ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Today’s Topic
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
Federal Milk Marketing Orders
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
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 Farm Bill programs
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
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
Somatic Cell Adjustment
• Low somatic cell counts in milk are correlated with
– Higher cheese yields
– Longer shelf life
• Adjustment is based on the formula:
Cheese price * 0.0005 * (350 – Count)
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 lowers the payment
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
Class I Price Differentials
Source: USDA-AMS
Prices for Jan. 2015
Source: www.fmmacentral.com
Source: www.fmmacentral.com
Example Producers
Location/County
Producer A Producer B
Story
Buena Vista
Class I Price Differential (map)
Class I Price Differential (calculated)
Butterfat
Protein
$1.80
$0.16
4.5%
3.7%
$1.75
$0.11
3.3%
2.8%
Other solids
Somatic cell count
6.0%
110,000
5.7%
420,000
Milk sold
1,000 cwt
1,000 cwt
= $0.36 - $0.20
= $0.36 - $0.25
Producer A’s Milk Values
Amount
3,700 lbs
Protein
Butterfat
Other solids
Somatic cell count
Producer Price Differential
4,500 lbs
6,000 lbs
240
Total value
Value per cwt
= 350 - (110,000/1,000)
1,000 cwt
= 240 * $0.00079 * 1,000
Rate
$2.6731
$1.6855
$0.4001
Value
$9,890.47
$7,584.75
$2.400.60
$0.00079
$0.16
$189.60
$160.00
$20.225.42
$20.23
Producer B’s Milk Values
Amount
2,800 lbs
Protein
Butterfat
Other solids
Somatic cell count
Producer Price Differential
3,300 lbs
5,700 lbs
-70
Total value
Value per cwt.
= 350 - (420,000/1,000)
1,000 cwt
= -70 * $0.00079* 1,000
Rate
$2.6731
$1.6855
$0.4001
Value
$7,484.68
$5,562.15
$2,280.57
$0.00079
$0.11
-$55.30
$110.00
$15,382.10
$15.38
Milk Supply Chain
Producer
10%-15%
85%-90%
Coop
Handler
Coop
Processor
Government
Various types
of market
outlets
Final consumers
Governed
by FMMO if
Grade A
Independent
Processor
Various types
of market
outlets
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
Dry Whey
44,000 lbs
Cash
Butter
20,000 lbs
Cash
Cheese
20,000 lbs
Cash
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2015/
Have a great weekend!