dairy marketing dr. roger ginder econ 338 fall 2009 lecture #22
TRANSCRIPT
Dairy Marketing
Dr. Roger Ginder
Econ 338
Fall 2009
Lecture #22
PROCEDURES FOR CONSTRUCTING CLASS III
PRICE• Component values are based on actual product values
in the market place
– Butter
– Cheese
– Dried whey
• Formulas used to decompose the product values into prices for components into “prices” for
– Butterfat
– Protein
– Other solids
• Formulas also incorporate:– Yield of product– Cost of manufacturing
BUTTER FAT FORMULA
Butterfat price/lb = (NASS monthly price Grade AA –
$0.114) 0.82*
Where:
$.114 = make allowance
0.82 = yield factor for butter*
Note:
* Yield factor = Lbs. of butterfat required to make a # of butter
+ U.S. butter is only 80% butterfat but manufacturing losses of .02% occur
+ Thus .02 is added to the yield factor
(1)
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
CALCULATING OTHER SOLIDS VALUE
Other solids value/lb =
(NASS monthly dry whey price - $0.137) 0.968
Where:
$0.137 = make allowance for whey
0.968 = yield factor for dry whey*
Note:
A lb. of other solids yields slightly more than one lb. of dry whey because dry whey contains slightly more than 3% moisture. Therefore yield factor of < 1 used.
(6)
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
INTERPRETATION
The value of dry whey to a plant
producing dry whey is the price of
dry whey less the make allowance
by the number of lbs of other solids
needed to make a pound of dry
whey.
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
• The cheese price is calculated using the weighted average of two styles of cheddar
- 40# blocks of cheddar
- 500# barrels of cheddar
• The two types are weighted by sales
• The 500# barrel is the base and blocks are assumed to be worth 3¢/lb more (i.e., add manufacturers costs
(Note: when we looked at cheese prices earlier this term the spread was wider than 3 cents)
PROTEIN TO CHEESE YIELD FACTOR
• Van Slyke cheese yield formula
• “TRUE” protein now used in calculation
• Prior to January 1, 2000, crude protein was used
• Crude protein based on nitrogen content
• True protein = crude protein – non-protein nitrogen found in the milk
• Cheese yield 1.405 # / # protein
• Make allowance is approx $1.70/cwt or about $.17/lb
PROTEIN FORMULA (VALUE)
Protein Price Per lb. =
(NASS monthly cheese price - $.1702) x 1.405 +
{[(NASS monthly cheese price - $.1702) x 1.582] – Butter fat price} x 1.28
Where
• Line 1 is the net value of protein in cheese. The net value of protein is defined as the cheese price less the make allowance X the number of lbs. of cheese that can be made from a lb. of protein.
(7)
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
(7) Protein Price Per lb. =
(NASS monthly cheese price $-.1702) x 1.405 +
{[(NASS monthly cheese price $-.1702) x 1.582] – Butter fat price} x 1.28
Line 2 is designed to account for the cheese value of butterfat in excess of its value in butter.
•Protein (in particular casein) functions to retain butterfat in cheese
•Thus Line 2 recognizes that the value of protein exceeds the mere volume it contributes to the cheese
•The formula incorporates the value of butterfat in cheese less the value of butterfat in butter adjusted for the ratio of fat to protein
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
CALCULATING CLASS III SKIM MILK PRICE
Class III skim milk price =
3.1 * protein price + 5.9 * other solids price
Assumptions for standard milk
• 3.1% true protein
• 5.9% nonfat/non-protein solids
(8)
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
X .965
CONSTRUCTING THE CLASS III PRICE
(9)Class III price @ test = 3.5 * butterfat price + 0.965 * Class III skim milk price• The Class III price reflects a cwt of milk
standardized at:- 3.5% butterfat- 3.1% protein- 5.9% other solids- 12.5% total solids
• Values for the standardized cwt of Class III milk are
- the 3.5# fat valued at Class IV/III butterfat price
- the 96.5# of skim milk valued at Class III skim price
- the Class III skim milk price value is linked to protein and other solids price
DERIVATION OF CLASS III PRICE FROM PRODUCT
PRICESNASS 4-
week Butter price
Butter fat
price/lb
NASS-4 week
Cheese Price
Protein price/lb
NASS 4-week Dry whey
price
Other solids
price/lb
Class III skim
price/cwt.
Class III price /cwt.
F(BF)
F(P, BF)
F(W)
X 3.5#
X 3.1#
X 5.9#
X .965
The Class III component relationships may be expressed directly in terms of actual butter, cheese and dry whey prices
(10) Class III price =
10.26 * NASS cheese price
- .40 * NASS butter price
+ 5.88 * NASS dry whey price
- 2.51
• These calculation factors are obtained by mathematically substituting the product price formulas for component values
• This transformation permits Class III to be expressed directly in terms of butter, cheese and dry whey prices
Effect of a 10¢ increase in cheese, dry whey or butter on class III price
•10¢ increase in cheese price increases milk price $1.03/ cwt.
•10¢ increase in dry whey price increases milk price $.59/cwt.
•10¢ increase in butter price DECREASES class III milk price by 4.3¢ /cwt.
CLASS IV MILK PRICE
Butter Price
NFDM Price
Butter Fat
Price/Lb.
NFDM Solids
Price/Lb.
4 Week Class
IV Skim Price
4 Week Class IV
Price
f(B)
f(NDM)
X 9.0
X .965
+
CLASS IV PRICE
•Class IV price is based on the value of butterfat and nonfat milk solids in standardized cwt of milk
- 3.5# fat
- 9.0# solids not fat
•Nonfat solids makeup nonfat dry milk
•Butterfat is the principal constituent of butter
•These components are priced based on product prices
CLASS IV BUTTERFAT PRICE
Butterfat is priced the same as for Class III component
Class IV/III butterfat price =
(NASS monthly AA butter price -.114 0.82
Where
$ .114 = make allowance
0.82 = yield factor
(1)
CLASS IV MILK PRICE
Butter Price
NFDM Price
Butter Fat
Price/Lb.
NFDM Solids
Price/Lb.
4 Week Class
IV Skim Price
4 Week Class IV
Price
f(B)
f(NDM)
X 9.0
X .965
+
X 3.5#
CLASS IV NONFAT SOLIDS PRICE
•Nonfat solids are priced based on monthly weighted averages of nonfat dry milk prices from the NASS National Survey
•The make allowance for nonfat solids is $0.137/lb
•The yield of nonfat dry milk is 1.0 lb. of nonfat dry milk for 1.02 lb. of nonfat solids
•This is due to moisture content in nonfat dry milk
•A small amount of buttermilk powder is also present but is not priced in the Class IV formula
•The yield factor adjusts for these differences
(2)
CLASS IV SKIM MILK PRICE
Nonfat solids price per lb. =
(NASS nonfat dry milk price -.137) 1.02
Where:
$ .137 = the make allowance
1.02 = the yield factor for nonfat solids
Class IV skim milk price =
(3) 9.0 * nonfat solids price
CLASS IV MILK PRICE
Butter Price
NFDM Price
Butter Fat
Price/Lb.
NFDM Solids
Price/Lb.
4 Week Class
IV Skim Price
4 Week Class IV
Milk Price
f(B)
f(NDM)
X 9.0
X .965
+
X 3.5#
CLASS IV MILK PRICE
The Class IV is price constructed for a standardized cwt of milk a 3.5% butterfat and 9% nonfat solids as follows:
(4) Class IV price @ test =
(3.5 * Class IV/III butterfat price) +
0.965 * Class IV skim milk price
•The formula accounts for milk used in a butter-powder plant to produce those products
•The cwt of milk accounts for 3.5 lb. of butterfat valued at Class IV/III price and 96.5 lbs. of skim milk valued at the Class IV skim milk value
•Skim milk value is directly related to product price for nonfat dry milk in the market
CLASS IV MILK PRICE
Butter Price
NFDM Price
Butter Fat
Price/Lb.
NFDM Solids
Price/Lb.
4 Week Class
IV Skim Price
4 Week Class IV
Milk Price
f(B)
f(NDM)
X 9.0
X .965
+
X 3.5#
The Class IV relationships may be expressed directly in terms of butter price and nonfat dry milk price as follows:
Class IV price =
4.268 x NASS butter price
+ 8.515 x NASS nonfat dry milk price
-1.653
• These calculations are obtained by mathematically substituting the product prices for component values
• 10¢ change in butterfat price changes Class IV price 43¢ per Cwt.
• 10¢ change in nonfat dry milk price changes Class IV price 85¢ per Cwt.
(5)
THE CLASS I AND CLASS II PRICING PROBLEM
• What do Class I bottlers and Class II manufacturers pay?
• Grade B / Class III price was a competitive price
• Class I and II were formula prices using the Class III /Grade B price as a base
• Average Class III price Wasn’t known until after the end of month
• Survey of Grade B prices for mfg. grade had to be conducted following month under the old system
THE CLASS I AND CLASS II PRICING PROBLEM Prior 2000
• August Class III price was surveyed in September
• August Class III price was announced in September
• Bottlers therefore used July Class III /IV as basis for Class I in September– a two month lag
• The drafters of new system incorporated an “advanced “ pricing system
ADVANCED PRICED IN NEW PRICING SYSTEM CLASS I AND II
•Uses different prices for skim
•Survey first two weeks of month