ECON 337: Agricultural Marketing

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Today’s Topic

3. Marketing Orders • A federal (or state) regulation which places requirements on market transactions in a given area • Exists for several commodities, including milk, fruits, and vegetables • Biggest requirement: minimum prices for the commodities, based on usage

4. Federal Milk Marketing Orders Source: USDA-AMS

5. Jobs of Marketing Order • Regulate milk prices • Classify milk by its final use • Establish minimum class and component prices • Enforce payments for milk in supply chain • Verify weights and test results • Audit records • Provide market information Source: Dr. Ginder, ISU

6. Not Part of a Marketing Order • Production controls/limits • Sanitary/quality production standards • Retail price setting • Guaranteed markets/forced sales • Government support • Such as the Milk Income Loss Contract (MILC) Source: Dr. Ginder, ISU

7. Milk Pricing for Producers • All producers receive the same price for milk components • Payments are based on amount of milk delivered • Three factors differentiate milk payments for producers: • Milk composition (quantity of components) • Milk quality (somatic cells) • Location of producer Source: Dr. Ginder, ISU

8. Milk Pricing for Producers • For central Iowa, milk producers receive payments based on: • Protein • Butterfat • Other solids • Somatic cells • Producer price differential • The protein, butterfat, and other solids prices come from the Class III prices for each component

9. Somatic Cell Adjustment • Low somatic cell counts in milk are correlated with • Higher cheese yields • Longer shelf life • Adjustment is based on the formula: • Cheese price * 0.0005 * (350 – Count) • where Count is the somatic cell count in thousands of cells per milliliter • The lower the count below 350, the higher the payment • Counts above 350 lowers the payment

10. Producer Price Differential • Pricing factor that captures location impact • Based on the value of milk in the marketing order region versus the value of the components using Class III prices • Adjusted by the relative difference in the Class I Price Differential by county • Can be positive or negative

11. Class I Price Differentials Source: USDA-AMS

12. Prices for Feb 2014 Source: www.fmmacentral.com

13. Source: www.fmmacentral.com

14. Example Producers = -$0.14 - $0.20 = -$0.14 - $0.25

15. Producer A’s Milk Values = 350 - (110,000/1,000) = 240 * $0.00114 * 1,000

16. Producer B’s Milk Values = 350 - (420,000/1,000) = -70 * $0.00114 * 1,000

17. Milk Supply Chain Producer 10%-15% 85%-90% Coop Handler Coop Processor Governed by FMMO if Grade A Independent Processor Various types of market outlets Various types of market outlets Government Government Final consumers Final consumers Source: Dr. Ginder, ISU

18. Dairy Futures and Options Contract Amount Settle Class III Milk 200,000 lbs Cash Class IV Milk 200,000 lbs Cash Nonfat Dry Milk 44,000 lbs Cash Dry Whey 44,000 lbs Cash Butter 20,000 lbs Cash Cheese 20,000 lbs Cash

19. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/index.htm