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

2. Today’s Topic

3. Milk Production

4. Milk Industry

5. Milk Usage
Source: Agricultural Statistics, USDA-NASS

6. Per Capita Dairy Consumption
Source: FAPRI, 2011 Outlook

7. Per Capita Dairy Consumption
Source: FAPRI, 2011 Outlook

8. What’s in Milk? SOLIDS CWT Butterfat 3.67 lbs. Protein 3.20 lbs.
Lactose lbs.
Ash/Minerals lbs.
WATER lbs.
TOTAL lbs.
Source: Dr. Ginder, ISU

9. Component Pricing
A payment plan that prices milk based on two or more component parts
Possible components which could be used include
Milk fat
Protein
Total solids (TS)
Solids not fat (SNF)
Lactose/Minerals/Ash
Water
Source: Dr. Ginder, ISU

10. 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

11. Milk Usage
Source: Agricultural Statistics, USDA-NASS

12. 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

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 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. Timing of Advanced Prices
Pricing Month
Release Date
Time Period of NASS Prices
May
Apr. 18
Apr. 7 and 14
June
May 23
May. 12 and 19
July
June 20
June 9 and 16
August
July 18
July 7 and 14
September
Aug. 22
Aug. 11 and 18
Source: USDA-AMS

16. Milk Prices by Class
The other class 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

17. Time Period of NASS Prices
Timing of Prices
Pricing Month
Release Date
Time Period of NASS Prices
May
May 31
May 5, 12, 19, 26
June
July 5
June 2, 9, 16, 23, 30
July
Aug. 1
July 7, 14, 21, 28
August
Aug. 29
Aug. 4, 11, 18, 25
September
Oct. 3
Sept. 1, 8, 15, 22, 29
Source: USDA-AMS

18. Class IV Price Class IV Price = Class IV Skim Milk Price * 0.965
+ Butterfat Price * 3.5
The price 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

19. Class IV Price Class IV Price = Class IV Skim Milk Price * 0.965
+ Butterfat Price * 3.5
Butterfat Price = (Butter Price – $0.1715) * 1.211
$ is a make allowance, USDA’s estimate on the additional costs to produce butter
1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter
There are several make allowance and yield factor adjustments in milk pricing

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 – $0.1678) * 0.99

21. Class IV Price for Feb. 2012
Class IV Price = Class IV Skim Milk Price * 0.965
+ Butterfat Price * 3.5
Butter Price = $1.4712/pound
Nonfat Dry Milk Price = $1.3792/pound
Butterfat Price = (Butter Price – $0.1715) * 1.211
= $1.5739/pound
Nonfat Solids Price = (Nonfat Dry Milk Price – $0.1678) * 0.99
= $1.1993/pound
Class IV Skim Milk Price = Nonfat Solids Price * 9
= $10.79/cwt.
Class IV Price = $15.92/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 – $0.1715) * * 3.5
+ Nonfat Solids Price * 9 * 0.965
+ (Nonfat Dry Milk Price – $0.1678) * 0.99 * 9 * 0.965
Class IV Price = * Butter Price
* Nonfat Dry Milk Price
– $2.1697

23. Class III Price Class III Price = Class III Skim Milk Price * 0.965
+ Butterfat Price * 3.5
Butterfat Price = (Butter Price – $0.1715) * 1.211
Class III Skim Milk Price = Protein Price * 3.1
+ Other Solids Price * 5.9
Other Solids Price = (Dry Whey Price – $0.1991) * 1.03

24. Class III Price Class III Price = Class III Skim Milk Price * 0.965
+ Butterfat Price * 3.5
Protein Price = (Cheese Price – $0.2003) * 1.383
+ (((Cheese Price – $0.2003) * 1.572)
– Butterfat Price * 0.9) * 1.17
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

25. Class III Price Class III Price = Class III Skim Milk Price * 0.965
+ Butterfat Price * 3.5
Class III Price = f(Cheese Price, Butter Price,
Dry Whey Price)
For February 2011:
Cheese Price = $1.5410/pound
Butter Price = $1.4712/pound
Dry Whey Price = $0.6400/pound
Class III Price = $16.06/cwt.

26. 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
So Class II Price depends on Butterfat Price from Classes III and IV
Class II Skim Milk Price = Advanced Class IV Skim Milk Price + $0.70
Class II Skim Milk Price uses advanced price for Nonfat Dry Milk in Class IV Skim Milk Price formula

27. Class II Price Class II Price = Class II Skim Milk Price * 0.965
+ Class II Butterfat Price * 3.5
Class II Price depends on the previous month’s Nonfat Dry Milk Prices and the current month’s Butter Prices

28. Class II Price Class II Price = Class II Skim Milk Price * 0.965
+ Class II Butterfat Price * 3.5
For February 2012:
Advanced Nonfat Dry Milk Price = $1.3133/pound
Butter Price = $1.4712/pound
Class II Butterfat Price = $1.5809/pound
Class II Skim Milk Price = $11.82/cwt.
Class II Price = $16.94/cwt.

29. 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 Skim Milk Price or
Advanced Class IV Skim Milk Price
Class I Butterfat Price = Advanced Class III Butterfat Price
These calculations give a base Class I Price, which is adjusted for location

30. Class I Price Differentials
Source: USDA-AMS

31. Class web site:
Have a great weekend!