Econ 337, Spring 2013 ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

Econ 337, Spring 2013 Today’s Topic

Econ 337, Spring 2013 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 337, Spring 2013 Federal Milk Marketing Orders Source: USDA-AMS

Econ 337, Spring 2013 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 337, Spring 2013 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 337, Spring 2013 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 337, Spring 2013 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 337, Spring 2013 Somatic Cell Adjustment Low somatic cell counts in milk are correlated with –Higher cheese yields –Longer shelf life Adjustment is based on the formula: Cheese price * * (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 lowers the payment

Econ 337, Spring 2013 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 337, Spring 2013 Class I Price Differentials Source: USDA-AMS

Econ 337, Spring 2013 Prices for Jan 2013 Source:

Econ 337, Spring 2013 Source:

Econ 337, Spring 2013 Example Producers Producer AProducer B Location/CountyStoryBuena Vista Class I Price Differential (map)$1.80$1.75 Class I Price Differential (calculated)$0.23$0.18 Butterfat4.5%3.3% Protein3.7%2.8% Other solids6.0%5.7% Somatic cell count110,000420,000 Milk sold1,000 cwt

Econ 337, Spring 2013 AmountRateValue Protein3,700 lbs $3.2862$12, Butterfat4,500 lbs $1.6168$7, Other solids6,000 lbs $0.4647$2, Somatic cell count240 $ $ Producer Price Differential $0.23$ Total value $22, Value per cwt1,000 cwt $22.66 Producer A’s Milk Values = (110,000/1,000) = 240 * $ * 1,000

Econ 337, Spring 2013 Producer B’s Milk Values AmountRateValue Protein2,800 lbs $3.2862$9, Butterfat3,300 lbs $1.6168$5, Other solids5,700 lbs $0.4647$2, Somatic cell count-70 $ $60.90 Producer Price Differential $0.18$ Total value $17, Value per cwt.1,000 cwt $17.30 = (420,000/1,000) = -70 * $ * 1,000

Econ 337, Spring 2013 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 337, Spring 2013 Dairy Futures and Options ContractAmountSettle Class III Milk200,000 lbsCash Class IV Milk200,000 lbsCash Nonfat Dry Milk44,000 lbsCash Dry Whey44,000 lbsCash Butter20,000 lbsCash Cheese20,000 lbsCash

Econ 337, Spring 2013 Class web site: Spring2013/index.htm