1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2009 Lecture #10

2. FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY Allocative Function Direct resources (Land, Labor, Capital) to the highest and best use, given the values tastes and preferences of consumers Rations the use of resources so that the available supply fits the existing demand Income Distribution Function For any given quantity produced of a product or service, a price increase raises (or a price reduction lowers) the level of the producers’ income y = price * quantity sold

3. FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY For any given quantity of product or service consumed, a price increase reduces (or a price reduction increases) the amount of other products the consumer can buy (i.e., income) If a consumer has $3.00 to spend on milk and strawberries and…. Milk = 2.00/galStrawberries = $1.00/# Milk = 1.00/galStrawberries = $1.00/# Income Distribution Function Continued

4. MILK PRICE CONCEPTS 1.M-W price 2.NASS price 3.CME price 4.Basic formula price 5.Support price 6.Blend price 7.Class I price 8.Class II price 9.Class III price 10.Class IV price 11.Grade A price 12.Grade B price 13.Single basing point price 14.Multiple basing point price 15.Competitive price 16.Formula price 17.Administered price 18.Skim price 19.Butter fat price 20.Over order price

5. FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY Competitive Price Established by market forces Supply and demand are dominant Significant volume Open access to market for buyers/sellers Administered Price Established by non-market forces May be legislated May be set by government agency May be set by other outside entity with ability to enforce

6. FUNCTION OF PRICE IN AN OPEN MARKET ECONOMY Formula Price Established by defining a fixed set of relationships - a formula A formula price may include some market prices (i.e., competitive prices) A formula price may include some administered prices (e.g., support) Specifies relationships among a number of prices and/or product characteristics

7. MILK PRICE CONCEPTS 1.M-W price 2.NASS price 3.CME price 4.Basic formula price 5.Support price 6.Blend price 7.Class I price 8.Class II price 9.Class III price 10.Class IV price 11.Grade A price 12.Grade B price 13.Single basing point price 14.Multiple basing point price 15.Competitive price 16.Formula price 17.Administered price 18.Skim price 19.Butter fat price 20.Over order price

8. PRICING MANUFACTURING GRADE MILK Grade B prices were a critical component of milk pricing system (least common denominator) until 12-31-99 Reflect total supply of Grade A and Grade B production available for storable products. Basis for federal price support programs Minnesota-Wisconsin Grade B prices historically used as the basis for pricing Grade A milk used for Class I & II products in Federal Milk Marketing Orders M-W was largely based on open market competitive prices not formula prices

9. The Issue of the Minnesota-Wisconsin Price Series (M-W) M-W defined: The weighted average of Grade B milk prices paid by Minnesota and Wisconsin butter, milk powder and cheese plants. Used 1961--2000 to set minimum producer pay prices for Grade A milk in all federal milk marketing orders.

10. The Issue of the Minnesota-Wisconsin Price Series (M-W) Purpose: To establish a uniform minimum pay price in all federal milk orders for pricing Grade A milk used in manufactured dairy products. Butter, non-fat milk powder and cheese are sold on national markets. Minnesota and Wisconsin used because of the large percentage of its milk is used for manufacturing. It also has the largest supply of Grade B milk, and the most vigorous milk plant competition.

11. Utilization of Milk, Wisconsin, 1993-98 UsePercent of Total Cheese86.5% Ice Cream0.6% Condensed milk2.0% Other manufactured1.3% Total Manufacturer90.4% Fluid (beverage)6.1% Shipped out-of-state2.1% (some to IA) Kept on the farm1.4%

12. Grade A of Milk, 1993--98 Grade AGrade B Wisconsin 90%10% Minnesota 86%14% United States 95%5% Basis for pricing 95% of U.S.milk

13. Class III Prices Used As the Class I and Class II Mover The Grade B Price Was Used To Set the Class III Price The Class I And Class II milk received a fixed Premium Above Class III milk When Class III ( a competitive price) Moved Up or Down the Class I and II Prices Moved Up and Down With it

14. FLUID MILK PRICING (Single Basing Point).002$/mi from basing point 1. Class I differential reflects the cost of transporting milk from basing point 2. Usually < hauling cost to prevent interorder movement 500 Miles $1.00 Eau Claire

15. FLUID MILK PRICING (Single Basing Point).002$/mi from basing point 1. Class I differential reflects the cost of transporting milk from basing point 2. Usually < hauling cost to prevent interorder movement 500 Miles $1.00 $2.00 1,000 Miles Eau Claire

16. Questions?