ECON 339X:
Agricultural Marketing
Chad Hart
Assistant Professor/Grain Markets Specialist
[email protected]
515-294-9911
Econ 339X, Spring 2010
Today’s Topic
Econ 339X, Spring 2010
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
Econ 339X, Spring 2010
Federal Milk Marketing Orders
Econ 339X, Spring 2010
Source: USDA-AMS
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
Econ 339X, Spring 2010
Source: Dr. Ginder, ISU
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)
Econ 339X, Spring 2010
Source: Dr. Ginder, ISU
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
Econ 339X, Spring 2010
Source: Dr. Ginder, ISU
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
Econ 339X, Spring 2010
Somatic Cell Adjustment
Low somatic cell counts in milk are correlated with
• Higher cheese yields
• Longer shelf life
Adjustment is based on formula
Cheese price * 0.0005 * (Count – 350)
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 lower payments
Econ 339X, Spring 2010
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
Econ 339X, Spring 2010
Class I Price Differentials
Econ 339X, Spring 2010
Source: USDA-AMS
Prices for Feb. 2010
Econ 339X, Spring 2010
Source: www.fmmacentral.com
Example Producers
Protein
Other solids
Somatic cell count
Producer A
Story
$1.80
4.5%
3.7%
6.0%
110,000
Producer B
Buena Vista
$1.75
3.3%
2.8%
5.7%
420,000
Milk sold
1,000 cwt.
1,000 cwt.
Location/County
Class I Price Differential
Butterfat
Econ 339X, Spring 2010
Producer A’s Milk Values
Protein
Butterfat
Other solids
Somatic cell count
Prod. Price Differential
Total value
Value per cwt.
Econ 339X, Spring 2010
Amount
3,700 lbs.
4,500 lbs.
6,000 lbs.
240
1,000 cwt.
Rate
$2.7066
$1.4404
$0.1992
$0.00076
$0.31
Value
$10,014.42
$ 6,481.80
$ 1,195.20
$ 182.40
$ 310.00
$18,183.82
$18.18
Producer B’s Milk Values
Protein
Butterfat
Other solids
Somatic cell count
Prod. Price Differential
Total value
Value per cwt.
Econ 339X, Spring 2010
Amount
2,800 lbs.
3,300 lbs.
5,700 lbs.
-70
1,000 cwt.
Rate
$2.7066
$1.4404
$0.1992
$0.00076
$0.26
Value
$ 7,578.48
$ 4,753.32
$ 1,135.44
$
-53.20
$ 260.00
$13,674.04
$13.67
Milk Supply Chain
Producer
10%-15%
85%-90%
Coop
Handler
Coop
Processor
Various types
of market
outlets
Government
Final consumers
Econ 339X, Spring 2010
Independent
Processor
Various types
of market
outlets
Governed
by FMMO if
Grade A
Government
Final consumers
Source: Dr. Ginder, ISU
Dairy Futures and Options
Contract
Class III Milk
Amount
200,000 lbs.
Settle
Cash
Class IV Milk
200,000 lbs.
Cash
Nonfat Dry Milk
44,000 lbs.
Cash or Delivery
Dry Whey
44,000 lbs.
Cash
Butter
40,000 lbs.
Cash or Delivery
Cheese (Spot Call)
Econ 339X, Spring 2010
Class web site:
http://www.econ.iastate.edu/classes/econ339/hartlawrence/
Econ 339X, Spring 2010
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Milk Pricing for Producers