1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
Chad Hart
Associate Professor 1

2. Today’s Topic

3. 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

4. Federal Milk Marketing Orders
Source: USDA-AMS

5. Jobs of Marketing Order
Regulate milk prices
Classify milk by its final use
Establish minimum class and component prices
Enforce payments for milk in supply chain
Verify weights and test results
Audit records
Provide market information
Source: Dr. Ginder, ISU

6. Not Part of a Marketing Order
Production controls/limits
Sanitary/quality production standards
Retail price setting
Guaranteed markets/forced sales
Government support
Such as the Milk Income Loss Contract (MILC)
Source: Dr. Ginder, ISU

7. Milk Pricing for Producers
All producers receive the same price for milk components
Payments are based on amount of milk delivered
Three factors differentiate milk payments for producers:
Milk composition (quantity of components)
Milk quality (somatic cells)
Location of producer
Source: Dr. Ginder, ISU

8. Milk Pricing for Producers
For central Iowa, milk producers receive payments based on:
Protein
Butterfat
Other solids
Somatic cells
Producer price differential
The protein, butterfat, and other solids prices come from the Class III prices for each component

9. Somatic Cell Adjustment
Low somatic cell counts in milk are correlated with
Higher cheese yields
Longer shelf life
Adjustment is based on the formula:
Cheese price * * (350 – Count)
where Count is the somatic cell count in thousands of cells per milliliter
The lower the count below 350, the higher the payment
Counts above 350 lowers the payment

10. Producer Price Differential
Pricing factor that captures location impact
Based on the value of milk in the marketing order region versus the value of the components using Class III prices
Adjusted by the relative difference in the Class I Price Differential by county
Can be positive or negative

11. Class I Price Differentials
Source: USDA-AMS

12. Prices for Feb 2014
Source:

13. Source: www.fmmacentral.com

14. Example Producers Producer A Producer B Location/County Story
Buena Vista
Class I Price Differential (map)
$1.80
$1.75
Class I Price Differential (calculated)
-$0.34
-$0.39
Butterfat
4.5%
3.3%
Protein
3.7%
2.8%
Other solids
6.0%
5.7%
Somatic cell count
110,000
420,000
Milk sold
1,000 cwt
= -$ $0.20
= -$ $0.25

15. Producer A’s Milk Values
Amount
Rate
Value
Protein
3,700 lbs
$4.6044
$17,036.28
Butterfat
4,500 lbs
$2.0109
$9,049.05
Other solids
6,000 lbs
$0.4453
$2,671.80
Somatic cell count
240 $
$273.60
Producer Price Differential
-0.34
Total value
$28,690.73
Value per cwt
1,000 cwt
$28.69
= (110,000/1,000)
= 240 * $ * 1,000

16. Producer B’s Milk Values
Amount
Rate
Value
Protein
2,800 lbs
$4.6044
$12,892.32
Butterfat
3,300 lbs
$2.0109
$6,635.97
Other solids
5,700 lbs
$0.4453
$2,538.21
Somatic cell count
-70 $
-$79.80
Producer Price Differential
-0.39
Total value
$21,596.70
Value per cwt.
1,000 cwt
$21.60
= (420,000/1,000)
= -70 * $ * 1,000

17. Independent Processor Various types of market outlets
Milk Supply Chain
Producer
10%-15%
85%-90%
Coop Handler
Coop Processor
Independent Processor
Governed by FMMO if Grade A
Government
Various types of market outlets
Final consumers
Source: Dr. Ginder, ISU

18. Dairy Futures and Options
Contract Amount Settle
Class III Milk 200,000 lbs Cash
Class IV Milk 200,000 lbs Cash
Nonfat Dry Milk 44,000 lbs Cash
Dry Whey 44,000 lbs Cash
Butter 20,000 lbs Cash
Cheese 20,000 lbs Cash

19. Class web site: