Agricultural Marketing ECON 339X: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 John Lawrence Professor jdlaw@iastate.edu 515-294-7801 1

Today’s Topic

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

Federal Milk Marketing Orders Source: USDA-AMS

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

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

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

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

Somatic Cell Adjustment Low somatic cell counts in milk are correlated with Higher cheese yields Longer shelf life Adjustment is based on 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 lower payments

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

Class I Price Differentials Source: USDA-AMS

Prices for Feb. 2011 Source: www.fmmacentral.com

Example Producers Producer A Producer B Location/County Story Buena Vista Class I Price Differential $1.80 $1.75 Butterfat 4.5% 3.3% Protein 3.7% 2.8% Other solids 6.0% 5.7% Somatic cell count 110,000 420,000 Milk sold 1,000 cwt.

Producer A’s Milk Values Amount Rate Value Protein 3,700 lbs. $2.5586 $ 9,466.82 Butterfat 4,500 lbs. $2.2967 $10,335.15 Other solids 6,000 lbs. $0.2310 $ 1,386.00 Somatic cell count 240 $0.00087 $ 208.80 Prod. Price Differential $0.30 $ 300.00 Total value $21,696.77 Value per cwt. 1,000 cwt. $21.70

Class I Price Differentials Source: USDA-AMS

Producer B’s Milk Values Amount Rate Value Protein 2,800 lbs. $2.5586 $ 7,164.08 Butterfat 3,300 lbs. $2.2967 $ 7,579.11 Other solids 5,700 lbs. $0.2310 $ 1,316.70 Somatic cell count -70 $0.00087 $ -60.90 Prod. Price Differential $0.25 $ 250.00 Total value $16,248.99 Value per cwt. 1,000 cwt. $16.25

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

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

Class web site: http://www.econ.iastate.edu/~chart/Classes/econ339/Spring2011/