1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor 1

2. Today’s Topic

3. Changes in the Milk Industry
Source: USDA-NASS,

4. Milk Production per Cow
Source: USDA-NASS,

5. MILK COWS THAT HAVE CALVED JANUARY 1, 2016 (1000 Head)
U.S. Total:
Livestock Marketing Information Center
Data Source: USDA-NASS

6. CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2015 TO JANUARY 1, 2016 (1000 Head)
U.S. Total:
Livestock Marketing Information Center
Data Source: USDA-NASS

7. CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2007 TO JANUARY 1, 2016 (1000 Head)
U.S. Total:
Livestock Marketing Information Center
Data Source: USDA-NASS

8. Milk Prices, Costs, and Returns
Source: USDA-ERS,

9. Major Dairy Products Source: USDA-ERS,

10. Per Capita Consumption
Source: USDA-ERS,

11. Average Milk Composition
SOLIDS Whole Milk Skim Milk
Butterfat lbs lbs
Protein lbs lbs
Lactose lbs lbs
Ash/Minerals lbs lbs
WATER lbs lbs
TOTAL lbs lbs

12. 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

13. 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

14. Milk Prices by Class
Class I and II 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

15. Milk Prices by Class
The other class (III and IV) 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

16. Timing of Prices Source: USDA-AMS,

17. Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
The 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
There are several make allowance and yield factor adjustments in milk pricing

18. Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Butterfat Price = (Butter Price – ) * 1.211
is a make allowance, USDA’s estimate of the additional costs to produce butter
1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter

19. 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
9 is a yield factor, USDA’s estimate of the percent of nonfat solids content of skim milk

20. 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 – ) * 0.99
is a make allowance, USDA’s estimate of the additional costs to produce nonfat dry milk
0.99 is a yield factor

21. Class IV Price for Jan. 2017
Class IV Price = f(Butter Price, Nonfat Dry Milk Price)
Butter Price = $2.2568/pound
Nonfat Dry Milk Price = $1.0229/pound
Butterfat Price = (Butter Price – ) * 1.211
= $2.5253/pound
Nonfat Solids Price = (Nonfat Dry Milk Price – ) * 0.99
= $0.8465/pound
Class IV Skim Milk Price = Nonfat Solids Price * 9
= $7.62/cwt.
Class IV Price = (Class IV Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
= $16.19/cwt.

22. Simplifying Class IV Price
Class IV Price = (Butterfat Price * 3.5) +
(Class IV Skim Milk Price * 0.965)
Class IV Price = (((Butter Price – ) * 1.211) * 3.5)
+ (((Nonfat Solids Price * 9 )* 0.965)
+ ((((Nonfat Dry Milk Price – ) * 0.99) * 9) * 0.965)
Class IV Price = * Butter Price
* Nonfat Dry Milk Price –

23. Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Butterfat Price = (Butter Price – ) * 1.211
is a make allowance, USDA’s estimate of the additional costs to produce butter
1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter

24. Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Class III Skim Milk Price = (Protein Price * 3.1) +
(Other Solids Price * 5.9)
3.1 is a yield factor, USDA’s estimate of pounds of protein in skim milk
5.9 is a yield factor, USDA’s estimate of pounds of other solids in skim milk

25. Class III Price
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 Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Protein Price = ((Cheese Price – ) * 1.383) +
((((Cheese Price – ) * 1.572) -
Butterfat Price * 0.9) * 1.17)
is a make allowance, USDA’s estimate of the additional costs to produce cheese
1.383 (1.572) is a yield factor, USDA’s estimate if an additional tenth of protein (butterfat) is contained in a cwt of milk
0.9 is a yield factor, USDA’s estimate of the percent nonfat solids content in milk
1.17 is a yield factor, USDA’s estimate of the ratio of butterfat to protein in cheese

26. Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Other Solids Price = (Dry Whey Price – ) * 1.03
is a make allowance, USDA’s estimate of the additional costs to produce dry whey
1.03 is a yield factor, USDA’s estimate of pounds of dry whey obtained from a pound of other solids

27. Class III Price for Jan. 2017
Class III Price = f(Cheese Price, Butter Price, Dry Whey Price)
Cheese Price = $1.7011/pound
Butter Price = $2.2568/pound
Dry Whey Price = $0.4421/pound
Butterfat Price = (Butter Price – ) * 1.211
= $2.5253/pound
Protein Price = ((Cheese Price – ) * 1.383) + ((((Cheese Price –
0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17)
=$2.1768/pound
Other Solids Price = (Dry Whey Price – ) * 1.03
= $0.2503/pound
Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9)
= $8.22/cwt
Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5)
= $16.77/cwt

28. 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
Class II Butterfat Price depends on Butterfat Price from Class III & IV
Class II Skim Milk Price = Advanced Class IV Skim Milk
Pricing Factor + $0.70
Estimate of the cost of drying condensed milk and re-wetting the solids in Class II products

29. Class II Price for Jan. 2017
Class II Price = f(Butterfat Price from Class III & IV, Advanced Class IV Skim Milk Pricing Factor)
Advanced Class IV Skim Milk Pricing Factor = $7.07/cwt
Butterfat Price = $2.5253/pound
Class II Butterfat Price = Butterfat Price + $0.007
= $2.5323/pound
Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor
+ $0.70
= $7.77/cwt
Class II Price = (Class II Skim Milk Price * 0.965) +
(Class II Butterfat Price * 3.5)
= $16.36/cwt

30. 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 or IV Skim Milk Pricing Factors Applicable Class I Differential
Class I Butterfat Price = Advanced Butterfat Pricing Factor +
(Applicable Class I Differential / 100)
Applicable Class I Differential = Adjustment for Location

31. Class I Price for Feb. 2017
Class I Price = f(Class I Skim Milk Price, Class I Butterfat Price)
Advanced Butterfat Pricing Factor = $2.5192/pound
Advanced Class III Skim Milk Pricing Factor = $8.20/cwt
Advanced Class IV Skim Milk Pricing Factor = $7.59/cwt
Applicable Class I Differential = $0.00/cwt
Class I Butterfat Price = Advanced Butterfat Pricing Factor +
(Applicable Class I Differential / 100)
= $2.5192/pound
Class I Skim Milk Price = (Higher of Advanced Class III or IV Skim Milk Pricing Factors) + Applicable Class I Differential
= $8.20/cwt
Class I Price = (Class I Skim Milk Price * 0.965) +
(Class I Butterfat Price * 3.5)
= $16.73/cwt

32. Class I Price Differentials
Source: USDA-AMS,

33. Class web site: Lab in Heady 68.
Lab in Heady 68.