1. Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

2. Econ 339X, Spring 2010 Today’s Topic

3. Econ 339X, Spring 2010 Milk Production

4. Econ 339X, Spring 2010 Milk Industry

5. Econ 339X, Spring 2010 Milk Usage Source: Agricultural Statistics, USDA-NASS

6. Econ 339X, Spring 2010 Per Capita Dairy Consumption Source: FAPRI, 2009 Outlook

7. Econ 339X, Spring 2010 Per Capita Dairy Consumption Source: FAPRI, 2009 Outlook

8. Econ 339X, Spring 2010 What’s in Milk? Source: Dr. Ginder, ISU SOLIDS CWT Butterfat 3.67 lbs. Protein 3.20 lbs. Lactose 4.75 lbs. Ash/Minerals.65 lbs. WATER 87.73 lbs. TOTAL100.00 lbs.

9. Econ 339X, Spring 2010 Component Pricing Source: Dr. Ginder, ISU 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

10. Econ 339X, Spring 2010 Classes of Milk Source: Dr. Ginder, ISU CLASS ICLASS IICLASS IIICLASS 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) PouredSpoonedCut with a knifeSpread with a knife Mixed with water or fluid

11. Econ 339X, Spring 2010 Milk Usage Source: Agricultural Statistics, USDA-NASS

12. 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

13. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 Milk Prices by Class Class I prices depend on advanced prices, dairy product prices before the pricing month, and is 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. Econ 339X, Spring 2010 Timing of Advanced Prices Source: USDA-AMS Pricing MonthRelease DateTime Period of NASS Prices JanuaryDec. 18, 2009Dec. 5 and 12, 2009 FebruaryJan. 22, 2010Jan. 9 and 16, 2010 MarchFeb. 19Feb. 6 and 13 AprilMar. 19Mar. 6 and 13 MayApr. 23Apr. 10 and 17 JuneMay 21May. 8 and 15 JulyJune 18June 5 and 12 AugustJuly 23July 10 and 17 SeptemberAug. 20Aug. 7 and 14 OctoberSept. 17Sept. 4 and 11 NovemberOct. 22Oct. 9 and 16 DecemberNov. 19Nov. 6 and 13

16. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 Timing of Prices Source: USDA-AMS Pricing MonthRelease DateTime Period of NASS Prices JanuaryFeb. 5, 2010Jan. 2, 9, 16, 23, 30 FebruaryMar. 5Feb. 6, 13, 20, 27 MarchApr. 2Mar. 6, 13, 20, 27 AprilApr. 30Apr. 3, 10, 17, 24 MayJune 4May 1, 8, 15, 22, 29 JuneJuly 2June 5, 12, 19, 26 JulyJuly 30July 3, 10, 17, 24 AugustSept. 3July 31, Aug. 7, 14, 21, 28 SeptemberOct. 1Sept. 4, 11, 18, 25 OctoberNov. 5Oct. 2, 9, 16, 23, 30 NovemberDec. 3Nov. 6, 13, 20, 27 DecemberDec. 30Dec. 4, 11, 18, 25

18. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 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 $0.1715 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. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 Class IV Price for Feb. 2010 Class IV Price = Class IV Skim Milk Price * 0.965 + Butterfat Price * 3.5 Butter Price = $1.3609/pound Nonfat Dry Milk Price = $1.0812/pound Butterfat Price = (Butter Price – $0.1715) * 1.211 = $1.4404/pound Nonfat Solids Price = (Nonfat Dry Milk Price – $0.1678) * 0.99 = $0.9043/pound Class IV Skim Milk Price = Nonfat Solids Price * 9 = $8.14/cwt. Class IV Price = $12.90/cwt.

22. Econ 339X, Spring 2010 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) * 1.211 * 3.5 + Nonfat Solids Price * 9 * 0.965 Class IV Price = (Butter Price – $0.1715) * 1.211 * 3.5 + (Nonfat Dry Milk Price – $0.1678) * 0.99 * 9 * 0.965 Class IV Price = 4.2385 * Butter Price + 8.59815 * Nonfat Dry Milk Price – $2.1697

23. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 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 2010: Cheese Price = $1.5110/pound Butter Price = $1.3609/pound Dry Whey Price = $0.3925/pound Class III Price = $14.28/cwt.

26. Econ 339X, Spring 2010 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. Econ 339X, Spring 2010 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 For February 2010, the Class II Price depended on: Nonfat Dry Milk Prices from Jan. 9 and 16 Butter Prices from Feb. 6, 13, 20, and 27

28. Econ 339X, Spring 2010 Class II Price Class II Price = Class II Skim Milk Price * 0.965 + Class II Butterfat Price * 3.5 For February 2010: Advanced Nonfat Dry Milk Price = $1.1431/pound Butter Price = $1.3609/pound Class II Butterfat Price = $1.4474/pound Class II Skim Milk Price = $9.39/cwt. Class II Price = $15.65/cwt.

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

31. Econ 339X, Spring 2010 Class web site: http://www.econ.iastate.edu/classes/econ339/hart- lawrence/ http://www.econ.iastate.edu/classes/econ339/hart- lawrence/