1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture #23

2. CLASS II PRICE – SKIM PORTION Priced differently than skim for hard manufactured products Skim portion price announced in advance of the month where they apply—not during the month Announced Class II price for current month is known by the Friday on or before 23 rd prior month Based on same product formulas as Class IV and Class III skim But advanced two week pricing is used Therefore PRICES used this in formula are different from Class III or Class IV skim Prices Only the first two weeks of NASS survey are used for Class II skim vs. four weeks of NASS survey in the case of Class III and IV skim

3. CLASS II MILK PRICE Butter Price 2 week NFDM Price Butter Fat Price/Lb. + $.007 Advanced NFDM Solids Price/Lb. 2 Week Class II Skim Price+ 70 ¢ Advanced 2 Week Class II Milk Price f(B) f(NDM)X 9.0X.965 X 3.5

4. CLASS II PRICE – BUTTERFAT PORTION Class II butterfat price per # is the Monthly Class III/IV butterfat price per # + constant differential of $.007 Class II skim price now announced prior to the following month when it will apply Friday in the preceding month on or before the 23 rd The butterfat portion is announced before the 5 th of the current month and is same as class III/IV BF price

5. CALCULATION FOR CLASS II SKIM PRICING FACTOR Advanced nonfat solids price / lb. (NASS two week nonfat dry milk price -.137) / 1.02 Note:Same as formula Class IV nonfat solids but uses 2-week average for price 11A

6. CALCULATION OF CLASS II SKIM PRICING FACTOR Next calculate advanced Class II skim price Use advanced Class IV skim price Add a fixed 70¢ /cwt Class II differential (12A) Advanced Class IV skim milk price factor/cwt = 9.0 x advanced nonfat solids price (13A) Class II skim price/cwt = advanced Class IV skim price + $.70

7. CLASS II MILK PRICE Butter Price 2 week NFDM Price Butter Fat Price/Lb. + $.007 Advanced NFDM Solids Price/Lb. 2 Week Class II Skim Price+ 70 ¢ Advanced 2 Week Class II Milk Price f(B) f(NDM)X 9.0X.965 X 3.5

8. CALCULATION OF NONFAT SOLIDS PRICE/LB. Market order pools are now calculated on a milk solids basis (rather than cwt of skim plus fat) Class II handlers must account for # of nonfat solids to market order pool Therefore must translate Class II skim price/cwt back to nonfat solids price/lb. Class II nonfat solids price includes 70¢/differential (14) Class II nonfat solids price/lb = (Class II skim milk price/cwt including the 70¢ differential)  9.0

9. CALCULATION OF CLASS II PRICE/CWT Butterfat for Class II is priced at the Monthly Class IV/III butterfat price plus a fixed Class II differential (15) Class II butterfat price/lb. = Class IV/III butterfat price +.007 The.007 is 70¢ Class II differential  100 Combining skim price and butterfat for Class II price/cwt: Class II price/cwt = (16A).965 x Class II advanced skim milk price/cwt + 3.5 x Class II butterfat price/lb.

10. CLASS II MILK PRICE Butter Price 2 week NFDM Price Butter Fat Price/Lb. +.007 Advanced NFDM Solids Price/Lb. 2 Week Class II Skim Price+ 70 ¢ Advanced 2 Week Class II Milk Price f(B) f(NDM)X 9.0X.965 X 3.5

11. CLASS I PRODUCT PRICING FACTOR Both the Class I skim and Class I butterfat price are based on ADVANCED NASS two week prices Class I products are based on either the advanced Class III or the advanced Class IV price, whichever is higher Thus, the Class I calculations must be made for both advanced Class III and advanced Class IV milk prices

12. ADVANCED CLASS I Class IV advanced skim price as calculated for Class II using 2 week averages Class III advanced skim price calculated using same formulas as Class III prices BUT…Substitute in two week NASS average prices for four week averages in Class III

13. ADVANCED CLASS III SKIM MILK PRICING FACTOR Advanced butterfat price / lb. = (NASS 2-week Grade AA butter price – 0.114)  0.82 Advanced protein price / lb. = (NASS 2 week cheese price –.1702) x 1.405 + {[(NASS 2-week cheese price – 0.1702) x 1.582] – Advanced butter fat price} x 1.28 (19A)Advanced other solids price / lb. = NASS 2-week dry whey price – 0.137) .968 (17A) (18A)

14. (20A)Advanced skim milk price factor = 3.1 x advanced protein price + 5.9 x advanced other solids price The Class I skim milk price is the highest of either the Advanced Class III skim price Equation (20) or the Advanced Class IV skim price Equation (12a)

15. (21A)Class I skim milk price = Advanced Class III skim milk pricing factor or advanced Class IV skim milk pricing factor + the appropriate Class I differential (22A)Class I butterfat price/lb. = Advanced butterfat price + the appropriate (Class I differential  100) (23A)Class I price/cwt =.965 X the Class I skim price + 3.5 X the Class I butterfat price/lb.

16. Appropriate Class I differentials No longer single basing point from Eau Claire Specified for each county in market order Generally increase from northwest – southeast Under market order reform changed East – little change in differentials South Florida – increased (e.g., Tampa 17¢) Upper Midwest – increased (e.g., Chicago 40¢ – Minneapolis 50¢) Central – Very Little change for differentials in Central FMMO Southwest decrease (e.g., Dallas 16¢ - Phoenix 17¢)

17. The Somatic Cell Adjustment Applies to Class II & Class III & Class IV but not Class I fluid milk Excluded Class I for several reasons –Possible reduction in shelf life – but there is no definitive data –High somatic cell count may increase rancidity/off flavor – but there is no definitive data –70-80% of milk pooled goes to Class II, III and IV uses in some orders and if quality of that portion is adjusted adequate incentive exists Price is adjusted for each 1,000 somatic cells in relation to a base level of 350,000 somatic cells Positive adjustment for <350,000 somatic cells/liter Negative adjustment for >350,000 somatic cells/liter Amount of adjustment based on NASS price 40# block cheese

18. Calculating Somatic Cell Adjustments Assume:1. SSC price adjuster of.0005 2. Average NASS 40# block price = $50.104 (1.2526/#) STEP 1Calculate discount (premium) adjuster value per 1000 cells.0005 x $1.2526/lb = $.0006263 =.063 ¢ / 1000 cells Adjuster * NCE cheese per # = Premium (discount) per 1000 cells STEP IICalculate the dollar premium (discount) per cwt (a) If SSC tests 500,000.063 (350-500) = -9.45 ¢ / cwt. Discount for excess cell count (b) If SSC tests 100,000.063 (350-100) = +15.75 ¢/cwt Premium for lower cell count Premium (disc) / 1000 x (Standard - Actual) = Premium for low count SSC SSC

19. STEP III Calculate value of higher (lower) milk quality on revenue from volume marketed during the period 50 cows @ 16,000 #/cow If somatic cell count is 500000 or 150,000 SSC > Standard 350,000 (a)8000 cwt.(-9.45 ¢)=($756.00) of MilkDiscount for MarketedExcess cells If Somatic cell count is 100,000 or 250,000 SSC < Standard 350,000 (b)8000(15.75 ¢ /cwt)=1260.00 Absolute difference in revenue = $2016.00 on 8000 cwt. marketed

20. Revenue Difference on 200 Cow Herd @ 19,000#/Head (a)38,000 cwt (-9.45 ¢/cwt)=($3591) (b)38,000 cwt (15.75 ¢ /cwt)=$5985 Absolute Revenue Diff=$9576

21. Calculating Class Prices for FMMOs Under New Component System - March Averages for NASS Survey Prices 2-Week Monthly (February) (March) Butter$0.9105$0.9497 Cheese1.10841.1093 Dry Whey0.18000.1780 Nonfat Dry Milk1.01041.0094

22. Advanced Prices Applying to Milk and Milk Components Under FMMO March (Reported February 18) Component/Class PriceEq. No.EquationValue Butterfat17(0.9105 – 0.114) : 0.82$0.9713 Protein18(1.1084 – 0.1702) X 1.405 + {[(1.1084 – 0.1702) X 1.582] – 0.9713} X 1.281.9747 Other Solids19(0.1800 – 0.137) : 0.9680.0444 Nonfat Milk Solids11(1.0104 – 0.137)  1.020.8563 Class IV Skim Milk Price Factor129.0 X 0.85637.71 Class II Skim Milk137.71 + 0.708.41 Class II Nonfat Solids148.41  9.00.9344 Class III Skim Milk Price Factor203.1 X 1.9747 + 5.9 X 0.04446.38 Class I Skim Milk (@ Base Zone)217.71 + 1.809.51 Class I Butterfat (@ Base Zone)220.9713 + (1.80  100)0.9893 Class I @ Test (@ Base Zone)23(0.965 X 9.51) + (3.5 X.9893)12.64

23. March Class III and Class IV Milk and Component Prices (Announced March )* With Class II Prices That Involved Butterfat Values Included Component/Eq. EquationValue Class PriceNo. Butterfat1(0.9497 – 0.114) : 0.82$1.0191 Protein7(1.1093 0.1702) X 1.405 + {[(1.1093 – 0.1702) X 1.582] – 1.0191} X 1.281.9166 Other Solids6(0.1780 – 0.137) : 0.9680.0424 Nonfat Milk Solids2(1.0094 – 0.137)  1.020.8553 Class IV Skim Milk39.0 X 0.85537.70 Class IV Milk @ Test4(3.5 X 1.0191) + (0.965 X 7.70)11.00 Class III Skim Milk8(3.1 X 1.9166) + (5.9 X 0.0424)6.19 Class III Milk @ Test9(3.5 X 1.0191) + (0.965 X 6.19)9.54 Class II Butterfat Price151.0191 + 0.0071.0261 Class II Milk @ Test16(3.5 X 1.0261) + (0.965 X 8.41)11.71

24. Location Adjustment Difference in Class I differential at receiving plant and Class I differential at supply plant or at the farm

25. Pooling Process Handlers account for their receipts by class Handlers pay in or draw out of fund depending on difference between -Value of receipts priced at Marketing Order minimum prices -Average market wide value of all classes Order minimum prices are established for four classes of milk Class I – Class IV

26. Pool Obligations of Handlers by Class* Milk Use Handler Obligation to the Producer Settlement Fund Class Class IClass I Skim milk price at location x skim milk pounds Class I Butterfat price at location x butterfat pounds Class II*Class II Nonfat Solids price x nonfat solids pounds Class II Butterfat price x butterfat pounds Class III*Protein price x protein pounds Other Solids price x other solids pounds Butterfat price x butterfat pounds Class IV*Nonfat Solids price x nonfat solids poundsButterfat price x butterfat pounds *Pool obligations in these classes are adjusted for somatic cell count of milk receipts.

27. Gross handler obligations are then reduced by several factors +Producer price differential (PPD) +Producer location adjustment +Protein value +Other solids value +Producer butterfat value +Somatic cell value If results are positive, the handler pays that amount in If results are negative, handler draws that amount out

28. Example Producer Settlement Fund Handler I Pool distributing plant Packages beverage milk Manufactures Class II products (soft) Handler II Pool supply plant Ships 10% of milk to a pool distributing plant Manufacturers cheese with 90% of milk Assumptions for both 1,000,000 pounds of milk processed 3.7% butterfat 3.1% protein 5.9% other solids No location or SSC adjustment

29. Partial Producer Settlement Fund Account with a Heavy Class I Handler Vs. Heavy Class III Handler (Av.Mkt.Val.=$106,024) Illustration of Producer Settlement Fund Accounting Rate per Handler 1 Handler 2 PoundPoundsValuePoundsValue Class I: Skim Milk$0.0951770,40073,26596,3009,158 Butterfat.989329,60029,2833,7003,660 Class II: Nonfat Solids.934418,00016,819 Butterfat1.02617,4007,593 Class III: Protein1.916653,473 Other Solids.04242,251 Butterfat1.019133,936 Class IV: Nonfat Solids.8553 Butterfat1.0191 Total 126960 102478 Less: Prod. Price Differential.00641,000,0006,4001,000,0006,400 Prod. Location Adj.--- Protein1.916631,00059,41531,00059,415 Other Solids.042459,0002,50259,0002,502 Prod. Butterfat Value1.019137,00037,70737,00037,707 Somatic Cell Value--- NET TO/FROM FUND+20,936-3,546

30. Producer Pricing All producers receive same price for components Payment based on cwt. of milk delivered Payment differs based on three factors –Milk composition (quantity of components in it) –Quality of milk (somatic cells) –Location Differences among producers on all three factors

31. Producer Price Differential Actual amount that market-wide average value of receipts exceeds the value of components Value of milk in excess of Class III component value in orders with MCP (seven of eleven orders) PPD may be positive or negative -Positive if actual market-wide value > Class III value -Negative if actual market-wide value < Class III value

32. Producer Milk Check for 1,000 CWT of Milk Producer A Class I differential=1.80/cwt Butterfat test4.5% Percent protein3.7% Other solids6.0% Somatic cell count110,000

33. Producer Milk Check for 1,000 CWT of Milk Producer B Class I differential=1.60/cwt Butterfat test3.3% Percent protein2.8% Other solids5.7% Somatic cell count420,000

34. Milk Check Values Producer A Pricing Element UnitsRate Value Producer Price Differential1,000 Cwt.$0.64$ 640 Protein3,700 lbs.1.91667,091 Other Solids6,000 lbs.0.0424254 Butterfat4,500 lbs.1.01914,586 Somatic Cell Adjustment1,000 Cwt.0.13130 TOTAL VALUE:12,701 VALUE PER CWT.12.70

35. Milk Check Values Producer B Pricing Element UnitsRate Value Producer Price Differential1,000 Cwt.$0.44$ 440 Protein2,800 lbs.1.91665,366 Other Solids5,700 lbs.0.0424242 Butterfat3,300 lbs.1.01913,363 Somatic Cell Adjustment1,000 Cwt.(0.04)(40) TOTAL VALUE:9,371 VALUE PER CWT.9.37

36. Comparisons Same rates of payment (prices) for component Different quantities of components Different locations Producer B has fewer components than the standardized Class III cwt of milk Therefore Producer B gets less than Class III price