Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist

Econ 339X, Spring 2010 Today’s Topic

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 Federal Milk Marketing Orders Source: USDA-AMS

Econ 339X, Spring 2010 Jobs of Marketing Order Source: Dr. Ginder, ISU 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

Econ 339X, Spring 2010 Not Part of a Marketing Order Source: Dr. Ginder, ISU Production controls/limits Sanitary/quality production standards Retail price setting Guaranteed markets/forced sales Government support Such as the Milk Income Loss Contract (MILC)

Econ 339X, Spring 2010 Milk Pricing for Producers Source: Dr. Ginder, ISU 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

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 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 * * (Count – 350) 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

Econ 339X, Spring 2010 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

Econ 339X, Spring 2010 Class I Price Differentials Source: USDA-AMS

Econ 339X, Spring 2010 Prices for Feb Source:

Econ 339X, Spring 2010 Example Producers Producer AProducer B Location/CountyStoryBuena Vista Class I Price Differential$1.80$1.75 Butterfat4.5%3.3% Protein3.7%2.8% Other solids6.0%5.7% Somatic cell count110,000420,000 Milk sold1,000 cwt.

Econ 339X, Spring 2010 Producer A’s Milk Values AmountRateValue Protein3,700 lbs.$2.7066$10, Butterfat4,500 lbs.$1.4404$ 6, Other solids6,000 lbs.$0.1992$ 1, Somatic cell count240$ $ Prod. Price Differential$0.31$ Total value$18, Value per cwt.1,000 cwt.$18.18

Econ 339X, Spring 2010 Producer B’s Milk Values AmountRateValue Protein2,800 lbs.$2.7066$ 7, Butterfat3,300 lbs.$1.4404$ 4, Other solids5,700 lbs.$0.1992$ 1, Somatic cell count-70$ $ Prod. Price Differential$0.26$ Total value$13, Value per cwt.1,000 cwt.$13.67

Econ 339X, Spring 2010 Milk Supply Chain Source: Dr. Ginder, ISU Producer 10%-15% 85%-90% Coop Handler Coop Processor Independent Processor Governed by FMMO if Grade A Government Various types of market outlets Government Final consumers

Econ 339X, Spring 2010 Dairy Futures and Options ContractAmountSettle Class III Milk200,000 lbs.Cash Class IV Milk200,000 lbs.Cash Nonfat Dry Milk44,000 lbs.Cash or Delivery Dry Whey44,000 lbs.Cash Butter40,000 lbs.Cash or Delivery Cheese (Spot Call)

Econ 339X, Spring 2010 Class web site: lawrence/ lawrence/