81 days till dairy chaos: Midwest farms face $56k losses as processors gain. Who survives the 2025 pricing overhaul? Time’s ticking.

The most significant dairy pricing overhaul in a generation will fundamentally transform American milk markets starting June 1st. The return to the “higher-of” Class I formula corrects a catastrophic 2018 Farm Bill experiment that cost producers an estimated $725 million during pandemic market disruptions. However, processor-friendly manufacturing allowance increases will extract approximately $56,000 annually from typical 100-cow operations, creating dramatic regional disparities that will permanently reshape America’s dairy landscape. This analysis provides the regional impact breakdown, processor perspectives, and tactical survival guide you need to navigate dairy’s new economic battlefield.

THE FUNDAMENTAL SHIFT: RETURNING WHAT WAS TAKEN

Let’s dispense with the bureaucratic jargon and call Federal Milk Marketing Orders what they are: the rules that determine who gets what slice of the dairy revenue pie. That pie is being reshaped to create clear winners and losers across America’s dairy landscape.

Restoring the “higher-of” Class I pricing formula reverses one of recent dairy history’s most catastrophic policy experiments. When the 2018 Farm Bill implemented the average-plus-74-cents formula, few anticipated how disastrously it would perform during market upheavals. During the pandemic, this flawed formula transferred an estimated $725 million from farmers’ pockets to processors’ profit margins—a wealth transfer that should outrage every dairy producer in America.

Dana Coale, deputy administrator of the AMS Dairy Program, acknowledged these pandemic-related losses, noting that the 2018 farm bill formula “resulted in steep reductions in producer income as a result of market disruptions during the COVID-19 pandemic.” The new order, according to Coale, “gives you certainty as to what lies ahead. You know what’s coming”.

THE REGIONAL BATTLEFIELD: WHERE YOU FARM DETERMINES IF YOU WIN OR LOSE

The nationwide referendum that approved these changes in December 2024 masked profound regional disparities in how these reforms will impact farm-level profitability. Analysis of USDA data reveals a stark geographic divide that will permanently alter regional competitive advantages, potentially reshaping dairy production patterns for years to come.

NORTHEAST PRODUCERS: THE UNEXPECTED WINNERS

The 2025 FMMO reforms create a potentially game-changing competitive advantage for Northeast dairy producers due to higher Class I utilization in the region. According to industry analysis, Northeast producers stand to benefit significantly from the reforms due to high Class I utilization, boosting profitability potential. The Northeast dairy industry is further positioned for growth driven by new processing capacity in New York and Pennsylvania, creating a unique window of opportunity.

The proposed allowance increases will have substantially less impact on Northeast producers due to the region’s higher Class I utilization. This contrasts sharply with areas like California, the Upper Midwest, the Southwest, and the Pacific Northwest, where higher Class III and IV utilization makes producers more vulnerable to the adverse effects of increased make allowances.

UPPER MIDWEST OPERATIONS FACE SERIOUS CHALLENGES

The reforms present a troubling financial picture for dairy farmers in the Upper Midwest. Edge Dairy Farmer Cooperative directly acknowledges that the reforms “would slightly decrease the minimum regulated price private milk buyers have to pay to pooled milk producers in the Upper Midwest order”. This regional disadvantage stems from several technical aspects of the reform package, particularly how components are valued.

The decision to update skim milk composition factors without corresponding increases in butterfat factors creates particular complications for Upper Midwest producers who typically emphasize butterfat production. According to industry analysis, these adjustments could significantly impact the Upper Midwest pool value. This substantial financial hit threatens the region’s competitive position and demands immediate adaptive strategies from affected producers.

WESTERN OPERATIONS: CALIFORNIA, SOUTHWEST, AND PACIFIC NORTHWEST DISADVANTAGED

Detailed analysis shows that the proposed increases in make allowances would significantly reduce the total pool value in several western orders. According to Farm Bureau analysis, California would have experienced a $94 million reduction in pool value, while the Southwest would have seen a $72 million decrease.

These regional disadvantages stem from the higher proportion of milk utilized in Class III and IV manufacturing in these areas. With make allowance increases directly reducing the value of milk used in these classes, western producers face the most dramatic negative impacts from the reforms. This geographic inequality creates concerning implications for an FMMO system supposedly designed to prevent such regional disparities.

CENTRAL AND MIDEAST REGIONS: MODEST GAINS LIKELY

In contrast to the challenges facing Upper Midwest and Western producers, operations in the Central and Mideast orders are positioned to see price improvements under the new system. According to industry analysis, the reforms “would slightly increase the price to producers in the Central and Mideast orders”.

This regional advantage stems from how the updated class price calculations and differentials interact with these regions’ typical milk composition and utilization patterns. The geographic proximity to major population centers and fluid milk markets gives these producers a competitive advantage under the reformed pricing structure.

PROCESSOR PERSPECTIVE: THE MAKE ALLOWANCE VICTORY

While producer organizations have focused on the return to the “higher-of” formula, processors have secured substantial increases in make allowances—the margin built into pricing formulas to cover manufacturing costs. This represents a significant win for the processing sector that deserves careful examination.

International Dairy Foods Association President and CEO Michael Dykes acknowledged the reforms include “important updates to elements of the FMMO system, including much-needed changes to ‘make allowances.'” Dykes also noted that “While the USDA process did not address all issues within the supply chain, particularly for Class I and organic milk processors, IDFA is optimistic that this process has laid the groundwork for a unified and forward-looking dairy industry”.

Farm Bureau President Zippy Duvall strongly criticized the process, stating, “USDA instead bases make allowances on an unscientific, voluntary survey that allows processors to opt-out, skewing the results in a direction that results in lower milk prices for farmers.” According to Farm Bureau analysis, “changing the make allowance without a mandatory, audited survey could lead to unjust penalties for dairy farmers, which directly defies the intended purpose of the FMMO system”.

The effects of these allowance increases are substantial. If implemented between 2019 and 2023, they would have reduced Class III prices by 90 cents/cwt and Class IV prices by 85 cents/cwt. These reductions directly impact producer payments, particularly in regions with high manufacturing utilization.

SURVIVAL TOOLKIT: YOUR 81-DAY ACTION PLAN

With implementation just 81 days away, forward-thinking producers are already developing comprehensive adaptation strategies. The following approaches represent the emerging consensus among dairy finance specialists and progressive operators:

REGION-SPECIFIC PROFIT MAXIMIZATION STRATEGIES

The stark regional disparities in reform impacts demand location-specific adaptation strategies:

For Northeast producers, the FMMO reforms coincide with new processing investments in New York and Pennsylvania, creating a unique window of opportunity. These producers face what industry analysts describe as “a period of potential competitive advantage after years of challenging margins”. A continued focus on maximizing milk components per cow remains “the greatest opportunity for our producers to maximize their profitability.” Before breaking ground on expansion plans, ensure you’re extracting maximum value from your existing herd through optimized nutrition, genetics, and management practices focused on component production efficiency.

Upper Midwest producers facing decreased regulated minimum prices must immediately pursue enhanced over-order premium negotiations. Concerned about potential pool value losses, these producers need to identify alternate revenue streams.

“To the extent that co-ops are not losing money at these higher make allowances, potentially that wouldn’t be coming off as a deduction. And to the extent that you have more proprietary firms covering their make allowances, they may be able to put some of those over-order premiums back into place.” — Mark Stephenson, dairy policy expert.

Western operations in California, the Southwest, and the Pacific Northwest face the most significant challenges, with analysis projecting substantial pool value losses. These producers must evaluate whether their current scale and efficiency can overcome these regulatory disadvantages or consider more dramatic business model adjustments.

COMPONENT PRODUCTION FOCUS: DECEMBER 1ST IMPLEMENTATION

The reforms include significant changes to milk composition factors, with true protein updated from 3.1 to 3.3 percent and other solids from 5.9 to 6 percent, effective December 1, 2025. These adjustments will slightly increase beverage (Class I) milk sales revenue to pooled producers, creating incentives to optimize component production.

However, USDA decided against updating butterfat solids factors despite the recent growth in milk butterfat content. This imbalanced approach to component valuation creates new strategic considerations for feeding and breeding programs, particularly for operations that have historically emphasized butterfat production.

The six-month delay in implementing these composition factor updates (June 1 vs. December 1) creates a transition period requiring careful planning. According to analysis, composition factor updates would contribute to a significant increase across all orders. Due to the implementation delay, this benefit would be inaccessible for the first six months. This delay could cost dairy farmers more than $100 million during the first six months alone.

HEDGING PROGRAM RECALIBRATION

The structural changes to pricing formulas necessitate an immediate review of risk management strategies. Industry experts have expressly cautioned about complications for dairy producers’ hedging programs. Producers utilizing Class III milk futures or equivalent USDA insurance products may face increased exposure to butterfat price risk under the new system.

Progressive operations are already consulting with risk management specialists to recalibrate their hedging programs, particularly regarding the alignment between component production, forward contracting practices, and futures positions. The transition period between now and full implementation presents a critical window for adjusting these strategies.

Removing 500-pound barrel cheddar cheese from pricing calculations will also impact hedging strategies. According to industry analysis, “Industry advocates of this removal believe relying solely on 40-pound block cheddar cheese to set the monthly announced cheese price will reduce the volatility of cheese prices”. However, this change requires careful reconsideration of existing risk management approaches.

IMPLEMENTATION TIMELINE: CRITICAL DATES TO MONITOR

THE COMPETITIVE COUNTDOWN: PREPARE NOW OR PERISH LATER

The most significant milk pricing overhaul in a generation will reshape dairy economics starting June 1, 2025—just 81 days from now. The return to the “higher-of” Class I formula corrects a fundamental injustice from the 2018 Farm Bill that cost producers hundreds of millions during market disruptions. However, the increased make allowances, adjusted component factors, and specialized ESL pricing create a complex web of implications that vary dramatically by region, farm size, and production profile.

USDA’s Dana Coale suggests the reforms provide certainty about “what lies ahead,” but that certainty includes opportunities and challenges depending on your operation’s circumstances. The 81-day implementation countdown represents a critical preparation window forward-thinking producers utilize to adapt contracts, recalibrate risk management, and optimize component production strategies.

While industry organizations debate the adequacy of these reforms—with some noting more could have been done to enhance the pricing formula—the reality is that June 1st marks the beginning of a new dairy economic paradigm regardless of these philosophical disputes. National Milk Producers Federation President and CEO Gregg Doud believes “This final plan will provide a firmer footing and fairer milk pricing, which will help the dairy industry thrive for years to come”. However, others offer starkly different assessments.

Your competitors aren’t waiting for perfect reforms but adapting to what’s coming. The question is whether your operation is similarly prepared for dairy’s new economic landscape. Industry leaders have noted, “While there is always more to do to keep the orders relevant and purposeful, at this juncture, we are encouraged that the FMMO will continue to provide the market stability needed for producers and processors”. That stability, however, will benefit some regions far more than others—making your adaptation strategy more critical than ever.

Key Takeaways:

• Processor Advantage: Make allowances surge 25-42%, costing farmers $56k/year per 100 cows
• Regional Warfare: Northeast gains from high Class I utilization; Midwest/California face $94M+ losses
• Pandemic Payback: Restored “higher-of” formula recovers $725M stolen from farmers in 2018 policy failure
• Survival Countdown: 81 days to renegotiate premiums, adjust hedging, and optimize component production

Executive Summary:

The USDA’s June 1, 2025 Federal Milk Marketing Order reforms will radically reshape dairy economics, reversing a flawed 2018 policy that cost farmers $725 million during the pandemic. While restoring the “higher-of” formula benefits some, controversial processor-friendly make allowances could strip $56,000 annually from 100-cow operations. Regional disparities will create clear winners (Northeast) and losers (Midwest, California), with urgent adaptation required as competitors already pivot strategies. The clock is ticking—81 days remain to restructure contracts, risk management, and production plans.

Learn more:

• USDA’s New Dairy Pricing Rules: The Financial Impact No One Saw Coming
  Examines the hidden consequences of the Class I pricing overhaul and its long-term effects on farm profitability.
• Is the Federal Milk Marketing Order Reform Benefiting Dairy Farmers or Only the Processors?
  Investigates the power dynamics behind the reforms, analyzing how make allowances tilt profits toward processors.
• USDA’s New Milk Pricing Rules: What Dairy Farmers Need to Know
  Breaks down phased implementation timelines, component updates, and practical steps to mitigate revenue losses.

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