Dairy Marketing Dr. Roger Ginder Econ 338a Fall 2007 Lecture # 15a

How does CCC support maintain the price of a target level What products are used by CCC? How does CCC decide which products to buy? How does CCC decide what price to pay for products purchased?

IMPLEMENTATION OF CCC ACTIVITIES Milk supplies tight relative to demand Perishable products will take higher fraction of production Production of hard products low Prices higher for these products CCC will purchase little or none Milk moves to all users at competitive or formula price

MILK SUPPLIES ARE LARGE RELATIVE TO DEMAND Surplus not used for perishables diverted to manufacturing Inventory of storable products grows Price falls as supply increases CCC becomes a more lucrative alternative compared to commercial outlets CCC prepared to buy unlimited quantity of hard product Manufacturers prepared to continue to buy milk, produce product, and sell to CCC at support Will pay support price to farmer to get supply needed

EFFECTS ON PRICES OF MANUFACTURED MILK PRODUCTS PURCHASED BY CCC CCC purchases only limited products +Cheddar Cheese +Butter +Nonfat dry milk Price of all manufactured products are closely related Interplant competition forces uniform prices across all hard products +If mozzarella cheese plant pays less, farmers divert to cheddar plant +If other users do not pay the support price, they lose volume Large manufacturers can divert their supplies internally to their butter, powder and cheese plants in response to government purchases.

CHARACTERISTICS OF THE THREE CCC PURCHASE PRODUCTS Storable for moderate to long period of time Concentrated in relation to quantity of milk used to produce them Transportable at relatively low freight cost Used by a wide range of domestic and foreign customers Account for a high percent of milk utilization (50%) Continually produced in large volume Fungible and broadly defined commodity with a standard definition

EFFECTS ON CLASS I AND CLASS II PRODUCTS Significant Grade A milk goes to manufacturing uses Even though only manufacturer grade milk is supported,Grade A is affected by a higher manufacturing price Formula price for Class I and II uses manufacturer product prices in pricing fat and skim components (Class III and Class IV products are used in calculating the base price) +Higher manufacturer price raised base price +Differentials added to that higher base price

How does the CCC maintain the support price of a target level (e.g. the $10.10cwt. Support level prior to 1996)?

CALCULATING CCC PRICE - CHEESE Target support price $/cwt$10.10/cwt (pay price) Plus plant make allowance (set by USDA)1. 37/cwt Required plant value for cheese $11.47 & whey LessWhey cream value$.15 Cheese value of 100 lbs. Of milk$ Cheese value/lb. = $ per cwt.  10.1# per cwt. =$ /lb.

CALCULATING CCC PRICE - CHEESE CCC would purchase cheese when price falls below $1.12/lb to support 10.10/cwt. Suppose the support price was increased to $ as it was in 1996 under the provisions of the 1995 Farm Bill. What would CCC purchase price be?

CALCULATING CCC PRICE - CHEESE Target support price $/cwt$10.10/cwt (pay price) Plus plant make allowance (set by USDA)1. 37/cwt Required plant value for cheese $11.47 & whey LessWhey cream value$.15 Cheese value of 100 lbs. Of milk$ Cheese value/lb. = $ per cwt.  10.1# per cwt. =$ /lb.

CALCULATING CCC PRICE – CHEESE— Target support price $/cwt$10. 35/cwt (pay price) Plus plant make allowance (set by USDA)1. 37/cwt Required plant value for cheese $11.72 & whey LessWhey cream value$.15 Cheese value of 100 lbs. Of milk$ Cheese value/lb. = $ per cwt.  10.1# per cwt. $ /lb. $ or approximately 2 ½ cents/lb of cheese ($ minus $1.1208)

CALCULATING CCC PRICE - CHEESE Until recently the make allowances had been held at the same level they were in the late 1970’s and early 1980’s Many have argued that they were too low. What would the impact on farm pay price be if the “make allowance” is higher or lower than $1. 37? (e.g. $1.65)

CALCULATING CCC PRICE - CHEESE Target support price $/cwt$10.10/cwt (pay price) Plus plant make allowance (set by USDA)$1. 65/cwt Required plant value for cheese $11.75 & whey LessWhey cream value$.15 Cheese value of 100 lbs. Of milk$ Cheese value/lb. = $ per cwt./ 10.1# per cwt. $ /lb Cheese would be purchased at $ /lb. Or approximately 2.77 cents more per lb. than at the old make allowance. Would this be a positive or negative change for farmers and the farm price of milk?

Calculating CCC Purchase Prices for a Butter or Powder Butter and Powder manufactured from whole milk are joint products Must know the price of the other joint product before a purchase price to be used by CCC can be identified Two examples

CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE PRODUCTS (butter tilt) Support Price ($/cwt)$10.10 PlusMake allowance (Convert cwt. Raw milk to butter and nonfat dry milk)$ Total value required for $10.10 pay price$ Value nonfat dry milk = $1.05¢ (established by secretary) Yield nonfat dry milk 8.13 (#/cwt milk established) Value butter = Unknown Yield of butter = 4.48 #/cwt milk Required value for $10.10 pay price$ LessValue nonfat dry milk per cwt $ Value of butter per cwt$ 2.88 Implicit value of butter per lb. ($2.88#/$4.48) $.64 CCC would support butter $.64/lb. to provide a farm pay support price of $10.10/cwt for raw milk (before deductions).

CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE PRODUCTS Butter-Powder Plant (nonfat dry milk tilt) Support price ($/cwt)$10.10 PlusMake allowance (to convert milk to butter and nonfat dry milk)$ 1.22 To value required for 10.10$11.32 Value butter = $.72 (established) Yield of butter = 4.48# per cwt milk Value nonfat dry milk unknown Yield nonfat dry milk 8.13# per cwt milk Required value for $10.10 pay price$11.32 LessValue of butter ($.72 x4.48# per cwt)$ 3.23 Implicit value of nonfat dry milk per$ 8.09 cwt milk Implicit value on nonfat dry milk per$.996 lb. or ($8.09/8.13# per cwt) CCC will purchase nonfat dry $.996/lbs. to provide a farm pay support price of $10.10/cwt for raw milk (before deductions).

CALCULATING CCC PRICE--- Butter and NDM Powder The current support price is $9.90/CWT. How much would the CCC pay for butter and NMP under the current support price?

CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE PRODUCTS Butter - Powder Plant (butter tilt) Support Price ($/cwt)$10.10____ PlusMake allowance (Convert cwt raw milk to butter and nonfat dry milk)$ 1.32____ ____ Total value required for $10.10 pay price$11.42 Value nonfat dry milk = ___105_¢ (established by secretary) Yield nonfat dry milk 8.13 (#/cwt milk established) Value butter = Unknown Yield of butter = 4.48 #/cwt milk Required value for $10.10 pay price$11.42____ LessValue nonfat dry milk per cwt$ 8.54____ ($1.05/lb x 8.13) Value of butter per cwt$ 2.88____ Implicit value of butter per lb ($2.88/4.48#)$.64____ CCC would support butter $.64/lb to provide a farm pay support price of $10.10/cwt for raw milk (before deductions).

Questions?