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Econ 339X, Spring 2010
ECON 339X:Agricultural Marketing
Chad HartAssistant Professor/Grain Markets Specialist
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
Source: USDA-AMS
Econ 339X, Spring 2010
Jobs of Marketing Order
Source: Dr. Ginder, ISU
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
Not Part of a Marketing Order
Source: Dr. Ginder, ISU
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
Milk Pricing for Producers
Source: Dr. Ginder, ISU
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
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 formulaCheese 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
Source: USDA-AMS
Econ 339X, Spring 2010
Prices for Feb. 2010
Source: www.fmmacentral.com
Econ 339X, Spring 2010
Example ProducersProducer A Producer B
Location/County Story Buena Vista
Class I Price Differential $1.80 $1.75
Butterfat 4.5% 3.3%
Protein 3.7% 2.8%
Other solids 6.0% 5.7%
Somatic cell count 110,000 420,000
Milk sold 1,000 cwt. 1,000 cwt.
Econ 339X, Spring 2010
Producer A’s Milk ValuesAmount Rate Value
Protein 3,700 lbs. $2.7066 $10,014.42
Butterfat 4,500 lbs. $1.4404 $ 6,481.80
Other solids 6,000 lbs. $0.1992 $ 1,195.20
Somatic cell count 240 $0.00076 $ 182.40
Prod. Price Differential $0.31 $ 310.00
Total value $18,183.82
Value per cwt. 1,000 cwt. $18.18
Econ 339X, Spring 2010
Producer B’s Milk ValuesAmount Rate Value
Protein 2,800 lbs. $2.7066 $ 7,578.48
Butterfat 3,300 lbs. $1.4404 $ 4,753.32
Other solids 5,700 lbs. $0.1992 $ 1,135.44
Somatic cell count -70 $0.00076 $ -53.20
Prod. Price Differential $0.26 $ 260.00
Total value $13,674.04
Value per cwt. 1,000 cwt. $13.67
Econ 339X, Spring 2010
Milk Supply Chain
Source: Dr. Ginder, ISU
Producer
10%-15%
85%-90%
Coop Handle
rCoop Processo
r
Independent
Processor
Governed by FMMO if Grade A
Government
Various types of market outlets
Various types of market outlets
Government
Final consumers
Final consumers
Econ 339X, Spring 2010
Dairy Futures and Options
Contract Amount SettleClass III Milk 200,000 lbs. 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/hart-lawrence/