ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Econ 337, Spring 2013
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Today’s Topic
Econ 337, Spring 2013
Source: USDA-NASS, http://quickstats.nass.usda.gov/
Econ 337, Spring 2013
Source: USDA-NASS, http://quickstats.nass.usda.gov/
Econ 337, Spring 2013
Top 5 States
(2013)
CA = 19.3%
WI = 13.8%
NY = 6.6%
ID = 6.3%
PA = 5.8%
MILK COWS THAT HAVE CALVED
JANUARY 1, 2012
(1000 Head)
263
14
18
32
465
123
581
6
371
1780
90
540
205
56
29
610
1265
90
270
99
131
123
175
10
93
45
50
190
52
335
11
16
14
435
96
75
10
0 to 14
14 to 50
50 to 99
99 to 270
270 to 1781
78
18
1
120
2
Livestock Marketing Information Center
Data Source: USDA-NASS
Econ 337, Spring 2013
VT 133
NH 14
MA 12
RI 1
CT 19
NJ 8
DE 5
MD 52
U.S. Total:
9230
CHANGE IN MILK COWS THAT HAVE CALVED
JANUARY 1, 2011 TO JANUARY 1, 2012
(1000 Head)
U.S. Total:
80
11
0
-2
0
-5
2
7
0
0
10
30
3
-3
-5
-2
1
0
1
8
1
3
0
-2
1
-2
1
0
5
-2
13
-1
0
-1
10
VT -2
NH -1
MA -2
RI 0
CT -1
NJ 0
DE 0
MD -1
0
0
-1
-5 to -1
-1 to 0
0 to 3
3 to 31
0
-1
0
6
0
Livestock Marketing Information Center
Data Source: USDA-NASS
Econ 337, Spring 2013
Largest Increases (2012-13)
KS = 9,000 (7.3%)
MI = 6,000 (1.6%)
WI = 5,000 (0.4%)
CO = 4,000 (3.1 %)
Largest Decreases (2012-13)
NM = -15,000 (-4.5%)
OK = -6,000 (-11.5%)
PA = -5,000 (-0.9%)
KY = -3,000 (-4.0%)
CHANGE IN MILK COWS THAT HAVE CALVED
JANUARY 1, 2003 TO JANUARY 1, 2012
(1000 Head)
U.S. Total:
88
16
-4
-19
-4
-15
6
191
2
70
110
-1
-50
-3
-10
4
-65
0
6
10
-15
33
11
30
-5
-41
-18
-34
35
-31
21
-20
-4
-19
115
-20
-45
VT -20
NH -3
MA -8
RI 0
CT -5
NJ -6
DE -4
MD -28
-9
-7
-70 to -20
-20 to -7
-7 to 0
0 to 200
-27
-1
-27
-5
Livestock Marketing Information Center
Data Source: USDA-NASS
Econ 337, Spring 2013
Largest Increases (2004-13)
ID = 168,000 (40.8%)
TX = 118,000 (37.2%)
CA = 80,000 (4.7%)
MI = 77,000 (25.7%)
CO = 37,000 (37.8%)
Largest Decreases (2004-13)
NY = -48,000 (-7.3%)
KY = -40,000 (-35.7%)
OK = -34,000 (-42.5%)
MO = -32,000 (-25.6%)
TN = -29,000 (-37.7%)
Econ 337, Spring 2013
Source: USDA-ERS,
http://www.ers.usda.gov/data-products/commodity-costs-and-returns.aspx
Econ 337, Spring 2013
Source: USDA-ERS,
http://www.ers.usda.gov/data-products/dairy-data.aspx
Source: USDA-ERS, http://www.ers.usda.gov/data-products/dairy-data.aspx
Econ 337, Spring 2013
Average Milk Composition
SOLIDS
Whole Milk
Skim Milk
Butterfat
3.50 lbs
0.10 lbs
Protein
3.50 lbs
3.60 lbs
Lactose
4.90 lbs
5.10 lbs
Ash/Minerals
0.70 lbs
0.70 lbs
WATER
87.40 lbs
90.50 lbs
TOTAL
100.00 lbs
100.00 lbs
Econ 337, Spring 2013
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
Econ 337, Spring 2013
Source: Dr. Ginder, ISU
Milk Prices by Class
• Given milk’s 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
Econ 337, Spring 2013
Milk Prices by Class
• Class I and II prices depend on advanced prices,
dairy product prices before the pricing month, and
are 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 midFebruary
Econ 337, Spring 2013
Timing of
Advanced
Prices…
Econ 337, Spring 2013
Source: USDA-AMS,
http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5100832
Milk Prices by Class
• The other class (III and IV) 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
Econ 337, Spring 2013
Timing of
Prices…
Econ 337, Spring 2013
Source: USDA-AMS,
http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5100832
Class IV Price
Class IV Price = (Class IV Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
The 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
There are several make allowance and yield factor
adjustments in milk pricing
Econ 337, Spring 2013
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, USDA’s estimate of the
additional costs to produce butter
1.211 is a yield factor, USDA’s estimate of the conversion
from butterfat to butter
Econ 337, Spring 2013
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
9 is a yield factor, USDA’s estimate of the percent of nonfat
solids content of skim milk
Econ 337, Spring 2013
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
0.1678 is a make allowance, USDA’s estimate of the
additional costs to produce nonfat dry milk
0.99 is a yield factor
Econ 337, Spring 2013
Class IV Price for Feb 2013
Class IV Price = f(Butter Price, Nonfat Dry Milk Price)
Butter Price = $1.5438/pound
Nonfat Dry Milk Price = $1.5559/pound
Butterfat Price = (Butter Price – 0.1715) * 1.211
= $1.6619/pound
Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99
= $1.3742/pound
Class IV Skim Milk Price = Nonfat Solids Price * 9
= $12.37/cwt.
Class IV Price = (Class IV Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
= $17.75/cwt.
Econ 337, Spring 2013
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 = 4.23850 * Butter Price
+ 8.59815 * Nonfat Dry Milk Price
– 2.16967
Econ 337, Spring 2013
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
0.1715 is a make allowance, USDA’s estimate of the
additional costs to produce butter
1.211 is a yield factor, USDA’s estimate of the conversion
from butterfat to butter
Econ 337, Spring 2013
Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Class III Skim Milk Price = (Protein Price * 3.1) +
(Other Solids Price * 5.9)
3.1 is a yield factor, USDA’s estimate of pounds of protein
in skim milk
5.9 is a yield factor, USDA’s estimate of pounds of other
solids in skim milk
Econ 337, Spring 2013
Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
The first part of the
protein price reflects the
value of the protein in
cheese
Protein Price = ((Cheese Price – 0.2003) * 1.383) +
((((Cheese Price – 0.2003) * 1.572) Butterfat Price * 0.9) * 1.17)
The second part of the
protein price reflects the
additional value of
butterfat to cheese
versus butter
0.2003 is a make allowance, USDA’s estimate of the additional costs to
produce cheese
1.383 (1.572) is a yield factor, USDA’s estimate if an additional tenth of
protein (butterfat) is contained in a cwt of milk
0.9 is a yield factor, USDA’s estimate of the percent nonfat solids
content in milk
1.17 is a yield factor, USDA’s estimate of the ratio of butterfat to protein
in cheese
Econ 337, Spring 2013
Class III Price
Class III Price = (Class III Skim Milk Price * 0.965) +
(Butterfat Price * 3.5)
Other Solids Price = (Dry Whey Price – 0.1991) * 1.03
0.1991 is a make allowance, USDA’s estimate of the
additional costs to produce dry whey
1.03 is a yield factor, USDA’s estimate of pounds of dry
whey obtained from a pound of other solids
Econ 337, Spring 2013
Class III Price for Feb 2013
Class III Price = f(Cheese Price, Butter Price, Dry Whey Price)
Cheese Price = $1.6623/pound
Butter Price = $1.5438/pound
Dry Whey Price = $0.6393/pound
Butterfat Price = (Butter Price – 0.1715) * 1.211
= $1.6619/pound
Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price –
0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17)
=$2.9610/pound
Other Solids Price = (Dry Whey Price – 0.1991) * 1.03
= $0.4534/pound
Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9)
= $11.85/cwt
Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5)
= $17.26/cwt
Econ 337, Spring 2013
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
Class II Butterfat Price depends on Butterfat Price from
Class III & IV
Class II Skim Milk Price = Advanced Class IV Skim Milk
Pricing Factor + $0.70
estimate of the cost of drying
condensed milk and re-wetting
the solids in Class II products
Econ 337, Spring 2013
Class II Price for Feb 2013
Class II Price = f(Butterfat Price from Class III & IV,
Advanced Class IV Skim Milk Pricing Factor)
Advanced Class IV Skim Milk Pricing Factor = $12.41/cwt
Butterfat Price = $1.6619/pound
Class II Butterfat Price = Butterfat Price + $0.007
= $1.6689/pound
Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor
+ $0.70
=$13.11/cwt
Class II Price = (Class II Skim Milk Price * 0.965) +
(Class II Butterfat Price * 3.5)
= $18.49/cwt
Econ 337, Spring 2013
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 or IV
Skim Milk Pricing Factors +
Applicable Class I Differential
Class I Butterfat Price = Advanced Butterfat Pricing Factor +
(Applicable Class I Differential / 100)
Applicable Class I Differential = Adjustment for Location
Econ 337, Spring 2013
Class I Price Differentials
Source: USDA-AMS,
http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELDEV3101903&acct=dairy
Econ 337, Spring 2013
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2013/index.htm
Econ 337, Spring 2013