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1308 PD: Milk marketing 101: How is your milk price derived ?

Published on 29 August 2008

Editor’s note: This is the second of two articles discussing milk pricing.

In the last issue, we explained how processors in Federal Milk Marketing Orders (FMMO) pay different amounts into the pool based on whether their milk will be used to produce fluid milk products (Class I) or manufactured products (Class II, Class III or Class IV).

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Now we’ll take a closer look at the producer side of the equation and explain how dairy farmers are paid for their milk out of the federal order pool.

Pooling (Figure 1)

The pooling portion of the federal order system allows processors of Class II, III and IV products to pay producers the same for their milk as processors of Class I products, even though manufactured products are traditionally less expensive than fluid milk. Processors with a lower pool obligation (Class II, III and IV products) can draw from the pool because processors with a higher obligation (Class I products) provide those funds into the pool. Pooling allows processors of manufactured products to be competitive, because they can pay their producers the same base price for milk as producers who ship their milk to Class I plants.

Processors always have the option to pay additional over-order premiums to attract specific milk, such as high-protein milk or high-quality milk; federal orders simply mandate the minimum price paid to producers.

Milk marketing terms
Producers in FMMOs are paid for their milk by one of two methods: fat-skim pricing and multiple component pricing (MCP).

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• Fat-skim pricing (Figure 2)
Fat-skim pricing pays producers for the butterfat and skim – nothing else – in their milk. The method is currently used in the three southeastern FMMOs, as well as the Arizona FMMO.

• Multiple component pricing (MCP, Figure 3)
The six other FMMOs use MCP. This method pays producers for the butterfat, true protein and other solids in their milk. The monthly prices for these three components are the same across all MCP orders. This pricing method also includes a producer price differential.

• True protein
This is a measurement of the protein content of milk. Total, or crude, protein tests measure nitrogen content in milk and provide an approximate protein value. True protein excludes non-protein nitrogen, which is of no value to cheese yield.

• Producer price differential (PPD)
The PPD adjusts the producer pay price (up or down) for the value of milk that is not represented by the basic Class III price.

For example, in an order with high Class I utilization (high volumes of milk being used for Class I products), demand for this milk will not be reflected solely by butterfat, true protein and other solids component prices, so the producer pay price will be increased through a PPD.

The PPD can also be negative. When the Class III price increases quickly during a given month after the Class I price has been established, the price represents a higher value than was actually realized across the pool. The PPD would be negative to correct for the overestimation of milk value.

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Figure 4 shows sample calculations for a high fluid-utilization order and a high cheese-utilization order using February 2008 class prices.

• Over-order premium
Producers can also receive payments above and beyond the minimum, federally-regulated prices. Common premiums include those for low somatic cell count and large-volume production. These premiums are neither regulated nor required by the federal order.

To compare milk prices across federal orders and from month-to-month and year-to-year, the United States Department of Agriculture (USDA) also reports several average prices. Two commonly used average prices are blend price and all-milk price.

• Blend price
Also known as uniform price, the blend price is an order’s average milk price weighted by that order’s utilization in each class. The blend price is calculated in the base county for each order and assumes federal standard component tests of 3.5 percent butterfat, 2.99 percent true protein and 5.69 percent other solids. These assumptions allow for price comparisons across orders.

• All-milk price
The all-milk price is the weighted average paid by processors for milk.

• Hearings
To change any aspect of a federal order, an interested party must file a petition with the Dairy Programs department of the USDA’s Agriculture Marketing Service. If the petition is accepted, a hearing is held and parties can provide statements in favor of or opposing the petition. A recommended decision is then made by the Secretary of Agriculture, or their representative, and an open comment period follows. Then, a final decision is issued and the change is put to a vote in each federal order that will be affected.

Producers only have two voting choices – accept the change or vote out the order completely. Once the USDA has determined a change is justified, it is not an option to leave the order unchanged. PD

—Excerpts from Jersey Journal, May 2008

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