Predicting Milk Basis in the

Southeast Federal Milk OrderJohn Campbell, Area Farm Management Specialist

Southeast Milk Order Basis (Uniform and Class III Price

for Same Month)

Avg. STD Low High

Jan 2.72 0.872 1.75 4.74

Feb 2.41 0.828 1.10 3.88

Mar 2.51 0.773 1.12 3.50

Apr 1.67 1.916 -2.94 3.51

May 1.99 1.162 -0.31 4.03

Jun 2.20 1.005 0.59 4.32

Jul 2.49 1.060 0.69 4.25

Aug 2.56 1.271 -0.26 4.04

Sep 2.30 0.826 1.35 3.70

Oct 2.68 0.967 1.68 4.66

Nov 3.33 1.319 1.84 5.57

Dec 2.11 1.288 0.89 5.14

Correlation of Milk Basis to Selected Variables

Variable

R-squared Value

Previous Month

Class III

Current Month Class III

Class III Price 0.04 0.17

Class I Percentage

0.06 0.001

Class III Percentage 0.01 0.07

Change in Class III from

Previous Month

0.15 0.38

Frequency of Milk Basis

Range

Previous Month

Class III

Current Month Class

III

No. Pct. No. Pct.

> $0 1 1 3 3

$0-$1 2 2 3 3

$1-$2 25 26 22 23

$2-$3 42 44 41 43

$3-$4 15 16 16 17

$4-$5 9 9 9 9

$5-$6 2 2 2 2

t Analysis of Milk Basis Previous Month Basis Calculation Versus

Current Month Basis CalculationTwo

Tailed P

Value

Statistically Significant

Confidence Interval

t ValueStandard Error of

Difference

Jan 0.8285 No 0.1250 0.2207 0.566

Feb 0.9287 No 0.0400 0.0911 0.439

Mar 0.7195 No -0.1775 0.3664 0.484

Apr 0.2462 No -0.9413 1.2104 0.778

May 0.5063 No -0.4363 0.6822 0.640

Jun 0.8673 No -0.1088 0.1702 0.639

Jul 0.7559 No -0.1687 0.3170 0.532

Aug 0.7905 No 0.1475 0.2708 0.545

Sep 0.1733 No -0.5888 1.4348 0.410

Oct 0.4332 No -0.3750 0.8069 0.465

Nov 0.2924 No -0.7213 1.0942 0.659

Dec 0.6031 No -0.3582 0.5319 0.674

Background for Study•Basis is the difference between a cash price for a commodity and a particular futures price.

•Accurately predicting basis is important to successfully use the futures market for price risk management

•Class III milk futures are traded on the Chicago Mercantile Exchange and settles near the USDA Class III each month.

•The study of milk basis differs from that of other commodities since milk is priced only one time per month. Other commodities like corn, soybeans, feeder cattle, and finished cattle, are priced nearly every business day.

•The Federal Order marketing system for milk is unique in that class prices are determined based on products made from raw milk. Milk for fluid use is Class I, soft product use Class II, cheese Class III, and butter and milk powder Class IV. The amount of milk used in each class varies widely among the different Federal Orders.

•The price for fluid milk (Class I) in each order is determined by pre-determined price differentials based on the location of processors.

•Class I prices are determined by adding the location differential to the Class I Mover Price (a predictor of the Class III price).

•This study used the Southeast Uniform price for 3.5% butterfat milk to calculate basis.

•Actual farm prices will vary from the uniform price based due to factors such as the producer’s butterfat content, specific location within a federal order, quality premiums/discounts, and over order premiums. Each producer should record basis for their farm calculated from their actual milk price.

•Marketing economists suggest producers in federal orders with low Class I utilization calculate basis using the current month Class III milk price and the current month farm price while producers in orders with high Class I utilization use the previous month Class III price and the current month farm price.

•These two methods of basis calculation were used in this study.

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0.50

2.50

4.50

6.50

8.50

10.50

12.50

14.50

16.50

18.50

20.50

22.50

Basis $ Per Cwt.

Class III $ Per Cwt.

Monthly Basis vs. Monthly Class III Milk Price

Class III Basis

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC

$ Per Cwt.

Monthly Average & Standard Deviation Southeast Federal Order Milk Basis

Basis Previous Month Calculation Basis Current Month CalculationSTD Previous Month Calculation STD Current Month Calculation

Conclusions

•There was little correlation between the selected variables in regression analysis.

•t analysis found no significant difference between the means of monthly basis when comparing to the methods of basis calculation.

•Frequency analysis found the most often occurring basis was between $2.00 and $3.00 for both basis calculation methods.

•There appears to be a tendency for basis to be smaller when the Class III price is increasing from month to month and larger when the Class III price is decreasing from month to month.

Southeast Milk Order Basis (Uniform and Class III Price

for Previous Month)

Avg. STD Low High

Jan 2.60 1.219 1.02 5.36

Feb 2.37 0.814 1.32 4.16

Mar 2.69 1.022 1.57 4.65

Apr 2.61 0.749 1.77 4.15

May 2.43 1.230 0.61 4.48

Jun 2.31 1.359 -0.47 4.41

Jul 2.66 0.927 1.42 4.77

Aug 2.42 0.678 1.32 3.49

Sep 2.89 0.705 1.85 4.03

Oct 2.31 0.760 0.80 3.29

Nov 2.60 1.411 1.33 4.76

Dec 2.87 1.235 1.97 5.94