at 

major retail supermarkets.35 For retail price of butter, two data sources are used: (1) Monthly BLS Butter 

retail price index from January 2000 to December 2016.36 (2) The USDA AMS provides weekly 

advertised retail sales prices of butter to consumers at major retail supermarkets.37 We use 16oz. block of 

non-organic butter as the representative retail butter product. The butter retail price data from AMS are 

available from March 2012 to December 2016. The table below summarizes the retail data information.

The matching wholesale price and manufacturing class price data are obtained from Dairy Product 

Mandatory Reporting Program.

38

 33 AC Nielson Scantrack Reports on Refrigerated Milk. www.cdfa.ca.gov/dairy/retail_prices_main.html. 34 The ice cream prices were averaged at 56 ounces. A simple average of the bi-weekly ice cream and weighted 

yogurt prices were used to create an annual average for the respective products. 35 These data are aggregated from weekly to monthly observations using simple averages by week. 36 Butter retail price, U.S. city average not seasonally adjusted, all urban consumers, base period 1982-1984=1. 

Series id: CUUR0000SS10011.

37 These data are aggregated from weekly to monthly observations using simple averages by week.

38 The most recent data are available at: 

https://mpr.datamart.ams.usda.gov/menu.do?path=Products\Dairy\All%20Dairy
Regulatory Economic Impact Analysis of the California FMMO Final Decision 31

Dairy Product Retail Prices by Product and Data Source

For fluid milk, Class II dairy products, American cheese and AA butter we use rolling average wholesale 

prices and seasonally adjusted hourly real wages of production and nonsupervisory employees for retail 

trade in the industry of grocery stores as main explanatory variables.39 In setting a price transmission 

model, we follow (Heien 1980). The pricing rule used is of this general form:

rr = bb1 ww + bb2WW,

where the retail price of a given dairy product, rr, is a function of wholesale price of the product, ww, and 

the retail marginal costs approximated by the retail wage, WW.

The assumptions underlying this pricing rule are: (1) a competitive market; (2) fixed proportions 

production technology between dairy inputs and other retail marketing costs; and (3) constant returns to 

scale in food marketing. Implicit in the price transmission model is that retail prices change in response to 

changing wholesale or farm prices (Lamm and Westcott 1981). Another aspect of the price pass-through 

process is that responses of retail prices to changes in wholesale prices are generally not instantaneous 

(Kinnucan and Forker 1987).40

The table below summarizes the regression results. For whole fluid milk, a full price transmission from 

wholesale to retail occurs in about 9 months. The results for cheese suggest statistically significant 

evidence for a full price transmission of change from whole sale to retail in about six to nine months. The 

regression results for butter and Class II dairy products suggest close to full price transmission from 

wholesale to retail price in about 9 months. It is important to note that most of the wholesale-to-retail 

price pass-through occurs in the first half of the year. 

 39 Nominal retail wage variable is converted to real wages by dividing nominal wages by normalized CPI. 

https://data.bls.gov/timeseries/CES4200000008?data_tool=XGtable. 40 Simple moving average of lags of whole sale price are used to accommodate the consideration of gradual response 

to retail prices to wholesale prices.

Retail Price Data Source Period Obs Mean

Fluid Milk $/Gallon

BLS July-1995 to Dec-2016 258 3.123

AC Nielson Jan-1999 to May-2015 197 3.120

Class II products $/lb. AMS Retail Mar-2012 to Dec-2016 58 1.369

Cheddar Cheese $/lb. BLS Jan-2000 to Dec-2016 204 4.707

Cheese $/lb. AMS Retail Mar-2012 to Dec-2016 58 3.930

Butter Index BLS Jan-2000 to Dec-2016 204 1.852

Butter $/lb. AMS Retail Mar-2012 to Dec-2016 58 2.960
Regulatory Economic Impact Analysis of the California FMMO Final Decision 32

Estimation Results for Wholesale to Retail Price Transmission

Explanatory Variables

Retail Price

Fluid Milk Price Cheese Price Butter Price

Class 2 Dairy 

Products

Neilson BLS AMS Retail BLS Price

AMS 

Retail BLS Index AMS Retail Price

Trend 0.0002*** 0.0001*** 0.006 0.008***

(0.00005) (0.00004) (0.002) (0.096)

Constant 2.671 2.500*** -0.116

(2.404) (0.290) (0.502)

Real Wages 0.020*** 0.020*** 0.006*** 0.247*** -0.118 -0.169 0.126***

(0.001) (0.0007) (0.001) (0.011) (0.259) (0.027) (0.046)

6 month average lag 

wholesale price

0.938***

(0.181)

9 month average lag 

wholesale price

0.881*** 0.970*** 0.850*** 0.808*** 0.733*** 0.966***

(0.070) (0.066) (0.090) (0.189) (0.023) (0.316)

Observations 176 195 52 195 58 195 58

R^2 0.997 0.996 0.996 0.997 0.442 0.854 0.186

Adjusted R^2 0.997 0.996 0.996 0.997 0.422 0.853 0.156

Residual std. Error 0.022 0.024 0.249 0.265 0.236 0.108 0.067

Degrees of Freedom (df=173) (df=192) (df=49) (df=192) (df=55) (df=192) (df=55)

F Statistics 16,841*** 16,124*** 4,367*** 7,747*** 21*** 562*** 6.27***

(df=3;173) (df=3;192) (df=3;49) (df=3;198) (df=2;55) (df=2;192) (df=3;55)

The assumption used for this consumer impact analysis is that a full retail price transmission in response 

to changing wholesale prices takes no more than one year. The regression results in this analysis support 

this assumption. This analysis serves as a further justification of using the assumption of one to one pass 

through from wholesale prices to retail prices when analyzing policy changes that affect the wholesale 

prices for fluid milk, Class II dairy products, cheese and butter. Since the data used in the Regional 

Econometric Model is on an annual basis, a one-to-one wholesale-to-retail price transmission within a 

year implies that all the changes in wholesale prices are fully transferred to the retail level within the same 

period. Given the analysis above, we follow the antecedent literature described and use the assumption of 

100 percent same-year price pass-through from wholesale to retail for all major dairy products including 

dry whey and nonfat dry milk. 

References

Capps, Jr., Oral, and Pablo Sherwell. (2007) “Alternative Approaches in Detecting Asymmetry in FarmRetail Price Transmission of Fluid Milk,” Agribusiness, Vol. 23 No. 3, pp. 313-331.

Chouinard, H.H., et al., (2010) “Milk Marketing Order Winners and Losers,” Applied Economic 

Perspectives and Policy, pp. 59-76.

Ferrucci, G., R. Jiménez-Rodríguez, and L. Onorante. (2012) "Food price pass-through in the euro area: 

Non-linearities and the role of the common agricultural policy," International Journal of Central 

Banking, Vol. 8, No. 1, pp. 179-217.

Heien, Dale M. (1980). "Markup pricing in a dynamic model of the food industry," American

Journal of Agricultural Economics, Vol. 62, No. 1, pp. 10-18.
Regulatory Economic Impact Analysis of the California FMMO Final Decision 33

Kim, D. and R. W. Cotterill (2008). “Cost Pass-Through in Differentiated Product Markets: The Case of

U.S. Processed Cheese,” The Journal of Industrial Economics, Vol. 56 No. 1, pp. 32-48.

Kinnucan, H.W. and O. D. Forker (1987). “Asymmetry in Farm-retail Price Transmission for Major Dairy 

Products,”American Journal of Agricultural Economics, Vol. 69, No. 2, pp. 285-292.

Lamm, R.M. and Westcott, P.C. (1981). “The Effects of Changing Input Costs on Food Prices,” American 

Journal of Agricultural Economics, Vol. 63(2), pp.187-196.

Leibtag, Ephraim (2009). “How much and how quick? Pass-through of commodity and input cost 

changes to retail food prices,” American Journal of Agricultural Economics, Vol. 91, No. 5, pp. 

1462–1467.