1. Dairy Marketing
Dr. Roger Ginder
Econ 338a
Fall 2007
Lecture # 13

2. MANUFACTURING MILK PRODUCT MARKETS
Under the “old M-W “ system the class I and Class II “MOVER” was a Class III price based on the Grade B milk price paid for milk used to manufacture Cheese, Butter, and Powder
It became the Class III price used in FMMO pricing
Fairly represented the value of raw milk used to manufacture storable dairy products for more than 30 years
Provided a competitive price to use as a starting point for Class I and Class II prices
BUT…the industry came to question the reliability of using the grade B milk price in the mid 1990’s
Grade B production had declined to 5% of total production
Production in M-W represented a smaller fraction of total production
In the Mid 1990’s NASS Refused to Stand Behind it as a Reliable Representative of Class III Pricing

3. Getting a New Class I and Class II Mover
Want it to be based on supply and demand—ie Competitive Price
Want it to be based more on something broadly representative than the continually shrinking quantity of Grade B milk
If possible want it to accurately reflect the supply and demand for manufacturing milk

4. MANUFACTURING MILK PRODUCT MARKETS
Major product categories for the “new system” put in place after 2000 are pretty much the same—Cheese, Butter &Powder
But the new system prices off of final product prices not Grade B raw milk prices
New system also better takes into account the fact that by-products that also have value
Cheese plants can recover
whey cream (used to make butter)
whey proteins
Lactose
Butter-powder plants produce joint products
cream produces butter and buttermilk powder
skim produces nonfat dry milk

5. MANUFACTURING MILK PRODUCT MARKETS
Under the New System the Class I and Class II “Mover “ is the value of either Grade A or Grade B milk used to manufacture Cheese or Butter based on the value of the final product sold into the market
The Classes were redefined under the new system so that:
Class III price is based on the finished price of cheese and the by-products of cheese production
Class IV price is based on the finished price of Butter and the by-products of butter production
The Class I and Class II mover is now the HIGHER of either the Class III or the Class IV price as calculated from finished product values

6. The New Class I and Class II Mover
Because the New Class I /CLASS II Mover is Based On the Price of Finished Manufactured Milk Products it Directly Affects Farm Price:
The markets prices for products becomes important
How the markets for these products functions becomes important
The relationship between the prices generated in each individual product market to prices generated in the other markets becomes important

7. Federal Farm Policy Toward Dairy Production

8. Evolving FOCUS OF FEDERAL DAIRY POLICY FROM 1938-99
DEPRESSION RELIEF FOCUS
INCOME ENHANCEMENT FOCUS
BUDGETARY AND SUPPLY MANAGEMENT FOCUS
MARKET ORIENTED FOCUS PRESENT
Focus for Next Farm Bill and beyond???

9. CHANGES IN AGRICULTURE AND RURAL DEMOGRAPHIGS 1938-1996
Farm population a % of total 25% > 2%
Labor force in agriculture 40% NA
Agriculture’s contribution to 7% 1.5%
Gross Domestic Product
Farm household income % of nonfarm Roughly equal
Percent of farms producing 60% 26%
corn
Percent of farms producing 40% > 7%
milk

10. “Permanent” Farm Policy Legislation
FOUNDATION LEGISLATION FOR FARM PROGRAMS ARE BASED IN DEPRESSION/WWII ERA
“Permanent” Farm Policy Legislation
Agricultural Adjustment Act 1938
Commodity Credit Corporation
Agricultural Act of 1949
These laws establish the basis for subsequent farm bills from 1949 to (2007 Farm Bill is Now Being Debated)
When existing farm bills expire, policy typically reverts to foundation 1949 legislation.

11. AGRICULTURAL ADJUSTMENT ACT 1938
Authorizes price support program
Directs secretary to support price of manufacturing milk
Use CCC to purchase dairy products
Set price at level where milk supply is “adequate”
No specified price level or rules (to be governed by farm bill in effect)

12. AGRICULTURAL ACT OF 1949 Required support @ 75-90% of parity
Pegged prices to relationship
Note: Parity was intended to give fair
treatment to agriculture in relation
to the rest of the economy
A parity price for a commodity is intended to give a unit of the commodity the
same purchasing power as it had in
Parity does not really imply fairness or equality
Freezes relationships at a prior point in time
Mechanical calculation - not current market forces
Ignores relative changes in productivity and changes in other relationships between farm/nonfarm sector
It ignores changes in the types of goods and services purchased by farm families

13. 1973 AMENDMENT TO AGRICULTURE ADJUSTMENT ACT
Raised the minimum support level from to 75-80% of parity
Required semi-annual adjustment April 1 and October 1
Adjustments reflect changes in index of all prices paid for purchased inputs - not just dairy inputs alone
Note: Dairy feed costs were falling but other other purchased inputs were
rising
Net Result - Unusually high milk -feed price
ratio and an unprecedented
expansion in production occurred

14. PARITY EXAMPLE 1992 Jan. 1982 - Dec. 1991
10 year average price received
of all wholesale
_______________________ X Current index of
prices paid
( Base)
10 year average index
of prices received ( ) base

15. PARITY EXAMPLE 1992 Jan. 1982 - Dec. 1991
10 year average price received Current index of prices
of all wholesale paid ( ) base $
_______________________ X
10 year average index
of prices received ( ) base
648
$13.00
__________ X = $26.50

16. 100% of parity = $ 26.50
90% of parity =
80% of parity =
75% of parity =
56% of parity =
52% of parity =
38% of parity =
37% of parity =

17. PARITY PRICES FOR VARIOUS COMMODITIES 1991
Wheat $8.07/bu
Soybeans $12.30/bu
Corn $5.73/bu
Barley $4.98/bu
Hay $151.00/ton
Milk $26.60/cwt

18. Total U.S. Milk Production and Total Commercial Disappearance, 1980-2006
Sources: Agricultural Statistics, NASS, USDA & Livestock, Dairy & Poultry, ERS, USDA

19. AGRICULTURAL AND FOOD ACT OF 1981
Made major changes in support program
Tied price support level to amount of CCC purchases
Tied price support level to government costs
Note: Eliminated parity price goal in effect and resulted
in support prices well
below parity

20. OMNIBUS BUDGET RECONCILIATION ACT 1982
Focused on limiting CCC purchases to specific level
Gave Secretary of Ag authority to impose up to a $1.00/cwt producer assessment
Established specific target levels for CCC purchases
Secretary could project CCC purchases
Higher CCC purchases could “trigger” lower support price

21. DAIRY AND TOBACCO ADJUSTMENT ACT 1983
Continued 50¢ assessment
Initiated a voluntary control program
Diversion payments ($10.00/cwt) for reducing production (marketing)
Below 1982 level
Below average marketing
CCC “trigger for reduction in support price
Levied a non-refundable 15¢/cwt assessment for promotion

22. Questions?