Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture #23

MAJOR PRICE CALCULATIONS 4 week Class III price 4 week Class IV price Advanced 2 week Class II price Advanced 2 week Class I price

(7) Protein Price Per lb. = (NASS monthly cheese price $-.1702) x {[(NASS monthly cheese price $-.1702) x 1.582] – Butter fat price} x 1.28 Line 2 is designed to account for the cheese value of butterfat in excess of its value in butter. Protein (in particular casein) functions to retain butterfat in cheese Thus Line 2 recognizes that the value of protein exceeds the mere volume it contributes to the cheese The formula incorporates the value of butterfat in cheese less the value of butterfat in butter adjusted for the ratio of fat to protein

DERIVATION OF CLASS III PRICE FROM PRODUCT PRICES NASS 4-week Butter price Butter fat price/lb NASS-4 week Cheese Price Protein price/lb NASS 4-week Dry whey price Other solids price/lb Class III skim price/cwt. Class III price /cwt. F(BF) F(P, BF) F(W) X 3.5# X 3.1# X 5.9#

DERIVATION OF CLASS III PRICE FROM PRODUCT PRICES NASS 4-week Butter price Butter fat price/lb NASS-4 week Cheese Price Protein price/lb NASS 4-week Dry whey price Other solids price/lb Class III skim price/cwt. Class III price /cwt. F(BF) F(P, BF) F(W) X 3.5# X 3.1# X 5.9# X.965

CONSTRUCTING THE CLASS III PRICE (9) Class III test = 3.5 * butterfat price * Class III skim milk price The Class III price reflects a cwt of milk standardized at: - 3.5% butterfat - 3.1% protein - 5.9% other solids % total solids Values for the standardized cwt of Class III milk are - the 3.5# fat valued at Class IV/III butterfat price - the 96.5# of skim milk valued at Class III skim price - the Class III skim milk price value is linked to protein and other solids price

CALCULATING CLASS IIISKIM MILK PRICE Class III skim milk price = 3.1 * protein price * other solids price Assumptions for standard milk 3.1% true protein 5.9% nonfat/non-protein solids (8)

The Class III component relationships may be expressed directly in terms of actual butter, cheese and dry whey prices (10) Class III price = * NASS cheese price -.40 * NASS butter price * NASS dry whey price These calculation factors are obtained by mathematically substituting the product price formulas for component values This transformation permits Class III to be expressed directly in terms of butter, cheese and dry whey prices

Effect of a 10¢ increase in cheese, dry whey or butter on class III price 10¢ increase in cheese price increases milk price $1.03/ cwt. 10¢ increase in dry whey price increases milk price $.59/cwt. 10¢ increase in butter price DECREASES class III milk price by 4.3¢ /cwt.

CLASS IV MILK PRICE Butter Price NFDM Price Butter Fat Price/Lb. NFDM Solids Price/Lb. 4 Week Class IV Skim Price 4 Week Class IV Price f(B) f(NDM)X 9.0X.965 +

CLASS IV PRICE Class IV price is based on the value of butterfat and nonfat milk solids in standardized cwt of milk -3.5# fat -9.0# solids not fat Nonfat solids makeup nonfat dry milk Butterfat is the principal constituent of butter These components are priced based on product prices

CLASS IV BUTTERFAT PRICE Butterfat is priced the same as for Class III component Class IV/III butterfat price = (NASS monthly AA butter price  0.82 Where $.114 = make allowance 0.82 = yield factor (1)

CLASS IV MILK PRICE Butter Price NFDM Price Butter Fat Price/Lb. NFDM Solids Price/Lb. 4 Week Class IV Skim Price 4 Week Class IV Price f(B) f(NDM)X 9.0X X 3.5#

CLASS IV MILK PRICE Butter Price NFDM Price Butter Fat Price/Lb. NFDM Solids Price/Lb. 4 Week Class IV Skim Price 4 Week Class IV Milk Price f(B) f(NDM) X 9.0 X X 3.5#

CLASS IV NONFAT SOLIDS PRICE Nonfat solids are priced based on monthly weighted averages of nonfat dry milk prices from the NASS National Survey The make allowance for nonfat solids is $0.137/lb The yield of nonfat dry milk is 1.0 lb. of nonfat dry milk for 1.02 lb. of nonfat solids This is due to moisture content in nonfat dry milk A small amount of buttermilk powder is also present but is not priced in the Class IV formula The yield factor adjusts for these differences (2)

CLASS IV SKIM MILK PRICE Nonfat solids price per lb. = (NASS nonfat dry milk price -.137)  1.02 Where: $.137 = the make allowance 1.02 = the yield factor for nonfat solids Class IV skim milk price = (3)9.0 * nonfat solids price

CLASS IV MILK PRICE Butter Price NFDM Price Butter Fat Price/Lb. NFDM Solids Price/Lb. 4 Week Class IV Skim Price 4 Week Class IV Milk Price f(B) f(NDM) X 9.0X.965 +

CLASS IV MILK PRICE The Class IV is price constructed for a standardized cwt of milk a 3.5% butterfat and 9% nonfat solids as follows: (4) Class IV test = (3.5 * Class IV/III butterfat price) * Class IV skim milk price The formula accounts for milk used in a butter-powder plant to produce those products The cwt of milk accounts for 3.5 lb. of butterfat valued at Class IV/III price and 96.5 lbs. of skim milk valued at the Class IV skim milk value Skim milk value is directly related to product price for nonfat dry milk in the market

The Class IV relationships may be expressed directly in terms of butter price and nonfat dry milk price as follows: Class IV price = x NASS butter price x NASS nonfat dry milk price These calculations are obtained by mathematically substituting the product prices for component values 10¢ change in butterfat price changes Class IV price 43¢ per Cwt. 10¢ change in nonfat dry milk price changes Class IV price 85¢ per Cwt. (5)

THE CLASS I AND CLASS II PRICING PROBLEM What do Class I bottlers and Class II manufacturers pay? Grade B / Class III price was a competitive price Class I and II were formula prices using the Class III /Grade B price as a base Average Class III price Wasn’t known until after the end of month Survey of Grade B prices for mfg. grade had to be conducted following month under the old system

THE CLASS I AND CLASS II PRICING PROBLEM Prior 2000 August Class III price was surveyed in September August Class III price was announced in September Bottlers therefore used July Class III /IV as basis for Class I in September– a two month lag The drafters of new system incorporated an “advanced “ pricing system

ADVANCED PRICED IN NEW PRICING SYSTEM CLASS I AND II Uses different prices for skim Survey first two weeks of month

CLASS II PRICE – SKIM PORTION Priced differently than skim for hard manufactured products Skim portion price announced in advance of the month where they apply—not during the month Announced Class II price for current month is known by the Friday on or before 23 rd prior month Based on same product formulas as Class IV and Class III skim But advanced two week pricing is used Therefore PRICES used this in formula are different from Class III or Class IV skim Prices Only the first two weeks of NASS survey are used for Class II skim vs. four weeks of NASS survey in the case of Class III and IV skim

CLASS II MILK PRICE Butter Price 2 week NFDM Price Butter Fat Price/Lb Advanced NFDM Solids Price/Lb. 2 Week Class II Skim Price+ 70 ¢ Advanced 2 Week Class II Milk Price f(B) f(NDM)X 9.0X.965

CLASS II PRICE – BUTTERFAT PORTION Class II butterfat price is the Monthly Class III/IV butterfat price + constant differential of $.007 Class II skim price now announced prior to the following month when it will apply Friday in the preceding month on or before the 23 rd The butterfat portion is announced before the 5 th of the current month and is same as class III/IV BF price

CALCULATION FOR CLASS II SKIM PRICING FACTOR Advanced nonfat solids price / lb. (NASS two week nonfat dry milk price -.137) / 1.02 Note:Same as formula Class IV nonfat solids but uses 2-week average for price 11A

CALCULATION OF CLASS II SKIM PRICING FACTOR Next calculate advanced Class II skim price Use advanced Class IV skim price Add a fixed 70¢ /cwt Class II differential (12A) Advanced Class IV skim milk price factor/cwt = 9.0 x advanced nonfat solids price (13A) Class II skim price/cwt = advanced Class IV skim price + $.70

CALCULATION OF NONFAT SOLIDS PRICE/LB. Market order pools are now calculated on a milk solids basis (rather than cwt of skim plus fat) Class II handlers must account for # of nonfat solids to market order pool Therefore must translate Class II skim price/cwt back to nonfat solids price/lb. Class II nonfat solids price includes 70¢/differential (14) Class II nonfat solids price/lb = (Class II skim milk price/cwt including 70¢ differential)  9.0

CALCULATION OF CLASS II PRICE/CWT Butterfat for Class II is priced at the Class IV/III butterfat price plus a fixed Class II differential (15) Class II butterfat price/lb. = Class IV/III butterfat price The.007 is 70¢ Class II differential  100 Combining skim price and butterfat for Class II price/cwt: Class II price/cwt = (16A).965 x Class II advanced skim milk price/cwt x Class II butterfat price/lb.

CLASS II MILK PRICE Butter Price 2 week NFDM Price Butter Fat Price/Lb Advanced NFDM Solids Price/Lb. 2 Week Class II Skim Price+ 70 ¢ Advanced 2 Week Class II Milk Price f(B) f(NDM)X 9.0X.965

CLASS I PRODUCT PRICING FACTOR Both the Class I skim and Class I butterfat price are based on ADVANCED NASS two week prices Class I products are based on advanced Class III or advanced Class IV price, whichever is higher Thus, the Class I calculations must be made for both advanced Class III and advanced Class IV milk prices

ADVANCED CLASS I Class IV advanced skim price as calculated for Class II using 2 week averages Class III advanced skim price calculated using same formulas as Class III prices BUT…Substitute in two week NASS average prices for four week averages in Class III

ADVANCED CLASS III SKIM MILK PRICING FACTOR Advanced butterfat price / lb. = (NASS 2-week Grade AA butter price – 0.114)  0.82 Advanced protein price / lb. = (NASS 2 week cheese price –.1702) x {[(NASS 2-week cheese price – ) x 1.582] – Advanced butter fat price} x 1.28 (19A)Advanced other solids price / lb. = NASS 2-week dry whey price – 0.137) .968 (17A) (18A)

(20A)Advanced skim milk price factor = 3.1 x advanced protein price x advanced other solids price The Class I skim milk price is the highest of either the Advanced Class III skim price Equation (20a) or the Advanced Class IV skim price Equation (12a)

(21A)Class I skim milk price = Advanced Class III skim milk pricing factor or advanced Class IV skim milk pricing factor + Class I differential (22A)Class I butterfat price/lb. = Advanced butterfat price + (Class I differential  100) (23A)Class I price/cwt =.965 Class I skim price Class I butterfat price/lb.

Class I differentials No longer single basing point from Eau Claire Specified for each county in market order Generally increase from northwest – southeast Under market order reform changed East – little change South Florida – increased (e.g., Tampa 17¢) Upper Midwest – increased (e.g., Chicago 40¢ – Minneapolis 50¢) Central – Little change for U.S. in Central Southwest decrease (e.g., Dallas 16¢ - Phoenix 17¢)

The Somatic Cell Adjustment Applies to Class II & Class III & Class IV but not Class I fluid milk Excluded Class I for several reasons –Possible reduction in shelf life – no definitive data –High somatic cell count may increase rancidity/off flavor - no definitive data –70-80% of milk pooled goes to Class II, III and IV uses in some orders and if quality of that portion is adjusted adequate incentive exists Price is adjusted for each 1,000 somatic cells in relation to a base level of 350,000 somatic cells Positive adjustment for <350,000 somatic cells/liter Negative adjustment for >350,000 somatic cells/liter Amount of adjustment based on NASS price 40# block cheese

Calculating Somatic Cell Adjustments Assume:1. SSC price adjuster of Average NASS 40# block price = $ (1.2526/#) STEP 1Calculate discount (premium) adjuster value per 1000 cells.0005 x $1.2526/lb = $ =.063 ¢ / 1000 cells Adjuster * NCE cheese per # = Premium (discount) per 1000 cells STEP IICalculate the dollar premium (discount) per cwt (a) If SSC tests 500, ( ) = ¢ / cwt. Discount for excess cell count (b) If SSC tests 100, ( ) = ¢/cwt Premium for lower cell count Premium (disc) / 1000 x (Standard - Actual) = Premium for low count SSC SSC

STEP III Calculate value of higher (lower) milk quality on revenue from volume marketed during the period 50 16,000 #/cow If somatic cell count is or 150,000 SSC > Standard 350,000 (a)8000 cwt.(-9.45 ¢)=($756.00) of MilkDiscount for MarketedExcess cells If Somatic cell count is 100,000 or 250,000 SSC < Standard 350,000 (b)8000(15.75 ¢ /cwt)= Absolute difference in revenue = $ on 8000 cwt. marketed

Revenue Difference on 200 Cow 19,000#/Head (a)38,000 cwt (-9.45 ¢/cwt)=($3591) (b)38,000 cwt (15.75 ¢ /cwt)=$5985 Absolute Revenue Diff=$9576

Calculating Class Prices for FMMOs Under New Component System - March Averages for NASS Survey Prices 2-Week Monthly (February) (March) Butter$0.9105$ Cheese Dry Whey Nonfat Dry Milk

Advanced Prices Applying to Milk and Milk Components Under FMMO March 2000 (Reported February 18, 2000) Component/Class PriceEq. No.EquationValue Butterfat17( – 0.114) : 0.82$ Protein18( – ) X {[( – ) X 1.582] – } X Other Solids19( – 0.137) : Nonfat Milk Solids11( – 0.137)  Class IV Skim Milk Price Factor129.0 X Class II Skim Milk Class II Nonfat Solids  Class III Skim Milk Price Factor203.1 X X Class I Skim Milk Base Zone) Class I Butterfat Base Zone) (1.80  100) Class Test Base Zone)23(0.965 X 9.51) + (3.5 X.9893)12.64

March Class III and Class IV Milk and Component Prices (Announced March )* With Class II Prices That Involved Butterfat Values Included Component/Eq. EquationValue Class PriceNo. Butterfat1( – 0.114) : 0.82$ Protein7( ) X {[( – ) X 1.582] – } X Other Solids6( – 0.137) : Nonfat Milk Solids2( – 0.137)  Class IV Skim Milk39.0 X Class IV Test4(3.5 X ) + (0.965 X 7.70)11.00 Class III Skim Milk8(3.1 X ) + (5.9 X )6.19 Class III Test9(3.5 X ) + (0.965 X 6.19)9.54 Class II Butterfat Price Class II Test16(3.5 X ) + (0.965 X 8.41)11.71

Location Adjustment Difference in Class I differential at receiving plant and Class I differential at supply plant or at the farm

Transportation and Assembly Credits Subtracted from pool proceeds used to calculate PPD Transportation credits –Help cover cost of moving milk to Class I markets –Applied to shipments from supply plants to distribution plants –Paid to distributing 28¢/mi/cwt –Adjusted for differences in Class I differential Assembly credits –Paid to all types of pool plants (distributing, supply, coops) –Incentive to move milk to Class I from manufacturing uses –Sometimes called “give-up” charges