Transcript California Milk Pricing - Understanding Dairy Markets

California Milk Pricing
California has its own state milk
pricing order
Share of U.S. Milk Production, California
and Wisconsin, 1990 & 2000
Year
1990
2000
% Change in
production
California
Wisconsin
Production & Production &
% Share
% Share
20.95 Billion 24.40 Billion
Lbs (14.1%) Lbs (16.5%)
32.24 Billion 23.26 Billion
Lbs (19.2%) Lbs (13.9%)
+53.9%
- 4.7%
1990 to 2000
Change in milk production
Largest Per Capita Decreases
Tennessee
Wyoming
Arkansas
Alabama
North Dakota
North Carolina
Mississippi
Missouri
Alaska
Illinois
-60
-50
-40
-30
% Change
-20
-10
0
9
33
42
21
8
48
23
19
25
29
10
17
36
4
11
18 16
1
13
3
12
30
45
22
27
7
41
20
31
40
32 35
43
34
2
24
6
38
14
5
26
15
44
46
28
39
49
37
1,092
349
949
1,930
5,582
524
154
755
1,344
169 389
447
565
404
952
375
588
628
574
732
238
196
908
393
147
418
247
92
158
191 78
32
190
269
148
2,878
275
175
Per Capita Milk Production
U.S. Average = 596 Lbs.
Less Than 300 Lbs. (22)
300 To 600 Lbs.
(12)
Greater Than 600 Lbs.(14)
251
4,336
2,165
495
4,578
154
255
62
27
140
-37
+5
-14
+9
-16
+91
-44
+3
-32
+11
+13
+2
+2
-12
-14
-13
+5
-13
-12
-13
+35
-5
+186
-31
+3
-17
-45
-36
-44
-28
-29
-21
-10
-3
-32
-34
-38
-21
-16
Percentage Changes
Decreasing (34)
Increasing (14)
-19
+9
-9
-5
-32
+31
-8
-21
-11
Regional Cheese Production As A Percent
Of 1999 Total U.S. Production
With Percent Change In Production: 1999 vs 1994
35%
+65%
17%
-8%
32%
+8%
16%
+18%
1%
-72%
Share of U.S. Cheese Production, California
& Wisconsin, 1990 &1999
Year
CA Share
WI Share
1990
11.6%
31.5%
1999
17.4%
27.1%
% change in
production
96.4%
12.5%
Regional Butter Production As A Percent
Of 1999 Total U.S. Production
With Percent Change In Production: 1999 vs 1994
36%
-18%
10%
-17%
31%
-7%
16%
+6%
8%
-0%
Share of U.S. Butter Production, California
and Wisconsin 1990 & 1999
Year
CA Share
WI Share
1990
21.5%
24.6%
1999
26.9%
22.8%
% Change in
production
22.7%
- 9.4%
Regional NFDM Production As A Percent
Of 1999 Total U.S. Production
With Percent Change In Production: 1999 vs 1994
69%
+41%
7%
-31%
4%
-47%
16%
+28%
4%
-55%
Share of U.S. Nonfat Dry Milk Production,
California & Wisconsin 1990 & 1999
Year
CA Share
WI Share
1990
36.7%
5.1%
1999
47.8%
1.5%
% Change in
production
102.3%
-51.3%
California viewed as an early adopter of
alternative milk pricing.
• 1962 adopted multiple component pricing for
class 1 milk; 1969 for all other classes.
• Decoupling class 1 price--class 1 price
determined from economic formula
• Advanced pricing of class 2 (not until 1981 in
federal orders)
• 1962- Higher minimum standards for beverage
milk
• Use of product price formula to establish fat and
solids-not-fat values (not until 2000 in federal
orders)
Existing U.S. FDA & California butterfat (BF) &
solids-not-fat (SNF) for beverage milk products
Fluid Milk
Product
FDA BF
FDA SNF
California
BF
California
Whole
milk
3.25%
8.25%
3.5%
SNF
Lowfat
milks
0.5 to 2.0%
8.25%
1.9 to 2.1%
8.7%
Less than
0.5%
8.25%
Less than
or equal to
0.25%
10.0%
Skim milk
9.0%
Five classes of milk:
• Class 1: Fluid products, sterilized or UTH milk
(in-state), and lactose reduced milk
• Class 2: Fluid creams, sour cream, cottage
cheese, buttermilk, sterilized creams, yogurt, and
UHT milk (out-of-state)
• Class 3: Ice cream, ice milk, light dairy desserts,
frozen mixes, frozen yogurt and other frozen
products
Classes continued:
• Class 4a: Butter and dried milk
• Class 4b: Cheese
Calculating 1a price:
• 1a minimum price for milkfat
- use higher of USDA support price or CME
butter price
- make allowance is subtracted
-results multiplied by yield factor of 4.2 pounds
1a pricing continued
• Minimum price for solids-not-fat:
- use higher of USDA support price for nonfat dry
milk or nonfat dry milk price CA plants sold f.o.b.
- Minus a make allowance
-result multiplied by a yield factor of 8.613 pounds
of nonfat dry milk (also reflects the value of
buttermilk solids)
Calculating 1b price: (three steps)
• Step 1: Base Price
- USDA support price for 40-pound cheddar
blocks X (1.0377 - make allowance) X 9.8
1.0377 is a moisture adjustment factor
9.8 is cheese yield
Step 2: Adjustment to base price:
- Base price is adjusted upward or downward in
direction proportion to the relationship between
the CME 40-pound cheddar block price and the
USDA support price.
If CME price higher than support price adjusted
upward, if lower, downward
Step 3: Value of whey cream
- whey cream as a by product of cheddar cheese is
imputed and added to the adjusted price in step 2.
- (CME butter price - 9 cents) - make allowance x
0.27 yield of whey butter = adjustment to add
The final class 4b hundredweight price is converted
to fat and solids-not-fat as follows:
• Class 4b fat is first set equal to to class 4a fat
price
• 4a fat price X 3.6 pounds of fat = total fat value
per hundredweight of milk
• Final class 4b price minus total fat value per
hundredweight divided by 8.7 = 4b solids-not-fat
price
• The final 4b price is reported on a 3.5% fat basis
by fat price X 3.5 plus the SNF price by 8.7
Class 2 and class 3 prices:
• Class 2 and class 3 prices are based directly on
class 4a component prices with fixed differentials
added.
• Class 2 and 3 prices are set in advanced for a two
month period
Class 1 price:
• A class 1 base price is set.
• This class 1 base price is adjusted with a
Commodity Reference Price (CRP) which
represents the wholesale revenue derived from a
hundredweight of milk used to make butter/powder
or cheese. A separate CRP is calculated for cheese
and butter/powder
Butter/powder CRP:
• CME butter price
• X 4.2 yield
• Plus California nonfat dry milk price X 8.613
yield
Cheese CRP:
• CME 40-pound cheddar block price
• X 9.8 yield
• Plus (CME butter price - 9 cents) X .27 yield
Note: the higher of these two CRPs is used
Class I pricing continued:
• Changes in the values of class 1 components are
calculated for a two-month period by averaging
two month’s CRPs lagged three months,
subtracting the statewide base price per
hundredweight and allocating the difference to the
components (MF, SNF and a fluid carrier) in
proportions of 40:40:20
Example class 1 adjustment:
• Assume calculating two-month class I price for
June and July
• The March and April CRPs averaged ($13.58 +
$13.85)/2 = $13.7150 per hundredweight
• $13.7150 minus statewide base price of $10.1784
= $3.5366 which is allocated as follows:
MF: (0.40 X $3.5366)/ 3.5 = $0.4042
SNF: (0.40 X $3.5366)/8.7 = $0.1626
Fluid carrier: (0.20 X $3.5366) = $0.0081
• These calculated changes are added to the
respective component base prices for June & July
Pooling:
• California milk producers receive a blend price
based on market-wide utilization of milk by class
• However, producers are paid different blend prices
depending upon their production relative to
individual quotas and production bases.
• Production base is total fat and SNF sales
expressed on a daily basis
• Quota is class 1 MF and SNF sales
• Quota may be traded among producers--sold in
dollars per pound of SNF
• Some producers have no quota
Pooling continued:
• Individual farm production not restricted by quota
• A uniform price is calculated
• Subtracted from the revenue of all 5 classes is
total revenue from quota milk (quantity of quota
milk X $1.70 per hundredweight)
• The residual is divided by total quantity of milk
for the month to arrive at a non-quota price per
hundredweight
• Thus, the difference between quota and non-quota
milk is fixed at $1.70 per hundredweight
California class 4a price and federal order
Class IV price, 2000
Dollars Per Hundredweight
$13.50
CA 4a
C IV
$13.00
$12.50
$12.00
$11.50
$11.00
$10.50
$10.00
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
California 4b price and Federal Order Class III
price , 2000
$11.50
CA 4b
C III
Dollars Per Hundredweight
$11.00
$10.50
$10.00
$9.50
$9.00
$8.50
$8.00
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
California class 1 price versus Upper Midwest
Order Class I price, 2000
$16.50
Dollars Per Hundredweight
$16.00
$15.50
$15.00
CA 1
CI
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
Utilization of California Milk
• Class 1 = 20%
• Class 2 & 3 = 10%
• 4a = 30%
• 4b = 40%
Dollars Per Hundredweight
Mailbox milk prices, Average all federal
orders, Upper Midwest order and California
1999-00
$18
$17
$16
$15
$14
$13
$12
$11
$10
$9
All markets
Upper Midwest
California