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
