ECON 339X:

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ECON 339X Agricultural Marketing

Chad Hart Assistant Professor/Grain
Markets Specialist chart_at_iastate.edu 515-294-9911
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Todays Topic
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Milk Production
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Milk Industry
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Milk Usage
Source Agricultural Statistics, USDA-NASS
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Per Capita Dairy Consumption
Source FAPRI, 2009 Outlook
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Per Capita Dairy Consumption
Source FAPRI, 2009 Outlook
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Whats in Milk?
SOLIDS CWT Butterfat 3.67
lbs. Protein 3.20 lbs. Lactose 4.75
lbs. Ash/Minerals .65 lbs. WATER 87.73
lbs. TOTAL 100.00 lbs.
Source Dr. Ginder, ISU
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Component Pricing
A payment plan that prices milk based on two or
more component parts Possible components which
could be used include Milk fat Protein Total
solids (TS) Solids not fat (SNF) Lactose/Minerals/
Ash Water
Source Dr. Ginder, ISU
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Classes of Milk
CLASS I CLASS II CLASS III CLASS IV
Milk used for beverage purposes Milk used for soft mfg. products and aseptic fluid prod. Milk used for hard cheeses Milk used for butter and dry milk products
(e.g., whole and reduced fat milk, skim milk, flavored milk, eggnog, fluid buttermilk (e.g., cream, ice cream, cottage cheese, yogurt, sour cream, dips, cream cheese products, aerosol and whipping cream) (e.g., hard American cheeses, hard Italian cheeses) (e.g., butter and butter based spread, whole milk powder, nonfat dry milk)
Poured Spooned Cut with a knife Spread with a knife Mixed with water or fluid
Source Dr. Ginder, ISU
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Milk Usage
Source Agricultural Statistics, USDA-NASS
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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
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Milk Prices by Class
Given milks 4 classes, the Federal government
has developed pricing formulas for each
class The class prices rely on average prices
for dairy products, such as butter, cheese, and
skim milk The class prices are set
monthly Class I prices are set before the month
begins Classes II, III, and IV prices are set
after the month ends
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Milk Prices by Class

• Class I prices depend on advanced prices, dairy
  product prices before the pricing month, and is
  announced before the month begins
• Advanced prices are two-week average prices for
  butter, nonfat dry milk, cheese, and dry whey
• These advanced prices are taken roughly in the
  middle of the preceding month
• So for example, the Class I milk price for March
  depends on the dairy product prices from
  mid-February

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Timing of Advanced Prices
Pricing Month Release Date Time Period of NASS Prices
January Dec. 18, 2009 Dec. 5 and 12, 2009
February Jan. 22, 2010 Jan. 9 and 16, 2010
March Feb. 19 Feb. 6 and 13
April Mar. 19 Mar. 6 and 13
May Apr. 23 Apr. 10 and 17
June May 21 May. 8 and 15
July June 18 June 5 and 12
August July 23 July 10 and 17
September Aug. 20 Aug. 7 and 14
October Sept. 17 Sept. 4 and 11
November Oct. 22 Oct. 9 and 16
December Nov. 19 Nov. 6 and 13
Source USDA-AMS
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Milk Prices by Class

• The other class prices depend on dairy product
  prices during the pricing month, and are
  announced after the month ends
• These prices are four-to-five-week average prices
  for butter, nonfat dry milk, cheese, and dry whey
• These prices are taken throughout the month
• So for example, the Class III milk price for
  March depends on the dairy product prices from
  March and will not be announced until April

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Timing of Prices
Pricing Month Release Date Time Period of NASS Prices
January Feb. 5, 2010 Jan. 2, 9, 16, 23, 30
February Mar. 5 Feb. 6, 13, 20, 27
March Apr. 2 Mar. 6, 13, 20, 27
April Apr. 30 Apr. 3, 10, 17, 24
May June 4 May 1, 8, 15, 22, 29
June July 2 June 5, 12, 19, 26
July July 30 July 3, 10, 17, 24
August Sept. 3 July 31, Aug. 7, 14, 21, 28
September Oct. 1 Sept. 4, 11, 18, 25
October Nov. 5 Oct. 2, 9, 16, 23, 30
November Dec. 3 Nov. 6, 13, 20, 27
December Dec. 30 Dec. 4, 11, 18, 25
Source USDA-AMS
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Class IV Price
Class IV Price Class IV Skim Milk Price
0.965 Butterfat Price 3.5 The price
formula values 100 pounds of Class IV milk
as 96.5 pounds of Class IV Skim Milk and 3.5
pounds of Butterfat The formulas for the other
classes follow this rule as well
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Class IV Price
Class IV Price Class IV Skim Milk Price
0.965 Butterfat Price 3.5 Butterfat
Price (Butter Price 0.1715) 1.211
0.1715 is a make allowance, USDAs estimate on
the additional costs to produce butter 1.211 is
a yield factor, USDAs estimate of the conversion
from butterfat to butter There are several make
allowance and yield factor adjustments in milk
pricing
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Class IV Price
Class IV Price Class IV Skim Milk Price
0.965 Butterfat Price 3.5 Class IV Skim
Milk Price Nonfat Solids Price 9 Nonfat
Solids Price (Nonfat Dry Milk Price 0.1678)
0.99
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Class IV Price for Feb. 2010
Class IV Price Class IV Skim Milk Price
0.965 Butterfat Price 3.5 Butter Price
1.3609/pound Nonfat Dry Milk Price
1.0812/pound Butterfat Price (Butter Price
0.1715) 1.211 1.4404/pound Nonfat Solids
Price (Nonfat Dry Milk Price 0.1678)
0.99 0.9043/pound Class IV Skim Milk Price
Nonfat Solids Price 9 8.14/cwt. Class IV
Price 12.90/cwt.
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Simplifying Class IV Price
Class IV Price Butterfat Price 3.5 Class
IV Skim Milk Price 0.965 Class IV Price
(Butter Price 0.1715) 1.211 3.5 Nonfat
Solids Price 9 0.965 Class IV Price
(Butter Price 0.1715) 1.211 3.5
(Nonfat Dry Milk Price 0.1678) 0.99 9
0.965 Class IV Price 4.2385 Butter Price
8.59815 Nonfat Dry Milk Price
2.1697
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Class III Price
Class III Price Class III Skim Milk Price
0.965 Butterfat Price 3.5 Butterfat
Price (Butter Price 0.1715) 1.211 Class
III Skim Milk Price Protein Price 3.1
Other Solids Price 5.9 Other Solids Price
(Dry Whey Price 0.1991) 1.03
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Class III Price
Class III Price Class III Skim Milk Price
0.965 Butterfat Price 3.5 Protein Price
(Cheese Price 0.2003) 1.383 (((Cheese
Price 0.2003) 1.572) Butterfat Price
0.9) 1.17 The first part of the protein price
reflects the value of the protein in cheese The
second part of the protein price reflects the
additional value of butterfat to cheese versus
butter
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Class III Price
Class III Price Class III Skim Milk Price
0.965 Butterfat Price 3.5 Class III
Price f(Cheese Price, Butter Price, Dry
Whey Price) For February 2010 Cheese Price
1.5110/pound Butter Price 1.3609/pound Dry
Whey Price 0.3925/pound Class III Price
14.28/cwt.
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Class II Price
Class II Price Class II Skim Milk Price
0.965 Class II Butterfat Price 3.5 Class
II Butterfat Price Butterfat Price 0.007 So
Class II Price depends on Butterfat Price from
Classes III and IV Class II Skim Milk Price
Advanced Class IV Skim Milk Price 0.70 Class
II Skim Milk Price uses advanced price for Nonfat
Dry Milk in Class IV Skim Milk Price formula
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Class II Price
Class II Price Class II Skim Milk Price
0.965 Class II Butterfat Price 3.5 Class
II Price depends on the previous months Nonfat
Dry Milk Prices and the current months Butter
Prices For February 2010, the Class II Price
depended on Nonfat Dry Milk Prices from Jan. 9
and 16 Butter Prices from Feb. 6, 13, 20, and 27
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Class II Price
Class II Price Class II Skim Milk Price
0.965 Class II Butterfat Price 3.5 For
February 2010 Advanced Nonfat Dry Milk Price
1.1431/pound Butter Price 1.3609/pound Clas
s II Butterfat Price 1.4474/pound Class II
Skim Milk Price 9.39/cwt. Class II Price
15.65/cwt.
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Class I Price
Class I Price Class I Skim Milk Price
0.965 Class I Butterfat Price 3.5 Class
I Skim Milk Price Higher of Advanced Class
III Skim Milk Price or Advanced Class IV Skim
Milk Price Class I Butterfat Price Advanced
Class III Butterfat Price These calculations
give a base Class I Price, which is adjusted for
location
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Class I Price Differentials
Source USDA-AMS
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Class web sitehttp//www.econ.iastate.edu/classe
s/econ339/hart-lawrence/