Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 1

Today’s Topic

Milk Production

Milk Industry

Milk Usage Source: Agricultural Statistics, USDA-NASS

Per Capita Dairy Consumption Source: FAPRI, 2011 Outlook

Per Capita Dairy Consumption Source: FAPRI, 2011 Outlook

What’s in Milk? SOLIDS CWT Butterfat 3.67 lbs. Protein 3.20 lbs. Lactose 4.75 lbs. Ash/Minerals .65 lbs. WATER 87.73 lbs. TOTAL 100.00 lbs. Source: Dr. Ginder, ISU

Component Pricing A payment plan that prices milk based on two or more component parts Possible components which could be used include Milk fat Protein Total solids (TS) Solids not fat (SNF) Lactose/Minerals/Ash Water Source: Dr. Ginder, ISU

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 Usage Source: Agricultural Statistics, USDA-NASS

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

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 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

Timing of Advanced Prices Pricing Month Release Date Time Period of NASS Prices May Apr. 18 Apr. 7 and 14 June May 23 May. 12 and 19 July June 20 June 9 and 16 August July 18 July 7 and 14 September Aug. 22 Aug. 11 and 18 Source: USDA-AMS

Milk Prices by Class The other class 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

Time Period of NASS Prices Timing of Prices Pricing Month Release Date Time Period of NASS Prices May May 31 May 5, 12, 19, 26 June July 5 June 2, 9, 16, 23, 30 July Aug. 1 July 7, 14, 21, 28 August Aug. 29 Aug. 4, 11, 18, 25 September Oct. 3 Sept. 1, 8, 15, 22, 29 Source: USDA-AMS

Class IV Price Class IV Price = Class IV Skim Milk Price * 0.965 + Butterfat Price * 3.5 The price 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

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 on the additional costs to produce butter 1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter 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 Class IV Skim Milk Price = Nonfat Solids Price * 9 Nonfat Solids Price = (Nonfat Dry Milk Price – $0.1678) * 0.99

Class IV Price for Feb. 2012 Class IV Price = Class IV Skim Milk Price * 0.965 + Butterfat Price * 3.5 Butter Price = $1.4712/pound Nonfat Dry Milk Price = $1.3792/pound Butterfat Price = (Butter Price – $0.1715) * 1.211 = $1.5739/pound Nonfat Solids Price = (Nonfat Dry Milk Price – $0.1678) * 0.99 = $1.1993/pound Class IV Skim Milk Price = Nonfat Solids Price * 9 = $10.79/cwt. Class IV Price = $15.92/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 = 4.2385 * Butter Price + 8.59815 * Nonfat Dry Milk Price – $2.1697

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 Class III Skim Milk Price = Protein Price * 3.1 + Other Solids Price * 5.9 Other Solids Price = (Dry Whey Price – $0.1991) * 1.03

Class III Price 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 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 Price = Class III Skim Milk Price * 0.965 + Butterfat Price * 3.5 Class III Price = f(Cheese Price, Butter Price, Dry Whey Price) For February 2011: Cheese Price = $1.5410/pound Butter Price = $1.4712/pound Dry Whey Price = $0.6400/pound Class III Price = $16.06/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 So Class II Price depends on Butterfat Price from Classes III and IV Class II Skim Milk Price = Advanced Class IV Skim Milk Price + $0.70 Class II Skim Milk Price uses advanced price for Nonfat Dry Milk in Class IV Skim Milk Price formula

Class II Price Class II Price = Class II Skim Milk Price * 0.965 + Class II Butterfat Price * 3.5 Class II Price depends on the previous month’s Nonfat Dry Milk Prices and the current month’s Butter Prices

Class II Price Class II Price = Class II Skim Milk Price * 0.965 + Class II Butterfat Price * 3.5 For February 2012: Advanced Nonfat Dry Milk Price = $1.3133/pound Butter Price = $1.4712/pound Class II Butterfat Price = $1.5809/pound Class II Skim Milk Price = $11.82/cwt. Class II Price = $16.94/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 Skim Milk Price or Advanced Class IV Skim Milk Price Class I Butterfat Price = Advanced Class III Butterfat Price These calculations give a base Class I Price, which is adjusted for location

Class I Price Differentials Source: USDA-AMS

Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/ Have a great weekend!