an overview of milk pricing under federal orders (milk pricing 101) july 8, 2003 brian w. gould...

An Overview of MilkAn Overview of MilkPricing Under Federal OrdersPricing Under Federal Orders

(Milk Pricing 101)(Milk Pricing 101)

July 8, 2003July 8, 2003

Brian W. GouldSenior Research Scientist

Wisconsin Center for Dairy Research andDepartment of Agricultural and Applied Economics

Wisconsin Center for Dairy Research

Summary of PresentationSummary of Presentation

Review Objectives of Federal Order SystemReview Objectives of Federal Order System

Overview of Classified Pricing SystemOverview of Classified Pricing System

Review Current Milk Pricing FormulasReview Current Milk Pricing Formulas

Work Through Example of May 2003Work Through Example of May 2003

Evolution of Current Federal Order SystemEvolution of Current Federal Order System

Enabled by Agricultural Marketing Agreement Act of 1937Enabled by Agricultural Marketing Agreement Act of 1937 Not mandatoryNot mandatory Dairy producers request and approve Dairy producers request and approve via via referendareferenda

Three main objectives:Three main objectives: Assure consumers adequate beverage (fluid) milk Assure consumers adequate beverage (fluid) milk

supply at reasonable pricesupply at reasonable price Promote producer price stability and orderly marketingPromote producer price stability and orderly marketing Provide sufficient producer prices to guarantee Provide sufficient producer prices to guarantee

adequate Grade A milk supplyadequate Grade A milk supply


These objectives achieved through:These objectives achieved through:

Classified pricingClassified pricing: : MinimumMinimum pay prices established pay prices establishedfor milk (and components) according to milk utilizationfor milk (and components) according to milk utilization

PoolingPooling: Within each order, producers receive : Within each order, producers receive uniform milk price (based upon quality and composition), uniform milk price (based upon quality and composition), regardless of how their milk is actually used regardless of how their milk is actually used ((this will not be covered todaythis will not be covered today))


1960 1970 1980 1990 2002

Orders (No.) 80 62 47 42 11

Producers (No.) 189,816 143,411 117,490 100,397 63,856

Producer Deliveries (Mil. Lbs.)

44,812 65,104 83,998 102,396 125,546

Delivery/Producer (Cwt)

2,361 4,540 7,149 10,199 19,661

% of U.S. Milk:

Grade A 64 79 80 77 77

All Milk 43 59 67 70 76

31 Orders 11 Orders


Prior to 2000Prior to 2000 After Jan. 2000After Jan. 2000

Note: CA, with 20% of U.S. milk production, is not part of FMMONote: CA, with 20% of U.S. milk production, is not part of FMMO

Classified Pricing of Farm MilkClassified Pricing of Farm Milk

Four classes of milk under Federal Orders Four classes of milk under Federal Orders Class I: beverage productsClass I: beverage products Class II: soft manufactured products (Class II: soft manufactured products (e.g.e.g., ice cream, , ice cream,

cottage cheese and creams)cottage cheese and creams) Class III: hard cheese and cream cheesesClass III: hard cheese and cream cheeses Class IV: butter and dry milk products (Class IV: butter and dry milk products (e.g.,e.g., NDM) NDM)

Under Federal pricing system, formulas used to set Under Federal pricing system, formulas used to set monthly monthly minimumminimum pay prices for each class of milk pay prices for each class of milk Proprietary plantsProprietary plants Coops should pay at-least minimumCoops should pay at-least minimum


Class III and IV minimum prices Class III and IV minimum prices Friday on or before the 5Friday on or before the 5thth of month of month followingfollowing

production (production (e.g.e.g., July ’03 prices announced on Aug. 1), July ’03 prices announced on Aug. 1)

Based on product formulas relating milk component Based on product formulas relating milk component values (values (e.g.e.g., fat, protein, solids-not-fat) to:, fat, protein, solids-not-fat) to: Wholesale dairy product pricesWholesale dairy product prices Product yieldProduct yield Assumed manufacturing costsAssumed manufacturing costs

Price data collected by NASS and averaged over Price data collected by NASS and averaged over 4-5 week period (depending on month)4-5 week period (depending on month)


Class III and IV price/cwt: multiply component Class III and IV price/cwt: multiply component volume/cwt at standard composition by derived component volume/cwt at standard composition by derived component valuesvalues


Class I and II minimum prices Class I and II minimum prices Based on Class III and IV price formulas Based on Class III and IV price formulas

Calculated over different/shorter periodCalculated over different/shorter period

Friday on or before 23Friday on or before 23rdrd of month of month priorprior to production to production month (e.g., July 2003 Class I price and II skim milk month (e.g., July 2003 Class I price and II skim milk price announced on June 20price announced on June 20thth ) )

Uses most recent 2 weeks of wholesale NASS dataUses most recent 2 weeks of wholesale NASS data


Some Assumptions:Some Assumptions: Farm Milk:Farm Milk:

3.5% fat3.5% fat 3.1% of skim is 3.1% of skim is true proteintrue protein (3.3% total protein) (3.3% total protein)

2.9915% of farm milk (3.1*.965)2.9915% of farm milk (3.1*.965) 82.2% of true protein is casein82.2% of true protein is casein 5.9% other solids (8.685% total non-fat solids)5.9% other solids (8.685% total non-fat solids)

Cheddar CheeseCheddar Cheese 90.0% fat retention, 95.9% casein retention90.0% fat retention, 95.9% casein retention 38% moisture38% moisture Cheese yield of 1.383/lb protein, 1.572/lb butterfatCheese yield of 1.383/lb protein, 1.572/lb butterfat

(based on Van Slyke cheese yield formula)(based on Van Slyke cheese yield formula) ““Gross” cheese yield of 9.685 lb/cwt (9.6615 lb/cwt Gross” cheese yield of 9.685 lb/cwt (9.6615 lb/cwt

net after farm-plant losses)net after farm-plant losses)

Class IV Pricing FormulasClass IV Pricing Formulas

Milk Used to Make Butter and Dry Milk ProductsMilk Used to Make Butter and Dry Milk Products Based on Wholesale Butter and NDM PricesBased on Wholesale Butter and NDM Prices

(1) Class IV (1) Class IV (and III)(and III) Butterfat Price/lb = Butterfat Price/lb =(NASS avg. monthly AA butter price – 0.115) X 1.20(NASS avg. monthly AA butter price – 0.115) X 1.20

(2) Nonfat Solids Price/lb =(2) Nonfat Solids Price/lb =(NASS Monthly NDM Price – 0.14) X 0.99 (NASS Monthly NDM Price – 0.14) X 0.99

(3)(3) Class IV Skim Milk Price = 9.0 X Nonfat Solids PriceClass IV Skim Milk Price = 9.0 X Nonfat Solids Price

(4)(4) Class IV Price = 3.5 X Butterfat Price + Class IV Price = 3.5 X Butterfat Price + 0.965 X Class IV Skim Milk Price0.965 X Class IV Skim Milk Price

Make Make AllowanceAllowance


Lbs. Butter Lbs. Butter Per Lb Per Lb Milk fatMilk fat

Lbs. NDM Lbs. NDM Per Lb Per Lb

NF SolidsNF Solids

Lbs. NF Solids/CwtLbs. NF Solids/Cwt

% Skim/100% Skim/100

Lbs. BF/CwtLbs. BF/Cwt


After Substituting (1), (2), and (3) into (4): After Substituting (1), (2), and (3) into (4):

(5)(5) Class IV Price =Class IV Price = 4.20 x NASS Butter Price 4.20 x NASS Butter Price + + 8.60 x NASS Nonfat Dry Milk Price8.60 x NASS Nonfat Dry Milk Price– – 1.691.69

A $0.10/lb change in butter price will change Class IV price A $0.10/lb change in butter price will change Class IV price by $0.42/cwt in the same directionby $0.42/cwt in the same direction

A $0.10/lb change in NDM price will change Class IV price A $0.10/lb change in NDM price will change Class IV price by $0.86/cwt in the same directionby $0.86/cwt in the same direction


NASS Grade AButter Price

Butterfat Price($/lb)

Class IV Price ($/cwt)

NASS NDMPrice ($/lb)

NonfatSolids Price

($/lb)

Class IV Skim Price

($/cwt)

(1)

x 3.5

x 0.965(2) x 9.0

Note: The numbers in parentheses identify product price formulaNote: The numbers in parentheses identify product price formula

Class III Pricing FormulasClass III Pricing Formulas

Milk Used to Make Cream Cheese and Hard CheesesMilk Used to Make Cream Cheese and Hard Cheeses

(1) Class IV/III Butterfat Price/Lb. =(1) Class IV/III Butterfat Price/Lb. =(NASS monthly AA butter price – 0.115) x 1.20 (NASS monthly AA butter price – 0.115) x 1.20

(6) Other Solids Price/Lb. = (6) Other Solids Price/Lb. = (NASS Monthly Dry Whey Price – 0.159) x 1.03(NASS Monthly Dry Whey Price – 0.159) x 1.03

(7) Protein Price/Lb. =(7) Protein Price/Lb. =(NASS Monthly Cheese Price – 0.165) x 1.383 +(NASS Monthly Cheese Price – 0.165) x 1.383 +{[(NASS Monthly Cheese Price – 0.165) x 1.572] –{[(NASS Monthly Cheese Price – 0.165) x 1.572] – 0.9 x Butterfat Price} x 1.170.9 x Butterfat Price} x 1.17




Lbs. OS Lbs. OS Per Lb Per Lb

OSOS


Protein-Based YieldProtein-Based Yield

Fat-Based YieldFat-Based Yield

Fat-Protein RatioFat-Protein RatioFat RetentionFat Retention


(8)(8) Class III Skim Milk Price = 3.1 x Protein Price + Class III Skim Milk Price = 3.1 x Protein Price + 5.9 x Other Solids Price5.9 x Other Solids Price

(9) Class III Price = 3.5 x Class IV/III Butterfat Price + (9) Class III Price = 3.5 x Class IV/III Butterfat Price + 0.965 x Class III Skim Milk Price 0.965 x Class III Skim Milk Price

Assumed Composition/CwtAssumed Composition/CwtLbs. Fat/CwtLbs. Fat/Cwt

% Skim/100% Skim/100


After Substituting (1), (6), (7), and (8) into (9):After Substituting (1), (6), (7), and (8) into (9): (10) Class III Price =(10) Class III Price = 9.64 x NASS Cheese Price9.64 x NASS Cheese Price

+ 0.42 x NASS Butter Price+ 0.42 x NASS Butter Price+ 5.86 x NASS Dry Whey Price + 5.86 x NASS Dry Whey Price - 2.57- 2.57

$0.10 increase in cheese, butter, and dry-whey prices will $0.10 increase in cheese, butter, and dry-whey prices will increase Class III price $0.964, $0.042 and $0.586 per cwt, increase Class III price $0.964, $0.042 and $0.586 per cwt, respectivelyrespectively


NASS Grade AButter Price

Butterfat Price($/lb)

Class III Price ($/cwt)

NASS DryWhey Price ($/lb)

OtherSolids Price

($/lb)

Class III Skim Price

($/cwt)

(1)

x 3.5

x 0.965(6) x 5.9

Note: The numbers in parentheses identify product price formulaNote: The numbers in parentheses identify product price formula

NASS CheesePrice ($/lb)

Protein Price($/lb)

x 3.1(7)

Class II Pricing FormulasClass II Pricing Formulas Minimum price for Class II Minimum price for Class II skim milkskim milk portion announced portion announced

in advance of production monthin advance of production month

(11) Advanced Nonfat Solids Price/Lb. =(11) Advanced Nonfat Solids Price/Lb. =(NASS Two-Week NDM price - 0.14) x 0.99(NASS Two-Week NDM price - 0.14) x 0.99

(12) Advanced Class IV Skim Milk Price Factor/Cwt. =(12) Advanced Class IV Skim Milk Price Factor/Cwt. =9.0 x Advanced Nonfat Solids Price9.0 x Advanced Nonfat Solids Price

(13) Class II Skim Milk Price/Cwt. = (13) Class II Skim Milk Price/Cwt. = Advanced Class IV Skim Milk Price Factor + $0.70Advanced Class IV Skim Milk Price Factor + $0.70

(14) Class II Nonfat Solids Price/Lb. =(14) Class II Nonfat Solids Price/Lb. =Class II Skim Milk Price/Cwt. ÷ 9.0Class II Skim Milk Price/Cwt. ÷ 9.0

Lbs. NDM Lbs. NDM Per Lb Per Lb

NF SolidsNF Solids


Lbs. NF Solids/CwtLbs. NF Solids/Cwt DifferentialDifferential

Lbs. NF Solids/CwtLbs. NF Solids/Cwt

Class II Pricing FormulasClass II Pricing Formulas

Minimum price for Class II butterfat determined as Class Minimum price for Class II butterfat determined as Class III/IV butterfat price plus differential (III/IV butterfat price plus differential (e.g.,e.g., announced by announced by 55thth of the month following production) of the month following production)

(15) Class II Butterfat Price/Lb. =(15) Class II Butterfat Price/Lb. =Class IV/III Butterfat Price + $0.007Class IV/III Butterfat Price + $0.007

Total Class II price combines advanced skim milk and Total Class II price combines advanced skim milk and butterfat valuebutterfat value

(16) Class II Price/Cwt. = (16) Class II Price/Cwt. = 0.965 x Class II Advanced Skim Milk Price + 0.965 x Class II Advanced Skim Milk Price + 3.5 x Class II Butterfat Price3.5 x Class II Butterfat Price

DifferentialDifferential

Lbs. Fat/CwtLbs. Fat/Cwt% Skim/100% Skim/100

Class I Pricing FormulasClass I Pricing Formulas

Unlike Class II, both skim and butterfat portions of Class I Unlike Class II, both skim and butterfat portions of Class I are are advanced-pricedadvanced-priced Skim milk value based on Skim milk value based on higher ofhigher of advanced Class III advanced Class III

or IV skim pricing factorsor IV skim pricing factors Eq. (11) and (12) show advanced Class IV milk pricing Eq. (11) and (12) show advanced Class IV milk pricing

factorfactor Butterfat value based on Class III/IV formula (Eq. 1)Butterfat value based on Class III/IV formula (Eq. 1)

Class I Pricing FormulasClass I Pricing Formulas Advanced Class III skim milk pricing factor based on skim Advanced Class III skim milk pricing factor based on skim

milk pricing factor used in Class III calculation except for milk pricing factor used in Class III calculation except for use of 2-week price datause of 2-week price data

Similar to eq. (1):Similar to eq. (1):(17) Class III Advanced Butterfat Price/Lb. =(17) Class III Advanced Butterfat Price/Lb. =

(NASS 2-Week AA Butter Price – 0.115) x 1.20 (NASS 2-Week AA Butter Price – 0.115) x 1.20

Similar to eq. (7):Similar to eq. (7):(18) Class III Advanced Protein Price/Lb. = (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 1.383 +{[(NASS 2-Week Cheese Price – 0.165) x 1.572] – {[(NASS 2-Week Cheese Price – 0.165) x 1.572] – 0.9 X Advanced Butterfat Price} x 1.170.9 X Advanced Butterfat Price} x 1.17



Protein-Based YieldProtein-Based Yield

Fat-Based YieldFat-Based Yield

Fat-Protein RatioFat-Protein RatioFat RetentionFat Retention


Class I Pricing FormulasClass I Pricing Formulas Similar to Eq. (6):Similar to Eq. (6):(19) Class III Advanced Other Solids Price/Lb. = (19) Class III Advanced Other Solids Price/Lb. =

(NASS 2-Week Dry Whey Price – 0.159) x 1.03(NASS 2-Week Dry Whey Price – 0.159) x 1.03

Similar to Eq. (8):Similar to Eq. (8):(20) Advanced Class III Skim Milk Price Factor = (20) Advanced Class III Skim Milk Price Factor =

3.1 x Class III Advanced Protein Price + 3.1 x Class III Advanced Protein Price + 5.9 x Class III Advanced Other Solids Price5.9 x Class III Advanced Other Solids Price


Lbs. OS Lbs. OS Per Lb Per Lb

OSOS

Assumed Composition/CwtAssumed Composition/Cwt


(21) Class I Skim Milk Price = Higher of: (21) Class I Skim Milk Price = Higher of: Advanced Class III Advanced Class III oror Class IV Skim Milk Price Class IV Skim Milk Price+ Class I Differential+ Class I Differential


(22) Class I Butterfat Price/Lb. =(22) Class I Butterfat Price/Lb. = Advanced Butterfat Advanced Butterfat Price + Price + (Class I Differential ÷ 100) (Class I Differential ÷ 100)

(23) Class I Price/Cwt. = 0.965 x Class I Skim Milk Price + (23) Class I Price/Cwt. = 0.965 x Class I Skim Milk Price + 3.5 x Class I Butterfat Price 3.5 x Class I Butterfat Price

Lbs. Fat/CwtLbs. Fat/Cwt% Skim/100% Skim/100

Example of Class Price CalculationsExample of Class Price Calculations

Average NASS Survey PricesAverage NASS Survey Prices

CommodityCommodity

May Advanced PricingMay Advanced Pricing May Class PricesMay Class Prices

April 18, 2003April 18, 2003(Avg. for Apr. 5(Avg. for Apr. 5thth & &

1212thth

May 30, 2003May 30, 2003(Avg. for 4 weeks (Avg. for 4 weeks ending May 25)ending May 25)

ButterButter 1.07021.0702 1.07431.0743

NDMNDM 0.80320.8032 0.80400.8040

CheeseCheese 1.08421.0842 1.13941.1394

Dry WheyDry Whey 0.15890.1589 0.14500.1450


Component PriceComponent PriceEq. Eq. No.No.

EquationEquation ValueValue

Advanced Butterfat ($/Lb)Advanced Butterfat ($/Lb) 1717 ((1.07021.0702 – 0.115) X 1.20– 0.115) X 1.20 1.14621.1462

Class III Advanced Protein Class III Advanced Protein ($/Lb)($/Lb)

1818((1.08421.0842 – 0.165) X 1.383 + – 0.165) X 1.383 +{[({[(1.08421.0842 – 0.165) X 1.582] – – 0.165) X 1.582] – 0.9 X 0.9 X 1.14621.1462} X 1.17} X 1.17

1.75491.7549

Class III Advanced Other Class III Advanced Other Solids ($/Lb)Solids ($/Lb)

1919 ((0.15890.1589 – 0.159) X 1.03 – 0.159) X 1.03 -0.0001-0.0001

Advanced Nonfat Milk Solids Advanced Nonfat Milk Solids ($/Lb)($/Lb)

1111 ((0.80320.8032 – 0.14) X 0.99 – 0.14) X 0.99 0.65660.6566

Calculation of May ’03 Advanced PricesCalculation of May ’03 Advanced Prices

Note: With Class III pricing formula effective April 2003, Other Solids Note: With Class III pricing formula effective April 2003, Other Solids price is not price is not snubbedsnubbed at zero and is negative whenever NASS dry-whey at zero and is negative whenever NASS dry-whey price is less than $0.159/lb. (green: NASS data, yellow: calculated value)price is less than $0.159/lb. (green: NASS data, yellow: calculated value)


Component/Class PriceComponent/Class PriceEq. Eq. No.No.


Class IV Skim Milk Price Class IV Skim Milk Price Factor ($/Cwt)Factor ($/Cwt)

1212 9.0 X 9.0 X 0.65660.6566 5.915.91

Class II Skim Milk ($/Cwt)Class II Skim Milk ($/Cwt) 1313 5.915.91 + 0.70 + 0.70 6.616.61

Class II Nonfat Solids ($/Lb)Class II Nonfat Solids ($/Lb) 1414 6.616.61 ÷ 9.0 ÷ 9.0 0.73440.7344

Class III Skim Milk Price Class III Skim Milk Price Factor ($/Cwt)Factor ($/Cwt)

2020 3.1 x 3.1 x 1.75491.7549 + 5.9 x + 5.9 x (-.0001)(-.0001) 5.445.44

Class I Skim Milk ($/Cwt)Class I Skim Milk ($/Cwt) 2121 5.915.91 + 1.80 (@ Base Zone) + 1.80 (@ Base Zone) 7.717.71

Class I Butterfat ($/Cwt)Class I Butterfat ($/Cwt) 2222 1.14621.1462 + (1.80 ÷ 100) + (1.80 ÷ 100) 1.16421.1642

Class I @ Test ($/Cwt)Class I @ Test ($/Cwt) 2323 (0.965 x (0.965 x 7.717.71) + (3.5 x ) + (3.5 x 1.16421.1642)) 11.5111.51

Calculation of May ’03 Advanced PricesCalculation of May ’03 Advanced Prices

yellow: calculated valueyellow: calculated value


Calculation of May ’03 Class PricesCalculation of May ’03 Class Prices

Component ValueComponent ValueEq. Eq. No.No.


Butterfat ($/Lb)Butterfat ($/Lb) 11 ((1.07431.0743– 0.115) x 1.20– 0.115) x 1.20 1.15121.1512

Protein ($/Lb)Protein ($/Lb) 77((1.13941.1394 – 0.165) x 1.383 + – 0.165) x 1.383 +{[({[(1.13941.1394 – 0.165) x 1.582] – 0.9 – 0.165) x 1.582] – 0.9 x x 1.15121.1512} x 1.17} x 1.17

1.92751.9275

Other Solids ($/Lb)*Other Solids ($/Lb)* 66 ((0.14500.1450 – 0.159) x 1.03 – 0.159) x 1.03 -0.0144-0.0144

Nonfat Milk Solids ($/Lb)Nonfat Milk Solids ($/Lb) 22 ((0.80400.8040 – 0.14) x 0.99 – 0.14) x 0.99 0.65740.6574


Calculation of May ’03 Class PricesCalculation of May ’03 Class Prices

Class PriceClass PriceEq. Eq. No.No.


Class IV Skim Milk Class IV Skim Milk ($/Cwt)($/Cwt)

33 9.0 x 9.0 x 0.65740.6574 5.925.92

Class IV Milk ($/Cwt)Class IV Milk ($/Cwt) 44 (3.5 X (3.5 X 1.15121.1512) + (0.965 x ) + (0.965 x 5.925.92)) 9.749.74

Class III Skim Milk Class III Skim Milk ($/Cwt)($/Cwt)

88 (3.1 X (3.1 X 1.92751.9275) + (5.9 x ) + (5.9 x (-0.0144)(-0.0144))) 5.895.89

Class III Milk ($/Cwt)Class III Milk ($/Cwt) 99 (3.5 X (3.5 X 1.15121.1512) + (0.965 x ) + (0.965 x 5.895.89)) 9.719.71

Class II Butterfat Price Class II Butterfat Price ($/Lb)($/Lb)

1515 1.1512 1.1512 + 0.007+ 0.007 1.15821.1582

Class II Milk ($/Cwt)Class II Milk ($/Cwt) 1616 (0.965 x (0.965 x 6.616.61) + (3.5 x ) + (3.5 x 1.15821.1582) ) 10.4310.43

yellow: calculated, red: correction from your handoutyellow: calculated, red: correction from your handout

Where Can You Obtain DairyWhere Can You Obtain DairyMarketing Information?Marketing Information?

Univ. of Wisconsin Dairy Marketing WebsiteUniv. of Wisconsin Dairy Marketing Website ((www.aae.wisc.edu/futurewww.aae.wisc.edu/future))

Basic Milk Pricing Concepts for Dairy FarmersBasic Milk Pricing Concepts for Dairy Farmers by byEd Jesse and Bob Cropp, Univ. of Wisconsin Ed Jesse and Bob Cropp, Univ. of Wisconsin

Extension Publication, July 2003Extension Publication, July 2003

Brian W. GouldBrian W. Gould Wisconsin Center for Dairy ResearchWisconsin Center for Dairy Research (608)263-3212(608)263-3212 [email protected]@aae.wisc.edu

an overview of milk pricing under federal orders (milk pricing 101) july 8, 2003 brian w. gould...

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