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Analysis finds wide range in ‘basis’

Progressive Dairyman Editor Dave Natzke Published on 19 December 2017

Basis – the amount received from a milk buyer above the monthly Federal Milk Marketing Order Class III minimum price – has been shrinking.

Speaking to producers attending the 2017 Vita Plus Dairy Summit, Dec. 6-7, in Madison, Wisconsin, Rod Wautlet, Agri-Business Consultants LLC, shared how basis payments differ among processors and payment scenarios. Among his clients, Wautlet said he saw a dramatic change in basis beginning early 2017.

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To analyze the change, Wautlet plugged a single dairy farm’s monthly milk marketings into multiple processor milk check formulas (nine plants and 11 payment scenarios). Payment plans from a couple of milk procurers were particularly impacted starting with October 2017’s milk production, with large differences for nonregulated milk pricing premiums and huge increases in hauling costs.

The 465-cow herd used in Wautlet’s analysis marketed just under 1.2 million pounds of milk during October. The herd averaged 83.2 pounds of milk per cow per day (94.4 pounds per day of 3.5 percent fat-corrected milk). With a 3.97 percent fat and 3.35 percent protein test, the cows produced an average of 3.3 pounds of butterfat and 2.79 pounds of protein per day, for a combined fat and protein total of 6.09 pounds per day. At test, the farm shipped 47,603 pounds of fat, 40,168 pounds of protein and 70,265 pounds of solids for the month. The herd’s somatic cell count (SCC) was 81,000 cells per milliliter.

October 2017’s Class III milk price was $16.69 per hundredweight (cwt) for milk standardized at 3.5 percent fat, 3.1 percent protein and 5.9 percent other solids.

11 comparisons

Among the 11 payment scenarios, the gross basis (calculated price above standardized Class III price) ranged from a high of +$4.46 per cwt to a low of +$2.54 per cwt, with an average of +$3.42 per cwt.

The mailbox basis (gross basis less marketing and hauling deductions) ranged from a high of +$4.18 per cwt to a low of +$1.75 per cwt, with an average of +$2.91 per cwt.

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The difference between the gross basis and mailbox basis ranged between -19 cents and -97 cents per cwt among the 11 scenarios, with an average of -51 cents per cwt.

Impacting the actual milk payment, October’s potential milk income (using the gross basis) ranged from a high of $253,446 to a low of $230,632 under the 11 scenarios, with an average of $241,132. Using the mailbox basis, actual milk income ranged from a high of $250,249 to a low of $221,136, with an average of $234,136.

The difference between the high potential payment (using gross basis) and the low payment (mailbox basis) ranged between -$2,346 and -$11,571, with an average of -$6,140.

Wautlet said one processor replaced some of the volume premiums with a premium for completion of an animal welfare audit and/or farm management audit. He expects to see this trend continue in other markets, as consumers demand responsible care of animals and vendors seek creative edges in niche markets.

Read also: Uncovering basis shrink: Where are milk check deductions being made?

Rod Wautlet is a business and financial consultant with Agri-Business Consultants, an affiliate of Vita Plus based in Madison, Wisconsin. He works with dairy farmers to assess their operations, set financial and business goals, and provide guidance in making decisions affecting short- and long-term success.  end mark

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