basic milk pricing concepts for dairy farmers...

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Milk pricing is complicated. Mostdairy farmers have under-standably been quite content

to worry about producing milk andlet the dairy plant worry about mar-keting it. And until the late 1990s,there wasn’t much dairy farmerscould to about pricing or marketingtheir milk beyond selecting a plant tohandle marketing.

But marketing milk at the farm levelhas fundamentally changed. Dairymanagers now have an opportunity toprotect price and profit objectivesthrough the use of futures, optionsand forward price contracts—some-thing their grain and livestock compa-triots have been able to do for manyyears. So such arcane matters asproduct formula make allowances,advanced higher-of Class I pricing,butter-powder tilts and producer pricedifferentials now make a difference toindividual farmers who engage infutures-based risk management.

In this publication, we attempt toexplain milk pricing concepts fordairy farmers and others who don’tneed to know all of the intricateaspects, but who do need to have abasic understanding of how federalmilk marketing order prices arederived and how orders and otherfederal milk pricing rules affect theirfarm-level milk prices.

We begin by discussing how marketsfor manufactured dairy productsoperate, since they are now the onlybasis for minimum federal orderprices. That discussion includes a briefreview of the federal dairy pricesupport program. Next, we describethe federal order system. We coverbasic principals of classified pricingand pooling, show how milk compo-nent and class prices are derived anddemonstrate the calculation of poolvalues and producer pay prices.Finally, we discuss some controversialissues surrounding milk pricing—issues that have occupied economistsand politicians for several decades.

Markets for dairy productsFarm milk prices are the final outcomeof the interaction of supply anddemand for hundreds of dairyproducts. These products vary accord-ing to how they are ultimatelyconsumed. Some, like homogenized2% (reduced fat) milk in gallon plasticjugs and yogurt in 6-ounce plasticcontainers, are purchased in grocerystores and other outlets for at-homefamily consumption. Some, like wheelsof Swiss cheese and bulk containers ofice cream, are distributed after somepreparation to consumers throughdelis, restaurants and cafeterias.

Basic Milk Pricing Conceptsfor Dairy FarmersEd Jesse and Bob Cropp

U N I V E R S I T Y O F W I S C O N S I N - E X T E N S I O N • C O O P E R A T I V E E X T E N S I O N

Marketing milk

at the farm level

has fundamentally

changed.

University of Wisconsin Extension • Cooperative Extension 2

Other dairy products, like most of themozzarella cheese produced in theU.S., reach consumers as primary orsecondary ingredients in other foodslike pizza. And some dairy products,like nonfat dry milk, whey productsand dried cheeses, are all but hiddenin the long list of ingredients forbakery items and snack foods.

For the purpose of discussing marketsand prices, it is useful to separate dairyproducts into fluid and manufac-tured categories. Minimum prices formilk used to produce beverage milkproducts (and some perishable manu-factured products) are set administra-tively through federal and state milkmarketing orders, which are discussedlater.1 Hence, processor and retailprices for fluid milk are tied closely tofederal order prices. In contrast, pricesfor storable manufactured dairyproducts are market-determinedexcept when the dairy price supportprogram is active. These product

prices then set the minimum prices forthe milk used to make them throughfederal order pricing formulas.

Over the last 50 years, milk use in theU.S. has shifted gradually from fluidforms to manufactured products (seefigure 1). In 1950, fluid milk and creamtook about half of the milk supplycompared to less than one-third in2000.2

There have been even larger changeswithin the manufactured productcategory (figure 2). The proportion ofmilk used for cheese has expandedrapidly, while the relative amount usedfor butter has declined. The relativevolume of milk used for ice cream hasbeen stable, and milk used for otherproducts (mainly evaporated and con-densed milk) has gone down. In 2000,more than 56% of milk used for manu-facturing went into cheese. Together,cheese and butter absorbed morethan 82% of manufacturing milksupplies in 2000.

Manufactured dairy products

Fluid products

100%

0%

20%

40%

60%

80%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Milk equivalent, butterfat basis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Other

Cheese

Ice cream and other frozen products

Butter Milk equivalent, butterfat basis

Figure 1. Utilization of U.S. milk

Figure 2. Utilization of U.S. milk for manufactured dairy products

1 Fluid milk handlers who purchase raw milk fromdairy cooperatives typically pay more than theorder price in the form of an “over-order premium,”which includes a service charge for providingcertain services such as supplying milk as neededto meet processing schedules.2 Milk utilization noted here is based on account-ing for the amount of milk in dairy products usingthe butterfat content of the products. See the boxon page 4 (Fat and Skim Accounting 101) for a dis-cussion of this and alternative methods of con-verting products to milk equivalent.

3 Basic Milk Pricing Concepts for Dairy Farmers

Milk use in the U.S. masks major differ-ences among regions. Given its prox-imity to large East Coast populationcenters, New York State supplies a rela-tively large proportion of its milk tofluid markets—53% in 2002. The com-position of manufactured products inNew York also reflects the state’slocation.“Other” cheese, principallymozzarella and other semi-perishablevarieties used for pizza, makes upalmost 60% of manufacturing milk usein New York (figure 3).

Wisconsin produces about twice asmuch milk as New York and is locatedfurther from dense populations.Consequently, less than 10% ofWisconsin’s milk supply is used forfluid products (see figure 4). The com-position of Wisconsin manufacturedproducts runs heavily to nonperish-able products.3

The manner in which producer milk isutilized in various products empha-sizes the importance of markets forbutter and cheese in determining farmmilk prices. The organized wholesalecheese and butter markets, operatedthrough the Chicago MercantileExchange (CME), are especially impor-tant in milk pricing, since they serve aspricing bases for products that utilizethe bulk of manufactured milkvolume.

Butter 5.0%

Fluid 53.3%

Frozen 4.6% Other 1.0%

Other cheese27.5%

American cheese 7.3%

Manufacturing46.7%

Fluid9.9%

Mfg.90.1%

American cheese 36%

Butter19.4%

Frozen0.9%

Other0.2%

Other cheese33.6%

Figure 3. Utilization of milk in New York, 2002.

Figure 4. Utilization of milk in Wisconsin, 2002.

3 State-level milk utilization is derived from dairy products made in the state and does not conform to actual usage of milk produced within the state.The most serious discrepancy relates to butter, much of which is made from sweet and whey cream rather than milk. For example, most of the buttermanufactured in Wisconsin is made from cream, and most of that cream comes from other states.

ButterBrokers representing butter buyers andsellers trade butter on the CME threedays per week (Monday, Wednesdayand Friday). Only Grade AA butter istraded on the CME.The price estab-lished at the end of the trading daybecomes the reference price for sellingbutter throughout the U.S. undervarious contractual arrangements.

The Exchange operates as an auctionmarket with offers to sell and bids tobuy butter. But unlike an auction, theremay or may not be any actual transac-tions during a particular tradingsession. The reported price at the endof a trading session can change fromthe previous session with a trade, anuncovered offer or an unfilled bid.

An uncovered offer occurs whenbutter is offered at a price lower thanthe last transaction price or offer andthere is no buyer. Since nobody wantsto buy at the lower price, it is assumedto indicate that the market-clearingbutter price is no higher than the offer.An unfilled bid is one that is higherthan the last transaction price or thatattracts no seller. An unfilled bidsuggests that the market-clearingbutter price is at least as high as thebid.

In 2002, 1,353 carlots (40,000-43,000pounds/carlot) of Grade AA butterwere traded on the CME. This repre-sented about 4.1% of total 2002 butterproduction. Despite the limitedvolume of CME butter trading relativeto production, the reported price isviewed by butter industry participantsas an accurate price barometer. Theargument goes like this: The largerbutter traders participating on theCME through their brokers account formost of the butter production and usein the U.S. These traders offer to sellbutter on the Exchange only if theyare unable to sell it on the regularcommercial market at the going price.


Determining how the U.S. milksupply is allocated to various dairyproducts is not a straightforwardprocess. Few dairy products areproduced independently of others.For example, butter, nonfat dry milkand buttermilk powder are fre-quently joint products in a butter-powder plant. So adding up thepounds of milk used to make butter,nonfat dry milk, and buttermilkpowder would involve triplecounting of the milk used. Similarly,cheese, whey powder and wheycream are produced together. Creamskimmed from lower-fat fluid milkproducts flows freely among severalproducts like whipping cream, icecream and butter.

Most USDA milk supply and use sta-tistics employ fat-based accountingto get around the joint productproblem. Utilization of milk forproducts is derived by convertingthe weight of the product to a milkequivalent weight using the butter-fat content of the product relative tothe average butterfat in milk. Forexample, the butterfat content ofGrade AA butter is 80%, so a poundof butter contains 0.80 pound of but-terfat. The national average butterfattest of raw milk is about 3.67%. So apound of butter converts to 21.8pounds of milk using fat-basedaccounting.

This method accounts for all of thebutterfat in whole milk, but grosslyunderstates milk use in lower fatproducts. Nonfat dry milk containslittle or no fat, so under fat-basedaccounting, the use of milk to makenonfat dry milk is practically zero.Milk utilized for cottage cheese andcondensed skim milk is also under-

stated. Under fat-based accounting,the reported utilization of milk forfluid products is less than thevolume of fluid milk sales since theaverage butterfat content of fluidmilk is lower than the butterfatcontent of raw milk.

An alternative to fat-based account-ing is skim-based accounting, whichconverts products to milk equivalentusing the nonfat solids content ofproducts relative to the solids-not-fat in raw milk. Skim-based account-ing grossly understates use of milk inbutter and frozen dairy products. Italso understates milk in cheesebecause most of the nonfat solids incheese are protein, which representsonly about a third of the solids-not-fat in milk. USDA reports milk utiliza-tion for a few dairy products in milkequivalent, skim milk basis. In 2000,for example, the combined produc-tion of cottage cheese curd, con-densed skim milk, dried buttermilkpowder and nonfat dry milk wasreported to represent 22.7 billionpounds milk equivalent, skim milkbasis.

For a short time, USDA reported milkuse on a total solids basis. Thismethod used a weighted average ofthe fat (40%) and skim (60%) equiva-lent values. It was used in the 1980swhen the department was obligatedby law to estimate government pur-chases of dairy products on a totalsolids basis to determine changes inthe price support level. USDA doesnot currently report milk used forindividual products on a total solidsbasis, even though this method moreaccurately accounts for total milk useacross all dairy products.

Fat and Skim Accounting 101

They bid to buy butter only if they areunable to obtain sufficient quantitieselsewhere. This marginal selling andbuying activity on the CME is per-ceived to reflect the overall commer-cial supply and demand situation.

Because of this trade confidence, mostbutter manufacturers sell butter undercontracts that peg the price to theCME quote. Since the value of cream islargely in the butterfat it contains,cream prices are also tied to the CMEbutter price. And since cream is theprimary ingredient in ice cream andother frozen dairy products, wholesaleprices for these dairy products are alsotied closely to the CME butter price.

Cheddar cheeseThe CME operates a daily wholesalemarket for cheddar cheese in twostyles—40-pound blocks and 500-pound barrels. Except for meetingeach business day instead of onlythree times per week, the cheesemarket operates the same as thebutter market. In particular, prices canchange from the previous tradingsession with an actual sale, an unfilledbid, or an uncovered offer.

In 2002, 644 carlots (40,000-44,000pounds/carlot) of block cheddarcheese and 194 carlots of barrelcheddar cheese were traded on theCME. The combined volume of tradingrepresented about 1.2% of cheddarcheese production and 0.4% of theproduction of all cheese in 2002.

Like the CME butter price and for thesame reasons, the CME cheddar cheeseprices serve as reference prices forother cheese trades. The prices estab-lished at the end of the daily tradingsession are used in formula pricing ofmost of the cheese made in the U.S.,cheddar as well as other varieties.

The “thinness” of the central wholesalemarkets for butter and cheese haslong been a source of concern. Somehave questioned whether tradinglegitimately reflects supply anddemand conditions. If the CME pricesapplied only to the small volumestraded on the butter and cheeseexchanges, this question may not berelevant. But in light of the extensivenature of formula pricing tied to theexchange prices, what happens on theexchanges gains considerable promi-nence—the small volume of tradinginfluences an enormous volume ofcheese and butter sales.

Controversy over charges that cheddarcheese prices had been manipulatedon the National Cheese Exchange(NCE), the predecessor of the CME, ledto shifting of the central cheesemarket to the CME in 1997. The NCEhad previously been the subject ofseveral investigations, none of whichyielded a legal finding of price fixing.For better or worse, the exchangescontinue to play a very large role inpricing butter and cheese, and,through federal order pricing formulasdiscussed later, farm-level milk.

Nonfat dry milkand dry wheyThe CME also maintains a wholesalecash market for nonfat dry milk, but ithas been essentially dormant. Therewere only 20 trades in 2002. This lackof trading activity relates to the impor-tance of the Commodity CreditCorporation (CCC) as a buyer of nonfatdry milk under the dairy price supportprogram. Except for brief periods, theCCC purchase price for nonfat dry milkhas set the commercial market pricesince the early 1990s.

There is no central market for drywhey products. Prices are establishedthrough individual negotiationsbetween buyers and sellers, oftenthrough brokers and other middlemenfirms. There are few dry whey manu-facturers relative to cheese plants, asmost cheese plants divert their liquidwhey to specialized dryers.

The dairy pricesupport programFrom time to time, prices for butter,cheese and nonfat dry milk areaffected by the federal dairy pricesupport program. The supportprogram operates through a standingoffer by USDA’s Commodity CreditCorporation (CCC) to purchase unlim-ited quantities of butter, nonfat drymilk and cheddar cheese at specifiedpurchase prices. The purchase pricesare derived from the announcedsupport price for milk, currently $9.90per hundredweight for milk of averagebutterfat test (3.67%) and $9.80 formilk testing 3.5% butterfat. The milksupport level is specified in federallegislation.

Formulas involving product yields andmake allowances are used to mathe-matically translate the support levelfor milk into associated CCC purchaseprices for the dairy products eligiblefor purchase. These formulas useroughly the same yields and makeallowances as the formulas used toprice milk under federal milk market-ing orders, thus linking the two federalprograms. The resulting purchaseprices should financially allow a rea-sonably efficient plant making theeligible products to pay farmers theannounced support price.


The mechanics of setting purchaseprices are illustrated below. The calcu-lations are for the purchase pricesestablished for products made on orafter November 15, 2002.

The process of deriving CCC purchaseprices from a specified milk supportprice is fairly straightforward for blockand barrel cheese. But in derivingpurchase prices for butter and nonfatdry milk, the two products areassumed to be jointly produced.4 Soto calculate the price for one product,the price of the other product must bespecified. For the November 15, 2002,price announcement, the nonfat drymilk price was specified at $0.80 perpound, and the butter price calculated(table 1).

Note that the butter and nonfat drymilk prices can be altered as long asthe combined value of butter andnonfat dry milk per hundredweight ofraw milk stays the same. A relativechange in product prices is popularlyknown as a butter-powder “tilt”—ifone price goes down, then the othermust go up to offset the lower value.

The 1990 farm bill instructed theSecretary of Agriculture to use butter-powder tilts to minimize the publiccost of the dairy price supportprogram. In the early 1990s, butter wasin surplus relative to nonfat dry milk.Four tilts were made between April1990 and July 1993, when the milksupport price was constant at $10.10per hundredweight. The butterpurchase price was decreased from$1.0925 to $0.65 per pound and thenonfat dry milk price was increasedfrom $0.79 to $1.034.

Butter-powder tilts were re-authorizedby subsequent farm bills passed in1996 and 2002. As under the 1990 Act,the Secretary of Agriculture was per-mitted to tilt butter-powder prices—as often as twice a year—as necessaryto minimize purchase and storagecosts. Despite rising CCC stocks ofnonfat dry milk along with commercialbutter prices well above the CCCbutter price, no tilts were made untilMay 31, 2001, when the CCC purchaseprice for (non-fortified) nonfat dry milkwas reduced from $1.0032 to $0.90per pound and the purchase price forbutter was increased from $0.6558 to

$0.8548 per pound. Another tiltlowering the nonfat dry milk price to$0.80 and raising the butter price to$1.05 was announced on November15, 2002. As amplified later, these tiltswere controversial because of theirpotential effect on fluid milk prices.

Given CCC purchase prices for butter,cheese and nonfat dry milk, how is thedairy price support program imple-mented? If milk supplies are relativelytight, production of hard manufac-tured products will be correspond-ingly low and prices will be above theCCC levels. Products will move to com-mercial outlets and the supportprogram will be inactive.

If milk supplies are large, the supply ofmilk not needed for perishableproducts will be increasingly divertedto the manufacture of storableproducts. Prices for these products willfall with increased supply. At somepoint, the CCC purchase prices willrepresent a more profitable market forsome plants than commercial outlets.5

Because of inter-plant competition forthe available supply of milk for manu-facturing, the CCC prices will also


4 This is not a valid assumption. Most of the butter manufactured in the U.S. is produced independent of nonfat dry milk, coming from excess creamskimmed in fluid milk processing and lower-fat cheese manufacturing. However, the assumption correctly implies that the relative price relationshipbetween butter and nonfat dry milk must conform to relative yields from raw milk.5 The market price for commodities purchased by the CCC may fall below the CCC purchase price because selling to the CCC involves additional costsrelative to selling to commercial buyers. These include special packaging requirements, mandatory inspections and grading and delayed payment. Inearly 2003, the CME price for block and barrel cheese fell as much as $0.12 per pound under the CCC purchase prices.

Table 1. Derivation of CCC purchase prices

Cheddar cheese Butter/nonfat dry milk

Milk Support Price/Cwt $9.9000 Milk Support Price/Cwt $9.9000

+ Make Allowance/Cwt 1.6500 + Make Allowance/Cwt 1.7747

= Processor Returns/Cwt 11.5500 = Processor Returns/Cwt 11.6747

- Net Whey Value/Cwt* .2888 - NDM Value/Cwt*** 6.9360

= Value of Cheese/Cwt 11.2612 = Value of Butter/Cwt 4.7387

÷ # Cheese/Cwt 9.9533 ÷ #Butter/Cwt 4.5130

= Cheese price/Lb** 1.1314 = Butter price/Lb 1.0500

* 0.275 pounds of whey cream butter valued at purchase price for butter.

** 40-lb. block price. 500-lb. barrel price is $0.03 lower.

*** Value at $0.80 per pound and 8.67 pounds per hundredweight.

buttress prices for other manufacturedproducts that are not purchased bythe CCC. For example, if cheddarcheese plants are able to pay theirpatrons the support price because oftheir ability to sell cheddar cheese tothe CCC, mozzarella plants will need topay at least as much to retain theirmilk supply.

The CCC may sell back to commercialmarkets products purchased underthe support program at not less thanthe purchase price. These sales arereferred to as unrestricted sales. Assurplus milk production eases, pricesfor butter, cheese, and nonfat dry milkwill increase, enabling the CCC toreduce stocks through commercialmarket sales.

Besides making unrestricted sales, theCCC makes surplus dairy productsavailable for use in several domesticand foreign food programs. Most ofthese special programs only providedairy products on an “as available”basis. That is, donations are made onlyif there are stocks available to donate.

The effect of the federal dairy pricesupport program on milk prices hasbeen substantially reduced over theyears. Once tied to parity, theannounced support price reached$13.10 per hundredweight in the early1980s. Milk production increasedrapidly in response to rapidly increas-ing prices and surpluses mounted.High government costs inducedCongress to decouple the supportprice from parity and gradually lowerit from $13.10 per hundredweight in1981 to $10.10 in 1990, where itremained through 1995 (figure 5).

Since the $10.10 level was below thefull cost of production for most dairyfarmers, government purchases, withthe recent exception of nonfat drymilk, essentially dried up. CCC pur-chases of both butter and cheese incalendar years 1999–2002 averagedless than 0.5% of production.

The 1996 Farm Bill increased thesupport price to $10.35 per hundred-weight for 1996, with subsequentreductions of $0.15 each January 1 to$9.90. The bill required termination ofthe program on December 31, 1999.Subsequent legislation extended theprogram until May 2002, when the2002 Farm Bill reinstated the programthrough 2007 at the $9.90 supportlevel.

Would elimination of the dairy pricesupport program significantly affectthe level and volatility of farm milkprices? The program as currentlyimplemented does not consistentlyenhance milk prices to dairy produc-ers, but it does provide a price floor.Since 1990, market forces, not the gov-ernment price support program, havelargely determined farm level milkprices.

With markets driving prices, volatilityhas increased markedly. Volatilitycould increase even more if the pricesupport program were terminated,since downside price movements forbutter, cheese, and nonfat dry milkwould no longer be limited by the CCCpurchase prices.


0

500

1,000

1,500

2,000

2,500

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Mill

ion

po

un

ds

Nonfat dry milk

Cheese

Butter

Figure 5. Government purchases of dairy products.

Federal milk marketing ordersFederal milk marketing orders setminimum prices for more than 70% ofthe Grade A milk produced in the U.S.and Grade A milk constitutes morethan 95% of all U.S. milk (see box:Grade A and Grade B Milk). California,with about 20% of U.S. milk produc-tion, uses a state pricing system that issimilar to federal order pricing.

Federal orders are authorized underthe Agricultural Marketing AgreementAct of 1937. The Act is enabling legis-lation—federal orders are notmandated. Rather, dairy producersmust request and approve an orderthrough a referendum.

USDA cites three major objectives offederal milk orders:

1) To assure consumers of anadequate supply of wholesomemilk at a reasonable price.

2) To promote greater producer pricestability and orderly marketing.

3) To provide adequate producerprices to ensure an adequatecurrent and future Grade A milksupply.

These objectives are achievedthrough:

■ Classified pricing: Minimum payprices are established for milk andmilk components according towhat dairy products they are usedto produce.

■ Pooling: Within each order, produc-ers receive a uniform price for theirmilk (of equal quality and composi-tion) or milk components regard-less of how their milk is used.

While producers approve orders, theorders regulate milk plants, calledhandlers, who acquire milk from pro-ducers or dairy cooperatives.

Regulated handlers are required toaccount to the federal order pool atthe established minimum class andcomponent prices.

There are three types of regulatedhandlers:

1) Distributing plants: Plants thatprocess, package and sell beveragemilk products within designatedmarketing areas. Distributingplants may procure milk directlyfrom producers or from supplyplants and cooperatives.

2) Supply plants: Plants that supplyraw milk to distributing plants.These are manufacturing milkplants, like cheese plants. Whileengaged primarily in manufactur-ing, supply plants help assure anadequate supply of milk for fluidpurposes by carrying fluid milkreserves. When milk is needed forfluid purposes, supply plants arerequired to ship milk to fluidprocessors rather than to use themilk in their own plants to makemanufactured dairy products.Supply plants also provide a bal-ancing service by manufacturingmilk that is not needed for fluidpurposes on days when bottlingplants are not operating.

3) Dairy cooperatives: Some dairycooperatives bottle milk andothers have manufacturing facili-ties. Still others are involved exclu-sively in representing theirmembers in negotiations with pro-prietary firms. Dairy cooperativesprovide a number of market-wideservices that enable federal ordersto operate more efficiently. Theseinclude such services as milk pro-curement at the producer level, fullsupply arrangements to milkbottlers (supplying the milkbottlers need for fluid purposesand handling what is not needed),


Grade A and Grade B MilkIn 2002, Grade A milk repre-sented 98% of the milkproduced in the U.S. and 96%of the Wisconsin milk supply.Federal milk orders apply onlyto Grade A milk. Grade A milk isdefined as milk that is eligiblefor use as beverage (fluid) milk,but most Grade A milk is con-verted to manufactured dairyproducts. Grade B milk can onlybe used for manufactured dairyproducts.

The grade of milk is determinedfrom quality standards and pro-duction standards. Somatic cellcount and bacteria count arethe principal quality standards.Production standards pertainto conditions in and around themilking facility.

Because high quality milk isrequired for both manufactur-ing and beverage purposes, thequality of Grade B and Grade Amilk being produced today ismuch closer than years ago.Most milk that is Grade B is soclassified because of producers’inability to meet production,rather than quality, standards.

moving milk to the highest useand best use, and providing milkquality testing services.

Dairy cooperatives are obligated tothe federal order pool for theestablished minimum prices. Butdairy cooperatives are not obli-gated to pay their members theorder minimum producer prices.This is because dairy cooperativesare viewed under the orders asbeing an extension of theirmembers’ farm firms. Cooperativesoften “re-blend” the proceeds frommilk sales across federal ordermarkets and pay their members acommon price. Of course, dairycooperatives need to pay produc-ers competitive prices to attractand keep producers as members.

Each milk order represents a definedmarket area (figure 6). This is a geo-graphical region where fluid(beverage) milk is sold to consumers,not necessarily where milk isproduced. Each order has performancestandards that establish the minimumamount of fluid milk that must be soldwithin the market area before a milkplant is regulated by that order. If amilk plant sells milk into more thanone federal order marketing area, thenit will be regulated under the orderhaving the greatest share of theplant’s milk. So whether a dairyproducer receives the order pricesdoes not depend upon where theproducer is located (within or outsidethe market area), but rather whetheror not its milk plant meets theminimum performance standardswithin the order.

Currently there are 11 federal orders,down from 31 prior to the order con-solidation that occurred on January 1,2000 (table 2). There were as many as81 orders in the mid-1960s. Thenumber was gradually reducedthrough mergers as packaging andtransportation technologies enabledmilk to move greater distances andexpanded marketing areas.

Classified pricingFederal orders define the followingfour classes of milk, from highest tolowest value (under most circum-stances):

1) Class I is milk used for beverageproducts. This includes “white”whole, low-fat and skim milk in allcontainer sizes, chocolate andother flavored milks, liquid butter-milk and eggnog.

2) Class II is milk used for soft manu-factured products like ice creamand other frozen dairy desserts,cottage cheese and creams (sourcream, aerosol whipped cream andwhipping cream, half and half, andcoffee cream).

3) Class III is milk used to manufacturecream cheese and hard cheeses.

4) Class IV is milk used to make butterand dry milk products—principallynonfat dry milk.

Minimum prices for the hard manufac-tured classes—Classes III and IV—areannounced monthly on the Friday onor before the fifth of the month fol-lowing the month to which they apply(for example, October prices areannounced on the Friday on or beforeNovember 5). They are based onproduct price formulas that relate milkcomponent values to: 1) wholesaledairy product prices; 2) the yield of thefinished products in terms of the milkcomponents used to produce them;and 3) assumed manufacturing costs,or make allowances. The volume of


Figure 6. Federal milk marketing order areas: January 1, 2001

Table 2. Evolution of federal milk orders

1960 1970 1980 1990 2002

Orders (No.) 80 62 47 42 11

Producers (No.) 189,816 143,411 117,490 100,397 63,856

Producer deliveries (mil. lbs.) 44,812 65.104 83,998 102.396 125,546

% of U.S. Milk:Grade A 64 79 80 77 77All Milk 43 59 67 70 76

components per 100 pounds of milkat standard composition is then multi-plied by the component values toderive the Class III and Class IV pricesper hundredweight.

Minimum prices for Class I skim milkand butterfat and Class II skim milk arerelated to Class III and IV prices thatare calculated for a different andshorter time period. They areannounced on the Friday on or beforethe 23rd of the month prior to themonth to which they apply; forexample, the October Class I price isannounced on the Friday on or beforeSeptember 23.

The formula-based procedure forsetting minimum class prices ties allfederal order milk prices directly andmechanically to the wholesale pricesof four dairy products: Grade AAbutter, cheddar cheese, nonfat drymilk and dry whey. The formulas usewholesale prices collected from sellersand reported weekly by the NationalAgricultural Statistics Service (NASS).The NASS prices for butter and cheeseare highly correlated with the CMEprices, emphasizing the extensive useof reference pricing at the wholesalelevel and the related influence of theCME cash markets on all milk prices.6

Class IV priceThe Class IV price is tied to the valuesof nonfat milk solids and butterfat.Nonfat solids make up nonfat dry milk,and butterfat is the principal con-stituent of butter. The Class IV (andClass III) butterfat price formula is:

(1) Class IV/III Butterfat Price/Lb. =(NASS monthly AA butter price –0.115) X 1.20

The NASS butter price is a weightedaverage of the reported weekly butterprices for the month that are availableon the day of the Class IV priceannouncement. The weights are thereported volume of sales associatedwith the weekly prices. NASS reportsweekly butter prices each Friday forthe week ending the previous Friday.Therefore, prices are lagged one weekand the monthly price announcementmay average either four or five weeklyreports, depending on the particularmonth.

The formula value, 0.115, is the buttermake allowance—USDA’s estimate ofthe national average cost of manufac-turing a pound of butter. The value,1.20, is the assumed pounds of butterthat can be made from one pound ofbutterfat.7

In words, the butterfat price formulasays that the value of butterfat to aplant making butter is the price ofbutter less the cost of manufacturingmultiplied by the number of poundsof butter that can be made from apound of butterfat. This is thegeneral structure of all of the milkcomponent price formulas.

The Class IV nonfat milk solids formula is:

(2) Nonfat Solids Price/Lb. =(NASS Monthly NDM Price – 0.14) X 0.99

The product price in this formula is themonthly weighted average of NASSnational weekly survey prices fornonfat dry milk. The nonfat solidsmake allowance is $0.14 per pound,and the assumed yield is 0.99 poundof nonfat dry milk per pound of nonfatmilk solids.8

A Class IV skim milk price per hun-dredweight is calculated by multiply-ing the nonfat solids price by 9.0, theassumed pounds of nonfat milk solidsin 100 pounds of skim milk ofstandard composition:

(3) Class IV Skim Milk Price = 9.0 X Nonfat Solids Price

Finally, the Class IV price (at 3.5% but-terfat) is expressed as:

(4) Class IV Price =3.5 X Butterfat Price +0.965 X Class IV Skim Milk Price

The Class IV price accounts for all ofthe value of a hundredweight of milktesting 3.5% butterfat and 8.685%total nonfat solids9 that is used tomake butter and nonfat dry milk. The100 pounds of milk consists of 3.5pounds of butterfat valued at theClass IV/III butterfat price (linked tothe price of butter) and 96.5 pounds ofskim milk valued at the Class IV skimmilk price (linked to the price ofnonfat dry milk).

By mathematically substitutingproduct price formulas for componentvalues, the Class IV price can beexpressed directly in terms of butterand nonfat dry milk prices. This rela-tionship is:


6 From September 1998, when NASS began reporting wholesale butter prices, through late 2002, the regression of NASS weekly butter prices onlagged (one week) CME prices yielded an R2 value of 0.935. The comparable R2 value for the regression of NASS weekly block cheddar cheese prices(reported by NASS since April 1997) on lagged CME prices was 0.969.7 Butter produced in the U.S. is usually 80% butterfat, which would imply a yield factor of 1.25. The 1.20 yield factor assumes some losses of butterfatin manufacturing and during farm-to-plant transportation.8 More than one pound of nonfat dry milk is normally recovered from one pound of nonfat milk solids because NDM contains some moisture.However, the production of nonfat dry milk also yields a small amount of buttermilk powder, which is not priced in the Class IV formula. The implicitformula yield factor adjusts the value of nonfat milk solids to account for the net value of buttermilk powder.9 Note that the skim milk portion of Class IV milk is assumed to contain 9% total solids. Since whole milk is assumed to contain 96.5% skim milk (plus3.5% butterfat), the assumed nonfat solids composition of whole milk is 0.965 X 9%, or 8.685%.

(5) Class IV Price = 4.20 X NASSButter Price + 8.60 X NASSNonfat Dry Milk Price – 1.69

Expressing the Class IV price in thisway shows the direct effect of month-to-month changes in product priceson the Class IV price. A 10-cent/poundchange in the butter price will changethe Class IV price by 42 cents/Cwt. inthe same direction. A 10-cent/poundincrease/decrease in the nonfat drymilk price will increase/decrease theClass IV price by 86 cents per hundred-weight.

The derivation of the Class IV price canbe illustrated schematically as shownin figure 7.

Class III priceThe Class III price is composed of thecombined value per hundredweight ofbutterfat in butter and in cheese,protein in cheese and other(nonfat/non-protein) milk solids inwhey. Therefore, three related productprice formulas link butterfat prices tobutter prices, protein prices to cheeseand butterfat prices, and other solidsprices to dry whey prices.

The Class III butterfat formula is thesame as used in Class IV (see Equation1). Class III and IV butterfat values areidentical, but not the same as the but-terfat values for Class II and Class I.

The formula for other solids is rela-tively straightforward:

(6) Other Solids Price/Lb. = (NASS Monthly Dry Whey Price– 0.159) X 1.03

The NASS monthly survey price for drywhey is constructed in the same wayas the butter and nonfat dry milkprices as demonstrated for Class IV.The other solids price formula uses alarger make allowance (0.159) thanthe nonfat solids formula for Class IV.The yield factor (1.03) accounts for themoisture content of dry whey,meaning that a pound of other solidsyields more that one pound of drywhey. The Other Solids price is notfloored at zero. In other words, if thedry whey price is less than 15.9 centsper pound, the Other Solids price isnegative.

The protein formula in the Class IIIprice derivation is complex:

(7) Protein Price/Lb. = (NASSMonthly Cheese Price – 0.165) X1.383 +{[(NASS Monthly CheesePrice – 0.165) X 1.572] – 0.9 XButterfat Price} X 1.17

The first part of the equation is in thesame form as the other product priceequations. It represents the net valueof protein in cheese-making (cheeseprice less make allowance timespounds of cheese per pound ofprotein). The NASS cheese price is for40-pound blocks and 500-poundbarrels of cheddar cheese. It is con-structed like the other NASS pricesexcept: (1) it is a weighted average ofthe two cheddar cheese styles withweights based on relative sales; (2) the500-pound barrel price is adjusted torepresent 38% moisture content; and(3) the barrel price is augmented by 3cents per pound (the assumed differ-ence in manufacturing costs betweenblocks and barrels). The cheese yield(1.383 pounds cheese per poundprotein) is from the Van Slyke cheeseyield formula using true protein andadjusting for farm-to-plant losses inprotein.10


10 True protein is crude or total protein less non-protein nitrogen. Prior to January 1, 2000, federal order protein prices were based on crude proteintests.

NASS Grade AA Butter price/lb

NASS Nonfat Dry milk price/lb

Class IV Skim price per cwt.

Class IVprice per cwt.

Butterfat price/lb

Nonfat solidsprice/lb

F(B)*

F(NDM)* X0.965X9.0

X3.5

Figure 7. Deriving the Class IV price

* denotes a product price formula.

The second part of the protein priceequation attempts to account for thevalue of butterfat in cheese in excessof the value of butterfat in butter.Without getting into the physiologicalbasis for the formula, it recognizes thatprotein has value in cheese over andabove its contribution to the cheeseitself. That added value is attributableto the fact that the casein in proteinallows retention of butterfat in cheese.

Given the values of the Class III com-ponents—butterfat, protein and othersolids—the Class III skim milk price is:

(8) Class III Skim Milk Price = 3.1 XProtein Price + 5.9 X Other SolidsPrice

The composition of “average” skimmilk is assumed to be 3.1% trueprotein and 5.9% other (nonfat/non-protein) solids.

Finally, the Class III price is expressedas:

(9) Class III Price = 3.5 X Class IV/IIIButterfat Price + 0.965 X Class IIISkim Milk Price

The Class III price formula accounts forall of the value of a hundredweight ofmilk testing 3.5% butterfat, 2.99% trueprotein (3.1 X 0.965) and 5.69% othersolids (5.9 X 0.965) that is used tomake cheese and whey. The 100pounds of milk consists of 3.5 poundsof butterfat valued at the Class IV/IIIbutterfat price and 96.5 pounds ofskim milk valued at the Class III skimmilk price, which is directly linked tothe prices for protein and other solids.

Expressing the Class III price directly interms of product prices yields:

(10) Class III Price = 9.64 X NASSCheese Price+0.42 X NASS ButterPrice+5.86 X NASS Dry WheyPrice-2.57

Increases of $0.10 per pound incheese, butter and dry whey pricesincrease the Class III price by $0.964 ,$0.042 and $0.586 per hundredweight,respectively.

The derivation of the Class III price canillustrated schematically as follows(figure 8).

Class II priceMinimum prices for milk used for ClassII and Class I products are set in a dif-ferent fashion from the hard manufac-tured classes. For both Class II andClass I, prices per hundredweight forthe skim milk portion are announcedin advance of the month to whichthey apply. The price announcementsare made on the Friday on or beforethe 23rd of the preceding month. Theclass prices are derived from the sameproduct price formulas used to deriveClass IV and Class III componentvalues. But the weighted averageproduct prices in the formulas averageonly the last two weekly prices thatare available in the NASS report issuedon the Friday on or before the 23rd ofthe month. Usually, these are the firsttwo weeks of the month.

The Class II butterfat price is themonthly Class IV/III butterfat price plusa constant differential. The Class I but-terfat price is the advanced (two-week)Class IV/III butterfat price plus a differ-ential that varies by market.

Derivation of the Class II price beginswith the advanced nonfat solids price:

(11) Advanced Nonfat SolidsPrice/Lb. =(NASS Two-Week NDMprice - 0.14) X 0.99


Figure 8. Deriving the Class III price

NASS Grade AA Butter price/lb

NASS Cheese price/lb

NASS Dry Whey price/lb

Other solids price/lb

Class III Skim price per cwt.

Class IIIprice per cwt.

Butterfat price/lb

Protein price/lb

F(B)*

F(P)*

F(W)*

X0.965X3.1

X5.9

X3.5

This is the same formula used for theClass IV nonfat solids price (Equation2) except that it uses an abbreviatedtwo-week weighted average ofmonthly nonfat dry milk prices fromthe preceding month—the two weeksof NASS price reports available on theFriday of the month on or before the23rd. Note that the two weeks used inthe advanced price formula for the fol-lowing month always appear in theClass IV formula for the current month,but the latter formula always includeslater and may include earlier weeks.

The advanced Class IV skim milk pricefactor calculation is equivalent to theClass IV skim milk price:

(12) Advanced Class IV Skim MilkPrice Factor/Cwt. =

9.0 X Advanced Nonfat Solids Price

The Class II skim milk price adds a dif-ferential of 70 cents per hundred-weight to the advanced skim milkprice:

(13) Class II Skim Milk Price/Cwt. =Advanced Class IV Skim MilkPrice Factor + $0.70

Class II handlers must account to theirfederal order pool for pounds ofnonfat milk solids rather than hun-dredweight of skim milk. Therefore,another formula translates the Class IIskim milk price back to a per poundvalue for nonfat solids:

(14) Class II Nonfat Solids Price/Lb. =Class II Skim Milk Price/Cwt. ÷ 9.0

The butterfat portion of Class II milk ispriced at the Class IV/III butterfat priceplus a constant differential:

(15) Class II Butterfat Price/Lb. =Class IV/III Butterfat Price +$0.007

Since the Class II butterfat price islinked to the monthly Class IV/III but-terfat price, it is not announced untilas late as the fifth of the month follow-ing the month it applies. In contrast,the Class II skim milk price isannounced no later than the 23rd ofthe month before it applies. In otherwords, there is advance pricing of theskim portion of Class II but not thebutterfat portion.

Finally, the Class II price combines theskim milk and butterfat values:

(16) Class II Price/Cwt. = 0.965 X Class II Advanced SkimMilk Price + 3.5 X Class IIButterfat Price

Class I priceBoth the skim milk and butterfatportions of the Class I price areadvanced-priced and announced onthe Friday on or before the 23rd of themonth before the month to whichthey apply. The skim milk value ofClass I is based on the advanced ClassIII or Class IV skim milk pricing factors,whichever is higher.11

Derivation of the advanced Class IVskim milk pricing factor is shown inequations 11 and 12. The advancedClass III skim milk pricing factor isbased on advanced product priceformulas for butterfat, protein andother solids:

(17) Advanced Butterfat Price/Lb.= (NASS 2-Week AA Butter Price– 0.115) x 1.20

(18) Advanced Protein Price/Lb.= (NASS 2-Week Cheese Price – 0.165) X 1.383 + {[(NASS 2-Week Cheese Price – 0.165) x 1.572] – 0.9 x AdvancedButterfat Price} x 1.17

(19) Advanced Other Solids Price/Lb.= (NASS 2-Week Dry Whey Price – 0.159) x 1.03

(20) Advanced Class III Skim MilkPrice Factor = 3.1 x AdvancedProtein Price + 5.9 x AdvancedOther Solids Price

The Class I skim milk price is the higherof the values obtained in equations 12and 20, plus a Class I differential:


Figure 9. Class I differentials—Upper Midwest Federal Order

11 Technically, the Class I skim milk price is based on the higher of the advanced Class III or Class IV milk price at standard composition (the value of3.5 pounds of butterfat and 96.5 pounds of skim milk). But since advanced Class III and Class IV butterfat values are identical, the advanced skim milkpricing factors determine whether the Class III or Class IV whole milk pricing factor is higher.

(21) Class I Skim Milk Price = Higherof: (Advanced Class III Skim MilkPrice Factor) or (Class IV SkimMilk Pricing Factor) + Class IDifferential

Class I differentials are specified foreach county within a marketing area.In general, differentials decrease withdistance from the major consumptionlocation within the order marketingarea. Differentials for the UpperMidwest order (figure 9) are highestnear Chicago (base differential of$1.80 per hundredweight) and lowestin northwestern Minnesota and north-eastern North Dakota.

Among marketing orders, Class I differ-entials in the eight markets east of theRocky Mountains increase withdistance from the Upper Midwest(figure 10). This alignment of priceswas originally designed to attract milkfrom the direction of the large UpperMidwest milkshed when supplies wereshort in other regions. At one time, thedifference in Class I differentialsapproximated bulk milk hauling costs.So milk would move in response tothe price differences. Over time,hauling costs increased and there wasno compensating change in the geo-

graphical Class I price alignment. Butat the same time, the need for supple-mental milk supplies diminished.

Class I differentials in the threemarkets west of the Rocky Mountainsare not aligned with eastern differen-tials. The base differentials in theNorthwest (Western and PacificNorthwest orders) are $1.90 per hun-dredweight, $0.10 higher than thebase Class I differential in the UpperMidwest. The base Class I differentialfor the Arizona-Las Vegas order is$2.45.

The Class I butterfat price also variesby market. It is based on the advancedbutterfat price from equation 17:

(22) Class I Butterfat Price/Lb.= Advanced Butterfat Price + (Class I Differential ÷ 100)

And the Class I price formula appliesstandard milk composition weights toClass I skim milk and butterfat prices:

(23) Class I Price/Cwt. = 0.965 x Class I Skim Milk Price + 3.5 x Class I Butterfat Price


Table 3. NASS survey prices used for deriving April 2003 federal order prices

2-Week—Mar. 21, 2003 Monthly—May 2, 2003(Average of prices for 2 wks (Average of prices for 4 wks

ending Mar. 14) ending April 25)

————————$/lb.———————

Butter 1.0506 1.0736

Cheese 1.0697 1.0997

Dry whey .1594 .1582

Nonfat dry milk .8048 .8030

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Minneapolis

Louisville

Boston

Miami

Detroit

Okla. City

Miles from Eau Claire

$/C

wt.

Atlanta

Class I Differential = 0.0018 x Miles from Eau Claire + 1.0952R2 = 0.95

Figure 10. Class I differentials for selected U.S. Eastern cities (January 1, 2000)

Illustration of class pricesAn example of price calculations forthe various components and classes ofmilk follows. Table 3 shows theaverage product prices from therelevant weekly NASS price surveysapplicable to federal order pricesannounced for the month of April2003.

Advanced prices applying to milk andmilk components procured by handlersregulated under the Upper Midwestorder during April 2003 were reportedon March 21, 2003 (the Friday on orbefore March 23) as shown in table 4.

April 2003 Class III and IV milk andcomponent prices were announced onMay 2 (the Friday on or before May 5).Class II prices that involved butterfatvalues were announced on the samedate. For the Upper Midwest order,these announced prices were calcu-lated as shown in table 5.

PoolingPooling is accomplished under federalmilk orders by obligating each regu-lated handler to account for milkreceipts according to class. Handlerspay into or draw from a producer set-tlement fund depending on the valueof their milk receipts priced at orderminimum prices relative to themarket-wide average value. Handlers’price obligation to their producers isat the market-wide average value ofmilk, or the uniform price.


Table 4. Derivation of advanced federal order prices for April 2003

Component/Class Price Eq. number Equation Equation value

Advanced butterfat ($/Lb) 17 (1.0506 – 0.115) X 1.20 1.1227

Advanced protein ($/Lb) 18 (1.0697 – 0.165) X 1.383 +{[(1.0697 – 0.165) X 1.582] – 0.9 X 1.1227} X 1.17 1.7330

Advanced other solids ($/Lb) 19 (0.1594 – 0.159) X 1.03 0.0004

Advanced nonfat milk solids ($/Lb) 11 (.8048 – 0.14) X 0.99 0.6582

Class IV skim milk price factor ($/Cwt) 12 9.0 X 0.6582 5.92

Class II skim milk ($/Cwt) 13 5.92 + 0.70 6.62

Class II nonfat solids ($/Lb) 14 6.62 ÷ 9.0 .7356

Class III skim milk price factor ($/Cwt) 20 3.1 X 1.7330 + 5.9 X 0.0004 5.37

Class I skim milk (@ base zone, $/Cwt) 21 5.92 + 1.80 7.72

Class I Butterfat (@ base zone, $/Cwt) 22 1.1227 + (1.80 ÷ 100) 1.1407

Class I @ test (@ base zone, $/Cwt) 23 (0.965 X 7.72) + (3.5 X 1.1407) 11.44

Table 5. Derivation of monthly federal order prices for April 2003

Component/Class Price Eq. number Equation number Equation value

Butterfat ($/Lb) 1 (1.0736– 0.115) X 1.20 1.1503

Protein ($/Lb) 7 (1.0997 – 0.165) X 1.383 +{[(1.0997 – 0.165) X 1.582] – 0.9 X 1.1503} X 1.17 1.8006

Other solids ($/Lb)* 6 (0.1582 – 0.159) X 1.03 -.0008

Nonfat milk solids ($/Lb) 2 (.8030 – 0.14) X 0.99 .6564

Class IV skim milk ($/Cwt) 3 9.0 X 0.6564 5.91

Class IV milk @ Std. Test ($/Cwt) 4 (3.5 X 1.1503) + (0.965 X 5.91) 9.73

Class III skim milk ($/Cwt) 8 (3.1 X 1.8006) + (5.9 X -0.0008) 5.58

Class III milk @ std. test ($/Cwt) 9 (3.5 X 1.1503) + (0.965 X 5.58) 9.41

Class II butterfat price ($/Lb) 15 1.1503 + 0.007 1.1573

Class II milk @ std. test ($/Cwt) 16 (0.965 X 6.62) + (3.5 X 1.1573) 10.44

*With the Class III pricing formulas effective April 2003, the Other Solids price is not “snubbed” at zero, and is negative whenever the NASS dry wheyprice is less than $0.159 cents per pound.

The following items are deductedfrom the gross value of each handler’smilk based on the table above toderive the net handler obligation tothe pool:

■ Producer price differential

■ Producer location adjustment

■ Protein value

■ Other solids value

■ Producer butterfat value

■ Somatic cell count adjustmentvalue

If the result of subtracting thesedeductions from gross milk value ispositive, the handler pays the differ-ence into the producer settlementfund. If the result is negative, thehandler draws the difference from thefund.

The deductions noted introduce somenew terminology that needs explana-tion. Conceptually, the producer pricedifferential (often abbreviated, PPD)is a measure of how much the averagevalue of handler receipts over theentire market exceeds the averagevalue if all milk were priced at Class III.Under most federal orders, producersare paid for milk components—butter-fat, protein and other milk solids—atthe same prices used to derive theClass III price. Hence, the producer

price differential indicates the value ofmilk in excess of the value of the ClassIII components. In other words, thePPD measures the relative value ofclass prices that exceed (or fall shortof ) Class III.

Among markets, the PPD varies posi-tively with the percent Class I utiliza-tion and the Class I differential. Withinany market, Class I utilization variesseasonally, resulting in a distinctseasonal pattern in the PPD.

The Class I price mover is the higher ofadvanced Class III or Class IV skim milkprices. In rapidly moving markets, themonthly Class III or Class IV skim pricemay move substantially above orbelow the advanced values. In theextreme, the Class I mover can be lessthan the monthly counterpart bymore than the Class I differential. Thisresults in a negative PPD.

Producer price differentials for theUpper Midwest order since the consol-idated order was created in January2000 are shown in figure 11. The PPDrange has been $3.01 per hundred-


The pool obligations by class are noted in table 6.

Table 6. Pool obligations by class

Milk use class Handler obligation to the producer settlement fund

Class I Class I skim milk price at location x skim milk poundsClass I butterfat price at location x butterfat pounds

Class II* Class II nonfat solids price x nonfat solids poundsClass II butterfat price x butterfat pounds

Class III* Protein price x protein poundsOther solids price x other solids poundsButterfat price x butterfat pounds

Class IV* Nonfat Solids price x nonfat solids poundsButterfat price x butterfat pounds

*Pool obligations in these classes are adjusted for somatic cell count of milk receipts in four of theseven orders that use multiple component pricing.

12 Seven of the 11 federal orders use multiple component pricing for establishing milk value and producer pay prices. The remaining four orders, inareas where milk is predominantly utilized for Class I, use skim milk-butterfat accounting

-1.60

-1.10

-0.60

-0.10

0.40

0.90

1.40

AverageSince Jan. 2000

Jan '0

0

Jan '0

1

Jan '0

2

Jan '0

3

Jan '0

4

Apr

Jul

OctJul

Jul

Jul

Jul

Apr

Apr

Apr

Apr

Oct

Oct

Oct

Oct

Figure 11. Producer price differential, Upper Midwest

weight, from $-1.58 to $1.43. NegativeProducer Price Differentials were expe-rienced in four months during 2003.

The producer location adjustmentaccounts for differences in the Class Idifferential at the receiving plant andthe differential at the location of thesupply plant.

The somatic cell value relates to priceadjustments for quality at theproducer level for milk used in Class II,Class III and Class IV. Quality ismeasured by somatic cell count ofproducer milk relative to a base levelof 350,000 cells per ml. A rate per1,000 cell count above or below thebase is derived by multiplying thecheese price used in the protein priceformula (equation 7) by 0.0005. ForApril 2003, the rate was 0.0005 x$1.0997 = $.00055 per thousand.

Calculate the somatic cell adjustmentper hundredweight by subtracting theproducer somatic cell count in thou-sands from 350 and multiplying theresult by the rate per 1,000. Aproducer with an April 2003 cell countof 120,000 would receive a premiumof (350-120) = 230 X $0.00055 = $0.13per hundredweight. A producer with a500,000 cell count would receive adeduct of (350-500) = -150 X $0.00055= - $0.08 per hundredweight.

Table 7 illustrates a hypotheticalproducer settlement accounting fortwo handlers regulated under theUpper Midwest order for April 2003.Handler 1 is a pool distributing plantthat packages beverage milk and softmanufactured (Class II) products.Handler 2 is a supply plant that ships10% of its milk receipts to a distribut-ing plant and manufactures cheesewith the remaining milk. Each handleris assumed to receive 1 million pounds

of milk during April 2003 of identicalcomposition: 3.7% butterfat, 3.0%protein and 5.8% other solids. Theproducer price differential applying toboth plants is $0.46 per hundred-weight. Both plants receive milk thathas an average somatic cell count of350,000, so the somatic cell adjust-ment is zero.

Handlers’ producer settlement fundpayments or receipts may be adjustedby transportation credits andassembly credits. Transportationcredits apply to shipments of milk forClass I use from supply plants to dis-tributing plants. In the Upper Midwestorder, the credits are paid to distribut-ing plants at the rate of 28 cents perhundredweight per mile to helpdefray the cost of moving milk to theClass I market. Transportation creditsare adjusted for differences in theClass I differential between theshipping and receiving plants.

Assembly credits are paid to poolplants (distributing plants, supplyplants, and cooperatives) on producermilk that is used for Class I purposes.Assembly credits provide an addi-tional incentive to “give up” milk forClass I that may otherwise be destinedfor manufacturing.

Transportation and assembly creditsfor the entire marketing area are sub-tracted from total pool proceeds inthe process of calculating theproducer price differential. In otherwords, the total Class I value isreduced by the amount of thesecredits.


13 The pool does not balance because the combined utilization of the two plants does not match the market utilization of milk as reflected by theproducer price differential. The producer price differential is also affected by assembly and transportation credits on Class I milk, which are notincluded in the example.

Table 7. Illustration of producer settlement fund accounting (April 2003 prices)

Rate per Handler 1 Handler 2

pound Pounds Value Pounds Value

Class I: Skim Milk .0772 770,400 59,475 96,300 7,434Butterfat 1.1407 33,765 30,890 3,700 4,221

Class II: Nonfat Solids .7356 18,000 13,241Butterfat 1.1573 7,400 8,564

Class III: Protein 1.8006 27,000 48,616Other Solids -.0008 52,200 (42)Butterfat 1.1503 33,300 38,305

Class IV: Nonfat Solids .6564Butterfat 1.1503

Less:Prod. Price Differential 0.0046 1,000,000 4,600 1,000,000 4,600

Prod. Location Adj.Protein 1.8006 30,000 54,018 30,000 54,018Other solids -.0008 58,000 (46) 58,000 (46)Butterfat 1.1503 37,000 42,561 37,000 42,561Somatic Cell ValueNet to/from fund13 11,037 (2,599)

Producer pricesWith federal order pooling, producersreceive a common price for their milkcomponents regardless of how theirmilk is used. Total producer milk valueunder the order is the sum of the fol-lowing elements:14

■ Total hundredweight milk XProducer Price Differential (@location)15

■ Protein pounds X Protein Price

■ Other Solids pounds X Other SolidsPrice

■ Butterfat pounds X Class IV/IIIButterfat Price

■ Total hundredweight milk XSomatic Cell Adjustment

Expressed in terms of hundredweightsof milk, producer prices will differaccording to milk composition, milkquality and the location of the receiv-ing plant.To illustrate extremes,consider two producers, each shipping100,000 pounds of Grade A milk to ahandler regulated under the UpperMidwest federal milk marketing orderduring the month of April 2003.ThePPD at the base zone for April 2003 was$0.46 per hundredweight, decreasingto $0.26 in the outermost zone.

Producer A ships to a plant in Harvard,IL (Class I differential = $1.80; PPD =$0.46). A operates a Jersey herd withApril 2003 tests of 4.5% butterfat, 3.7%protein and 6.0% other solids. Theherd somatic cell count was 110,000.

Producer B milks Holsteins and shipsto a plant in Grand Forks, ND (Class Idifferential = $1.60; PPD = $0.26); B’sApril 2003 tests were 3.2% butterfat,2.8% protein and 5.7% other solids.Somatic cell count was 420,000.

Under these conditions, UpperMidwest federal order milk values forProducer A would be calculated asshown in table 8.

Producer B’s milk value as determinedfrom the federal order pricingelements would be calculated asshown in table 9.

While the rates of payment for milkcomponents are the same for eachproducer, the federal order paymentper hundredweight differs because ofdifferent milk composition and differ-ent locations. Producer B actuallyreceives $0.47 per hundredweight lessthan the Class III price for April 2003,mainly because lower butterfat andprotein values relative to the stan-

dards used to compute the Class IIIprice more than offset the producerprice differential.

Other milk checkcomponentsWhat dairy producers receive fromtheir milk plants is usually differentfrom the federal order calculation.Most producers receive variouspremiums and deductions.

Some premiums and deductions areassociated with specific milk charac-teristics. Many plants have qualitypayment schedules that reward orpenalize producers according tostandard plate count (SPC) andsomatic cell count (SCC). The SCCpremiums or penalties are in addition


14 Note that producers may receive “extra-order” payments: premiums for other milk characteristics (e.g. volume premiums) or payments for milkquality or protein beyond what is required by federal order pricing rules. Producers may also be paid under a different pricing arrangement, forexample via a cheese yield formula. However, the total producer payment cannot be less than what would be calculated using the federal orderpricing elements.15 Producer price differentials are reported at the base, or highest Class I differential zone and adjusted downward by the difference between the basezone differential and the differential applicable to the location of the receiving handler.

Table 8. Federal order producer price calculation—Producer A

Pricing element Units Rate Value

Producer Price Differential 1,000 Cwt. 0.46 460.00

Protein 3,700 Lbs. 1.8006 6,662.22

Other Solids 6,000 Lbs. (.0008) (4.80)

Butterfat 4,500 Lbs. 1.1503 5,176.35

Somatic Cell Adjustment 1,000 Cwt. .1320 132.00

TOTAL VALUE: 12,425.77

VALUE PER CWT. 12.43

Table 9. Federal order producer price calculation—Producer B

Pricing element Units Rate Value

Producer Price Differential 1,000 Cwt. 0.26 260.00

Protein 2,800 Lbs. 1.8006 5,041.68

Other Solids 5,700 Lbs. (.0008) (4.56)

Butterfat 3,200 Lbs. 1.1503 3,680.96

Somatic Cell Adjustment 1,000 Cwt. (.0392) (39.20)

TOTAL VALUE: 8,938.88

VALUE PER CWT. 8.94

to what is required by the federalorder schedules. Some plants payprotein premiums on top of thefederal order protein payment.

Other premiums and deductions arerelated to producer characteristics,principally scale. In Wisconsin, volumepremiums are common. Most volumepremium programs contain daily ormonthly milk shipment “brackets” andassociated payments per hundred-weight. Other programs indirectly payvolume premiums through varyinghauling subsidies.

Another class of premiums, commonlycalled plant premiums, is unrelated toeither milk or producer characteristics.Plant premiums result from the abilityor willingness of a plant to out-payminimum federal order prices. Thesource of additional revenue may bebetter plant efficiency or higherproduct prices than indicated in thepricing formulas used to derive com-ponent and class prices.

For many cooperatives, another sourceof revenue to support plant premiumsis over-order premiums for Class I andClass II milk sales. Dairy cooperativesorganize marketing agencies-in-common to negotiate with milkhandlers for a premium above federalorder minimum Class I prices and,sometimes, Class II prices. Thesepremiums are called “over order” or“super-pool” premiums. A portion ofthe premium is reimbursement forservices that cooperatives performsuch as full supply agreements withhandlers, transportation of milk, bal-ancing functions and the like. Theexcess beyond the out-of-pocket coststo provide these services is paid out toproducers.

As an example, Central Milk ProducersCooperative (CMPC) is the federatedbargaining cooperative for a group ofUpper Midwest dairy cooperativesthat supply fluid milk to distributingplants operating in the Chicago area.Each month, CMPC negotiates a pricefor Class I deliveries from its membercooperatives that exceeds theannounced federal order price. Atypical premium, or over-order charge,on Class I milk is $1.50 per hundred-weight. Class I utilization in the UpperMidwest market is about 20%.Suppose a member of CMPC incursout-of-pocket costs of $0.25 per hun-dredweight in supplying Class I milk. Inthat case, the cooperative would have($1.50 - $0.25) X 0.20 = $0.25 per hun-dredweight in additional revenue todistribute to its members. This wouldlikely be included as part of a plantpremium in members’ milk checks.

Some states have state-controlledover-order pricing of Class I milk.Pennsylvania, for example, requiresdistributing plants to make a separatepayment for milk in excess of theminimum federal order price. Theseover-order revenues are pooled at theplant level and paid out toPennsylvania producers.

In 1997, the Northeast Interstate DairyCompact was implemented, creating adifferent form of over-order pricing.The compact established a minimumprice for all fluid milk sold in thecompact region (the six New Englandstates). Fluid milk handlers madepayments to a compact pool (separatefrom the federal order pool) equal toany positive difference between theminimum compact price and theannounced federal order price. Poolpayments were then made to produc-ers supplying milk to New Englandbottlers. Since the compact wouldhave otherwise violated interstate

commerce laws, its creation requiredCongressional and presidentialapproval.

The Northeast Compact was contro-versial for several reasons. Consumergroups objected to the high inflexiblefluid milk price. Producers in nearbymarkets objected to being effectivelyclosed out of the compact area.Producer groups in the Midwestobjected to the compact’s potentialfor stimulating production of milk formanufacturing uses.

The Northeast Compact did providesubstantial revenue enhancement todairy farmers in the New Englandstates. Consequently, farmers in manyother states successfully lobbied theirstate legislatures to pass legislationauthorizing them to join the NortheastCompact or create new compactregions.

A bill was submitted to Congress in2001 that would have expanded theNortheast Compact to include sixadditional states and authorized thecreation of several new compacts. Thebill was defeated along with severalefforts to extend the existingNortheast Compact, and the Compactexpired on September 30, 2001.

There were attempts to resurrect theCompact in debate over the Dairy Titleof the Farm Security and RuralInvestment Act of 2002. While thesewere not successful, the new dairy leg-islation contains remnants of theCompact in the National Dairy MarketLoss program, slated to operate fromDecember 2001 through September2005. Specifically, deficiency paymentsare equal to 45% of the monthly dif-ference between $16.94 and theBoston Class I price. This is the samepayment rate used under theCompact, but payments are madenationally on eligible production.


Milk pricing issuesThe dairy industry is extensively regu-lated, with much of the regulationdirectly affecting prices. Contentiousissues often arise because of per-ceived or actual differences in howregulations affect prices for dairyproducts or farm milk prices. In whatfollows, we provide a brief overview ofsome of these issues.

Dairy price supportsAfter more than 50 years of continu-ous operation, the dairy price supportprogram has provided several lessons.One is that the program cannot con-sistently enhance milk prices abovemarket-clearing levels without somekind of supply control. That lessoncame in the late 1970s, when Congressraised the support level to 80% ofparity, mandated semi-annual adjust-ments in the support price and pre-vented the Secretary of Agriculturefrom interceding to lower the supportprice.

The support price was ratcheted up$5.00 per hundredweight betweenApril 1977 and October 1980. Dairyfarming became unusually profitable,setting in motion a rapid expansion inmilk production, much of it in new drylot western dairies. Commercial saleswere stagnant, leading to large CCCpurchases and annual governmentcosts as high as $2.7 billion. A badpolicy in place for only five yearscreated a surplus situation that took10 years to rectify.

Another dairy price support programlesson is that fixed relative prices forproducts purchased by the CCC candistort product markets and the allo-cation of milk among products. Duringmuch of the 1980s, the CCC was theprimary market outlet for nonfat drymilk. Much nonfat dry milk use wasdisplaced by whey solids and

imported casein, both of which were acheaper source of milk protein. FixedCCC prices for nonfat dry milk pre-vented appropriate market adjust-ments to this displacement.

In the early 1990s, the CCC purchaseprice for butter dictated the U.S. pricefor butterfat. Consumers weredemanding lower-fat products,leading to conflicting signals in themarketplace. Butter surpluses and CCCstocks mounted. The price of butterfatwas not permitted to change in accor-dance with consumer preferencesuntil butter-powder tilts weremandated by Congress in 1990. Theindustry responded to these tilts byproducing less butter and using morebutterfat in other dairy products.

These lessons are often forgotten.Many dairy groups consistently lobbyfor an increase in the support price.Few proposals include a correspon-ding method for controlling supply,and those that do typically favor weaksystems that pay bonuses to produc-ers who do not expand productionrather than penalize those who do.

The negative effects of misalignedproduct prices because of inflexibleCCC purchase prices were also soonforgotten. The high nonfat dry milk-butter price ratio problem of the1980s was repeated starting in the late1990s, when the CCC once againbegan purchasing large volumes ofnonfat dry milk. By early 2003, CCCnonfat dry milk stocks exceeded 1.2billion pounds, about 80 percent ofannual nonfat dry milk production.Some dairy trade associations com-plained about expanding imports ofmilk protein concentrates, which werea direct result of nonfat dry milk pricesclearly out of line with market condi-tions. And most of the industry strenu-ously fought butter-powder tilts in

2001 and 2002 that eventuallyaddressed the problem, at least inpart.

These lessons stress the need for flexi-bility and market orientation in admin-istering the dairy price supportprogram. The Secretary of Agriculturemust have discretion to alter thesupport level to prevent milk sur-pluses and to change relative productprices when market distortions areapparent.

The support program can be usedeffectively to establish a safety net,but, without supply management, itcannot be used to keep prices abovemarket-clearing levels. If supportingdairy farmer income rather than main-taining a safety net is the politicalgoal, then direct payments distortmarkets less than raising supportprices.

Federal Milk MarketingOrdersStructure of Class I Differentials:Perhaps the most contentious aspectof federal orders is the setting of ClassI differentials in reference to location.As noted earlier, Class I differentials ineastern markets increase with distancefrom the Upper Midwest. This geo-graphical Class I pricing pattern isknown in economics as single basingpoint pricing.16

Single basing point pricing occurs nat-urally only when there is either asingle producing area for a commod-ity or a single producing area that pos-sesses a surplus. These conditions donot apply in the case of fluid milk.Some markets are deficit in fluid milkduring parts of the year, and the costof acquiring supplementary milkwould be a major factor in determin-ing the local milk price. But in mostmarkets, milk production is far inexcess of fluid milk needs plus a


16 We should note that the USDA has repeatedly and strenuously denied that the geographical pattern of Class I differentials represents single basingpoint pricing. USDA’s position is that the alignment of Class I prices is coincidental.

reserve. Consequently, there is noreason to expect that the fluid milkprice in those markets would berelated to the cost of hauling milkfrom another market.

Administered prices using the singlebasing point structure distorts fluidmilk shipment patterns and increaseshauling costs. For example, fluid milkprocessors in deficit Florida marketswould logically draw milk from theclosest surplus market to minimizetransportation costs. But single basingpoint pricing makes it less costly toprocure milk from the direction of thebasing point regardless of where thesurplus milk might be located. Singlebasing point pricing may also encour-age production of unneeded milk formanufacturing. Class I differentialsthat are higher than necessary toattract an adequate supply of milk forfluid purposes can lead to expandedmilk production.

In 1985, Congress passed legislationthat increased Class I differentials withdistance from the Upper Midwest.Since then, producer groups andothers in the upper Midwest haveattempted in several different ways toeliminate single basing point pricing.A suit challenging the legality of ClassI differentials was filed by theMinnesota Milk Producers Associationin early 1990. The suit was ultimatelydismissed in 1999 after severalappeals, reversals, and remands. Alsoin 1990, the Secretary of Agricultureheld a nation-wide hearing to reviewClass I pricing. Following 43 days oftestimony in five locations, theSecretary issued a decision thatretained the existing structure of ClassI differentials.

In 1996, Congress mandated federalorder reform, including a review of thestructure of Class I differentials. USDArecommended a substantially “flat-tened” Class I price structure. The finalrule was approved by producers in anAugust 1999 referendum. But beforethe modified price surface could beimplemented, Congress passed legisla-tion requiring USDA to adopt a pricesurface very similar to the status quo.

These actions emphasize the difficultiesin changing federal order provisionsthat bestow economic benefits oncertain regions, even though thosebenefits may come at the expense ofother regions.The process of changebecomes politicized, and changes aredetermined by number of votes ratherthan efficiency or equity considerations.

Class I price mover: Since the 1960s,Class I prices have been set in refer-ence to prices for milk used for manu-facturing by adding a Class I differen-tial to a manufacturing price “mover.”The Minnesota-Wisconsin Price Series,or M-W Price, was the Class I pricemover until 1995. The M-W Price wasan estimate of the Grade B milk pricepaid to producers in Minnesota andWisconsin. Most of the Grade B milk inthe two states is used to make cheese.

Declining Grade B milk production ledUSDA to adopt the Basic FormulaPrice, or BFP, as the Class I price moverin May 1995. The BFP used the M-WPrice as a base, but adjusted theprevious month’s value by weightedaverage month-to-month changes inmanufactured product prices. Sincecheese absorbed the majority of milkused for manufacturing, the BFP con-tinued to link fluid milk prices closelyto cheese prices.

As part of the federal order reformpackage implemented on January 1,2000, the BFP was replaced by a newClass I price mover. The current moveris the “higher of” the advanced Class IIIor Class IV skim milk values (seeequation #21). Use of the “higher of”mover was intended to give a tempo-rary “bump” to Class I prices if andwhen nonfat dry milk was in relativelytight supply compared to cheese. Formost of the year, the Class III skimvalue was expected to exceed theClass IV skim value, and Class I priceswere expected to move with changesin the price of cheese.

To the surprise of most dairyobservers, Class IV was the “higher of”every month from January 2000through July 2001. Nonfat dry milkprices were practically constant at justabove the CCC support price prior toUSDA’s “tilt” in relative butter andnonfat dry milk prices in May 2001.Following that price adjustment, thenonfat dry milk price remained steadyat near the new support level of $0.90per pound. This yielded Class IV skimmilk prices in a narrow range of $6.85to $7.90 per hundredweight.17 Butbutter prices were high relative tocheese prices during much of thisperiod. And since the butterfat pricenegatively affected the protein pricein the formula used then, the Class IIIskim milk price was often lower thanthe Class IV skim milk price. The gapreached as much as $3.61 forDecember 2000 (figure 12).


17 The November 15, 2002, tilt reduced the CCC purchase price for nonfat dry milk to $0.80 per pound. The Class IV skim milk price associated with thisnew CCC price is $5.88 per hundredweight. Thus, the tilt has reduced the odds of Class IV being the Class I mover.

With the Class IV skim milk price as themover of Class I milk prices everymonth during 2000, the Class I priceexceeded the Class III price by theapplicable Class I differential plus anadditional amount averaging $1.76per hundredweight for the year.

In effect, order reform increased theClass I differential by $1.76 and madethe CCC purchase price for nonfat drymilk a floor for fluid milk prices. Thedecoupling of Class I milk prices fromcheese prices resulted in conflictingmarket signals. Producers in high ClassIII use markets felt the full brunt oflower cheese prices while those inhigh Class I use markets were partiallyinsulated.

Pricing formulas: The “higher of”problem noted here illustrates a largerissue of how effectively the federalorder pricing formulas capture supplyand demand conditions for producermilk. For many years, federal milkorders tied minimum prices by class ofmilk to competitively determinedprices for manufacturing milk. Therewas a certain sense of confidenceassociated with that linkage, as com-petition for the milk supply tended todictate plant margins, profitability andviability. Efficient plants would attractmilk away from those that were lessefficient. Plants making products withstrong demand would attract milkaway from those making productswith weak demand.

That confidence was weakened whenfederal order reform moved toproduct price formulas. Milk compo-nent values and prices are nowderived through mathematical equa-tions that employ assumed yields andmanufacturing costs. Assumptions donot replicate reality very well. Plantsvary significantly with respect to man-ufacturing costs and efficiency.

Product price formulas requirereliable, representative product pricesto derive accurate component values.NASS summarizes actual sales pricesfor reporting companies and NASS hasan unblemished reputation foraccurate reporting. But the extensiveuse of reference pricing for butter andcheese tied to the thinly traded CMEspot market prices leads to consider-able discomfort. Do the spot marketsconsistently and appropriately reflectbroad market conditions for cheeseand butter? Do they over-react? Arethey subject to manipulation?

Pooling issues: Federal order reformnot only consolidated markets butalso made it easier and more attractivefor cooperatives to pool theirmembers’ milk on orders distant fromwhere their members are located.Some orders permitted milk to bepooled without being regularlyshipped to a plant regulated by theorder.


$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$ C

wt.

Class III

Class IV

NovNov

NovNov

Figure 12. Advanced skim milk pricing factors

For example, a cooperative operatingin the Upper Midwest order mightidentify several producers to affiliatewith the Central order. The cooperativewould ship the milk of those produc-ers to a plant in the Central orderoften enough to meet the Centralorder’s shipping (qualification)requirements, which may be only oncea month. All of the monthly milk deliv-eries of the designated producerswould then be priced under theCentral order even though only oneday’s production was actually shipped.This would be advantageous to thecooperative as long as the differencein the PPDs between the Central andUpper Midwest orders was more thanenough to offset the hauling costsnecessary to qualify the milk on theCentral order.

Unregulated Grade A milk is alsobeing pooled in certain orders. Muchof this milk is from California and hasalready been priced under theCalifornia state order. This has led tocharges of “double-dipping”—theCalifornia milk enjoys the poolbenefits of both the California pricingsystem and the federal order pricingsystem.

Liberal pooling has created winnersand losers. The winners are producersin low Class I use markets. They gain intwo ways. First, the cooperative whosemembers are pooled on other marketsget the receiving market ProducerPrice Differential on milk pooled onthe receiving market. Second, the ClassI utilization in the shipping market iselevated because some milk isremoved from the shipping marketpool. This raises the Producer PriceDifferential in the shipping market.

The losers from liberal pooling areproducers in the receiving market,who experience lower Class I utiliza-tion. This reduces the Producer PriceDifferential.

A number of federal order hearingswere held in 2001 and 2002 to tightenshipping requirements and reduce theincentive for distant pooling. Ahearing in the Upper Midwest orderled to a ruling that prohibited poolingmilk on the order that was pricedunder a state order. Other hearingsresulted in major restrictions on coop-eratives affiliated with other orderspooling member milk on the Centraland Mideast orders, and similar restric-tions are expected from USDA’sanalyses of the records from otherhearings.

At issue in the pooling debate iswhether Class I revenues should berestricted to local producers or sharedmore broadly with more distant pro-ducers who are equally capable ofsupplying milk for fluid use if needed.

Opponents of liberal pooling stressthe need to generate a producer pricedifferential high enough to encouragelocal self-sufficiency. Supporters ofliberal pooling argue that with currenttransportation methods, reserve milksupplies can be located practicallyanywhere in the United States. For thetime being, local interests have heldsway in the debate.



Authors: Ed Jesse is a professor of agricultural and applied economics with the College of Agricultural and Life Sciences at theUniversity of Wisconsin–Madison and a dairy marketing and policy specialist with the University of Wisconsin–Extension, CooperativeExtension. Bob Cropp is professor emeritus of agricultural and applied economics with the College of Agricultural and Life Sciences atthe University of Wisconsin–Madison.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department ofAgriculture, University of Wisconsin–Extension, Cooperative Extension. University of Wisconsin–Extension provides equal opportunitiesin employment and programming, including Title IX and ADA requirements. If you need this information in an alternative format,contact the Office of Equal Opportunity and Diversity Programs of call Extension Publishing at 608-262-2655.

© 2003 by the Board of Regents of the University of Wisconsin System. Send inquiries about copyright permission to: CooperativeExtension Publishing Operations, 103 Extension Building, 432 N. Lake St., Madison, WI 53706.

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Basic Milk Pricing Concepts for Dairy Farmers (A3379) 1/2004

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