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

Today’s Topic

Changes in the Milk Industry Source: USDA-NASS, http://quickstats.nass.usda.gov/

Milk Production per Cow Source: USDA-NASS, http://quickstats.nass.usda.gov/

MILK COWS THAT HAVE CALVED JANUARY 1, 2018 (1000 Head) 1 2 5 6 7 9 12 13 15 16 19 30 32 39 40 45 47 57 60 84 85 87 93 97 119 124 128 153 166 187 203 220 264 274 332 428 455 515 525 600 625 1275 1740 0 to 13 13 to 85 85 to 264 264 to 1741 Livestock Marketing Information Center Data Source: USDA-NASS

CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2017 TO JANUARY 1, 2018 (1000 Head) -15 -5 -1 2 3 4 5 7 11 25 -15 to 0 0 to 1 1 to 3 3 to 26 Livestock Marketing Information Center Data Source: USDA-NASS

CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2008 TO JANUARY 1, 2018 (1000 Head) -95 -34 -28 -27 -26 -21 -15 -12 -11 -10 -8 -7 -5 -4 -3 -2 -1 2 3 4 5 8 9 12 18 21 25 31 33 38 40 70 84 115 -100 to -10 -10 to 0 0 to 12 12 to 116 Livestock Marketing Information Center Data Source: USDA-NASS

Milk Prices, Costs, and Returns Source: USDA-ERS, http://www.ers.usda.gov/data-products/commodity-costs-and-returns.aspx

Major Dairy Products Source: USDA-ERS, http://www.ers.usda.gov/data-products/dairy-data.aspx

Per Capita Consumption Source: USDA-ERS, http://www.ers.usda.gov/data-products/dairy-data.aspx

Average Milk Composition SOLIDS Whole Milk Skim Milk Butterfat 3.50 lbs 0.10 lbs Protein 3.50 lbs 3.60 lbs Lactose 4.90 lbs 5.10 lbs Ash/Minerals 0.70 lbs 0.70 lbs WATER 87.40 lbs 90.50 lbs TOTAL 100.00 lbs 100.00 lbs

Classes of Milk CLASS I CLASS II CLASS III CLASS IV Milk used for beverage purposes Milk used for “soft” mfg. products and aseptic fluid prod. Milk used for “hard” cheeses Milk used for butter and dry milk products (e.g., whole and reduced fat milk, skim milk, flavored milk, eggnog, fluid buttermilk (e.g., cream, ice cream, cottage cheese, yogurt, sour cream, dips, cream cheese products, aerosol and whipping cream) (e.g., hard American cheeses, hard Italian cheeses) (e.g., butter and butter based spread, whole milk powder, nonfat dry milk) Poured Spooned Cut with a knife Spread with a knife Mixed with water or fluid Source: Dr. Ginder, ISU

Milk Prices by Class Given milk’s 4 classes, the Federal government has developed pricing formulas for each class The class prices rely on average prices for dairy products, such as butter, cheese, and skim milk The class prices are set monthly Class I prices are set before the month begins Classes II, III, and IV prices are set after the month ends

Milk Prices by Class Class I and II prices depend on advanced prices, dairy product prices before the pricing month, and are announced before the month begins Advanced prices are two-week average prices for butter, nonfat dry milk, cheese, and dry whey These advanced prices are taken roughly in the middle of the preceding month So for example, the Class I milk price for March depends on the dairy product prices from mid-February

Milk Prices by Class The other class (III and IV) prices depend on dairy product prices during the pricing month, and are announced after the month ends These prices are four-to-five-week average prices for butter, nonfat dry milk, cheese, and dry whey These prices are taken throughout the month So for example, the Class III milk price for March depends on the dairy product prices from March and will not be announced until April

Timing of Prices Source: USDA-AMS, https://www.fmmacentral.com/price_release_dates.html

Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) The formula values 100 pounds of Class IV milk as: 96.5 pounds of Class IV Skim Milk and 3.5 pounds of Butterfat The formulas for the other classes follow this rule as well There are several make allowance and yield factor adjustments in milk pricing

Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Butterfat Price = (Butter Price – 0.1715) * 1.211 0.1715 is a make allowance, USDA’s estimate of the additional costs to produce butter 1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter

Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Class IV Skim Milk Price = Nonfat Solids Price * 9 9 is a yield factor, USDA’s estimate of the percent of nonfat solids content of skim milk

Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Class IV Skim Milk Price = Nonfat Solids Price * 9 Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99 0.1678 is a make allowance, USDA’s estimate of the additional costs to produce nonfat dry milk 0.99 is a yield factor

Class IV Price for Jan. 2019 Class IV Price = f(Butter Price, Nonfat Dry Milk Price) Butter Price = $2.2343/pound Nonfat Dry Milk Price = $0.9513/pound Butterfat Price = (Butter Price – 0.1715) * 1.211 = $2.4981/pound Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99 = $0.7757/pound Class IV Skim Milk Price = Nonfat Solids Price * 9 = $6.98/cwt. Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) = $15.48/cwt.

Simplifying Class IV Price Class IV Price = (Butterfat Price * 3.5) + (Class IV Skim Milk Price * 0.965) Class IV Price = (((Butter Price – 0.1715) * 1.211) * 3.5) + (((Nonfat Solids Price * 9 )* 0.965) + ((((Nonfat Dry Milk Price – 0.1678) * 0.99) * 9) * 0.965) Class IV Price = 4.23850 * Butter Price + 8.59815 * Nonfat Dry Milk Price – 2.16967

Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Butterfat Price = (Butter Price – 0.1715) * 1.211 0.1715 is a make allowance, USDA’s estimate of the additional costs to produce butter 1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter

Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9) 3.1 is a yield factor, USDA’s estimate of pounds of protein in skim milk 5.9 is a yield factor, USDA’s estimate of pounds of other solids in skim milk

Class III Price The first part of the protein price reflects the value of the protein in cheese The second part of the protein price reflects the additional value of butterfat to cheese versus butter Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price – 0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17) 0.2003 is a make allowance, USDA’s estimate of the additional costs to produce cheese 1.383 (1.572) is a yield factor, USDA’s estimate if an additional tenth of protein (butterfat) is contained in a cwt of milk 0.9 is a yield factor, USDA’s estimate of the percent nonfat solids content in milk 1.17 is a yield factor, USDA’s estimate of the ratio of butterfat to protein in cheese

Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) Other Solids Price = (Dry Whey Price – 0.1991) * 1.03 0.1991 is a make allowance, USDA’s estimate of the additional costs to produce dry whey 1.03 is a yield factor, USDA’s estimate of pounds of dry whey obtained from a pound of other solids

Class III Price for Jan. 2019 Class III Price = f(Cheese Price, Butter Price, Dry Whey Price) Cheese Price = $1.3868/pound Butter Price = $2.2343/pound Dry Whey Price = $0.4805/pound Butterfat Price = (Butter Price – 0.1715) * 1.211 = $2.4981/pound Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price – 0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17) =$1.1927/pound Other Solids Price = (Dry Whey Price – 0.1991) * 1.03 = $0.2898/pound Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9) = $5.41/cwt Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) = $13.96/cwt

Class II Price Class II Price = (Class II Skim Milk Price * 0.965) + (Class II Butterfat Price * 3.5) Class II Butterfat Price = Butterfat Price + $0.007 Class II Butterfat Price depends on Butterfat Price from Class III & IV Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + $0.70 Estimate of the cost of drying condensed milk and re-wetting the solids in Class II products

Class II Price for Jan. 2019 Class II Price = f(Butterfat Price from Class III & IV, Advanced Class IV Skim Milk Pricing Factor) Advanced Class IV Skim Milk Pricing Factor = $6.52/cwt Butterfat Price = $2.4981/pound Class II Butterfat Price = Butterfat Price + $0.007 = $2.5051/pound Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + $0.70 = $7.22/cwt Class II Price = (Class II Skim Milk Price * 0.965) + (Class II Butterfat Price * 3.5) = $15.74/cwt

Class I Price Class I Price = (Class I Skim Milk Price * 0.965) + (Class I Butterfat Price * 3.5) Class I Skim Milk Price = Higher of Advanced Class III or IV Skim Milk Pricing Factors + Applicable Class I Differential Class I Butterfat Price = Advanced Butterfat Pricing Factor + (Applicable Class I Differential / 100) Applicable Class I Differential = Adjustment for Location

Class I Price for Jan. 2019 Class I Price = f(Class I Skim Milk Price, Class I Butterfat Price) Advanced Butterfat Pricing Factor = $2.5217/pound Advanced Class III Skim Milk Pricing Factor = $5.16/cwt Advanced Class IV Skim Milk Pricing Factor = $6.52/cwt Applicable Class I Differential = $0.00/cwt Class I Butterfat Price = Advanced Butterfat Pricing Factor + (Applicable Class I Differential / 100) = $2.5417/pound Class I Skim Milk Price = (Higher of Advanced Class III or IV Skim Milk Pricing Factors) + Applicable Class I Differential = $8.52/cwt Class I Price = (Class I Skim Milk Price * 0.965) + (Class I Butterfat Price * 3.5) = $15.12/cwt

Class I Price Differentials Source: USDA-AMS, http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELDEV3101903&acct=dairy

Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/