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An Overview of Milk Pricing Under Federal Orders (Milk Pricing 101) July 8, 2003

Wisconsin Center for Dairy Research. An Overview of Milk Pricing Under Federal Orders (Milk Pricing 101) July 8, 2003. Brian W. Gould Senior Research Scientist Wisconsin Center for Dairy Research and Department of Agricultural and Applied Economics. Summary of Presentation.

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An Overview of Milk Pricing Under Federal Orders (Milk Pricing 101) July 8, 2003

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  1. Wisconsin Center for Dairy Research An Overview of Milk Pricing Under Federal Orders (Milk Pricing 101) July 8, 2003 Brian W. Gould Senior Research Scientist Wisconsin Center for Dairy Research and Department of Agricultural and Applied Economics

  2. Summary of Presentation • Review Objectives of Federal Order System • Overview of Classified Pricing System • Review Current Milk Pricing Formulas • Work Through Example of May 2003

  3. Evolution of Current Federal Order System • Enabled by Agricultural Marketing Agreement Act of 1937 • Not mandatory • Dairy producers request and approve via referenda • Three main objectives: • Assure consumers adequate beverage (fluid) milk supply at reasonable price • Promote producer price stability and orderly marketing • Provide sufficient producer prices to guarantee • adequate Grade A milk supply

  4. Evolution of Current Federal Order System • These objectives achieved through: • Classified pricing: Minimum pay prices established for milk (and components) according to milk utilization • Pooling: Within each order, producers receive uniform milk price (based upon quality and composition), regardless of how their milk is actually used (this will not be covered today)

  5. Evolution of Current Federal Order System

  6. 31 Orders 11 Orders Evolution of Current Federal Order System Prior to 2000 After Jan. 2000 Note: CA, with 20% of U.S. milk production, is not part of FMMO

  7. Classified Pricing of Farm Milk • Four classes of milk under Federal Orders • Class I: beverage products • Class II: soft manufactured products (e.g., ice cream, cottage cheese and creams) • Class III: hard cheese and cream cheeses • Class IV: butter and dry milk products (e.g., NDM) • Under Federal pricing system, formulas used to set monthly minimum pay prices for each class of milk • Proprietary plants • Coops should pay at-least minimum

  8. Classified Pricing of Farm Milk • Class III and IV minimum prices • Friday on or before the 5th of month following production (e.g., July ’03 prices announced on Aug. 1) • Based on product formulas relating milk component values (e.g., fat, protein, solids-not-fat) to: • Wholesale dairy product prices • Product yield • Assumed manufacturing costs • Price data collected by NASS and averaged over 4-5 week period (depending on month)

  9. Classified Pricing of Farm Milk • Class III and IV price/cwt: multiply component volume/cwt at standard composition by derived component values

  10. Classified Pricing of Farm Milk • Class I and II minimum prices • Based on Class III and IV price formulas • Calculated over different/shorter period • Friday on or before 23rd of month prior to production month (e.g., July 2003 Class I price and II skim milk price announced on June 20th ) • Uses most recent 2 weeks of wholesale NASS data

  11. Classified Pricing of Farm Milk • Some Assumptions: • Farm Milk: • 3.5% fat • 3.1% of skim is true protein (3.3% total protein)  2.9915% of farm milk (3.1*.965) • 82.2% of true protein is casein • 5.9% other solids (8.685% total non-fat solids) • Cheddar Cheese • 90.0% fat retention, 95.9% casein retention • 38% moisture • Cheese yield of 1.383/lb protein, 1.572/lb butterfat (based on Van Slyke cheese yield formula) • “Gross” cheese yield of 9.685 lb/cwt (9.6615 lb/cwt net after farm-plant losses)

  12. Class IV Pricing Formulas • Milk Used to Make Butter and Dry Milk Products • Based on Wholesale Butter and NDM Prices • (1) Class IV (and III) Butterfat Price/lb = • (NASS avg. monthly AA butter price – 0.115) X 1.20 • (2) Nonfat Solids Price/lb = • (NASS Monthly NDM Price – 0.14) X 0.99 • Class IV Skim Milk Price = 9.0 X Nonfat Solids Price • Class IV Price = 3.5 X Butterfat Price + • 0.965 X Class IV Skim Milk Price Make Allowance Make Allowance Lbs. Butter Per Lb Milk fat Lbs. NDM Per Lb NF Solids Lbs. BF/Cwt Lbs. NF Solids/Cwt % Skim/100

  13. Class IV Pricing Formulas • After Substituting (1), (2), and (3) into (4): (5) Class IV Price = • 4.20 x NASS Butter Price • + 8.60 x NASS Nonfat Dry Milk Price • – 1.69 • A $0.10/lb change in butter price will change Class IV price by $0.42/cwt in the same direction • A $0.10/lb change in NDM price will change Class IV price by $0.86/cwt in the same direction

  14. Class IV Pricing Formulas NASS Grade A Butter Price Butterfat Price ($/lb) x 3.5 (1) Class IV Price ($/cwt) (2) x 9.0 x 0.965 Class IV Skim Price ($/cwt) Nonfat Solids Price ($/lb) NASS NDM Price ($/lb) Note: The numbers in parentheses identify product price formula

  15. Class III Pricing Formulas • Milk Used to Make Cream Cheese and Hard Cheeses • (1) Class IV/III Butterfat Price/Lb. = • (NASS monthly AA butter price – 0.115) x 1.20 • (6) Other Solids Price/Lb. = • (NASS Monthly Dry Whey Price – 0.159) x 1.03 • (7) Protein Price/Lb. = • (NASS Monthly Cheese Price – 0.165) x 1.383 + • {[(NASS Monthly Cheese Price – 0.165) x 1.572] – • 0.9 x Butterfat Price} x 1.17 Make Allowance Lbs. Butter Per Lb Milk fat Make Allowance Protein-Based Yield Lbs. OS Per Lb OS Fat-Based Yield Make Allowance Fat-Protein Ratio Fat Retention

  16. Class III Pricing Formulas • Class III Skim Milk Price = 3.1 x Protein Price + • 5.9 x Other Solids Price • (9) Class III Price = 3.5 x Class IV/III Butterfat Price + • 0.965 x Class III Skim Milk Price Assumed Composition/Cwt Lbs. Fat/Cwt % Skim/100

  17. Class III Pricing Formulas • After Substituting (1), (6), (7), and (8) into (9): • (10) Class III Price = • 9.64 x NASS Cheese Price • + 0.42 x NASS Butter Price • + 5.86 x NASS Dry Whey Price • - 2.57 • $0.10 increase in cheese, butter, and dry-whey prices will increase Class III price $0.964, $0.042 and $0.586 per cwt, respectively

  18. Class III Pricing Formulas (1) NASS Grade A Butter Price Butterfat Price ($/lb) x 3.5 x 3.1 (7) NASS Cheese Price ($/lb) Protein Price ($/lb) Class III Price ($/cwt) Class III Skim Price ($/cwt) x 0.965 (6) x 5.9 Other Solids Price ($/lb) NASS Dry Whey Price ($/lb) Note: The numbers in parentheses identify product price formula

  19. Class II Pricing Formulas • Minimum price for Class II skim milk portion announced in advance of production month • (11) Advanced Nonfat Solids Price/Lb. = • (NASS Two-Week NDM price - 0.14) x 0.99 • (12) Advanced Class IV Skim Milk Price Factor/Cwt. = • 9.0 x Advanced Nonfat Solids Price (13) Class II Skim Milk Price/Cwt. = • Advanced Class IV Skim Milk Price Factor + $0.70 • (14) Class II Nonfat Solids Price/Lb. = • Class II Skim Milk Price/Cwt. ÷ 9.0 Make Allowance Lbs. NDM Per Lb NF Solids Lbs. NF Solids/Cwt Differential Lbs. NF Solids/Cwt

  20. Class II Pricing Formulas • Minimum price for Class II butterfat determined as Class III/IV butterfat price plus differential (e.g., announced by 5th of the month following production) • (15) Class II Butterfat Price/Lb. = • Class IV/III Butterfat Price + $0.007 • Total Class II price combines advanced skim milk and butterfat value (16) Class II Price/Cwt. = • 0.965 x Class II Advanced Skim Milk Price + • 3.5 x Class II Butterfat Price Differential Lbs. Fat/Cwt % Skim/100

  21. Class I Pricing Formulas • Unlike Class II, both skim and butterfat portions of Class I are advanced-priced • Skim milk value based on higher of advanced Class III or IV skim pricing factors • Eq. (11) and (12) show advanced Class IV milk pricing factor • Butterfat value based on Class III/IV formula (Eq. 1)

  22. Class I Pricing Formulas • Advanced Class III skim milk pricing factor based on skim milk pricing factor used in Class III calculation except for use of 2-week price data • Similar to eq. (1): • (17) Class III Advanced Butterfat Price/Lb. = • (NASS 2-Week AA Butter Price – 0.115) x 1.20 • Similar to eq. (7): • (18) Class III Advanced Protein Price/Lb. = • (NASS 2-Week Cheese Price – 0.165) x 1.383 + • {[(NASS 2-Week Cheese Price – 0.165) x 1.572] – • 0.9 X Advanced Butterfat Price} x 1.17 Lbs. Butter Per Lb Milk fat Make Allowance Protein-Based Yield Fat-Based Yield Make Allowance Fat-Protein Ratio Fat Retention

  23. Class I Pricing Formulas • Similar to Eq. (6): • (19) Class III Advanced Other Solids Price/Lb. = • (NASS 2-Week Dry Whey Price – 0.159) x 1.03 • Similar to Eq. (8): • (20) Advanced Class III Skim Milk Price Factor = • 3.1 x Class III Advanced Protein Price + • 5.9 x Class III Advanced Other Solids Price Make Allowance Lbs. OS Per Lb OS Assumed Composition/Cwt

  24. Class I Pricing Formulas (21) Class I Skim Milk Price = Higher of: Advanced Class III or Class IV Skim Milk Price + Class I Differential

  25. Class I Pricing Formulas (22) Class I Butterfat Price/Lb. = Advanced Butterfat Price + (Class I Differential ÷ 100) (23) Class I Price/Cwt. = 0.965 x Class I Skim Milk Price + 3.5 x Class I Butterfat Price % Skim/100 Lbs. Fat/Cwt

  26. Example of Class Price Calculations

  27. Example of Class Price Calculations Calculation of May ’03 Advanced Prices Note: With Class III pricing formula effective April 2003, Other Solids price is not snubbed at zero and is negative whenever NASS dry-whey price is less than $0.159/lb. (green: NASS data, yellow: calculated value)

  28. Example of Class Price Calculations Calculation of May ’03 Advanced Prices yellow: calculated value

  29. Example of Class Price Calculations Calculation of May ’03 Class Prices

  30. Example of Class Price Calculations Calculation of May ’03 Class Prices yellow: calculated, red: correction from your handout

  31. Where Can You Obtain Dairy Marketing Information? • Univ. of Wisconsin Dairy Marketing Website (www.aae.wisc.edu/future) • Basic Milk Pricing Concepts for Dairy Farmers by Ed Jesse and Bob Cropp, Univ. of Wisconsin Extension Publication, July 2003 • Brian W. Gould Wisconsin Center for Dairy Research (608)263-3212 gould@aae.wisc.edu

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