ECON 337 Agricultural Marketing Chad Hart Assistant Professor

ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate. edu 515 -294 -9911 Econ 337, Spring 2012

Today’s Topic Econ 337, Spring 2012

Marketing Orders A federal (or state) regulation which places requirements on market transactions in a given area Exists for several commodities, including milk, fruits, and vegetables Biggest requirement: minimum prices for the commodities, based on usage Econ 337, Spring 2012

Federal Milk Marketing Orders Econ 337, Spring 2012 Source: USDA-AMS

Jobs of Marketing Order Regulate milk prices Classify milk by its final use Establish minimum class and component prices Enforce payments for milk in supply chain Verify weights and test results Audit records Provide market information Econ 337, Spring 2012 Source: Dr. Ginder, ISU

Not Part of a Marketing Order Production controls/limits Sanitary/quality production standards Retail price setting Guaranteed markets/forced sales Government support • Such as the Milk Income Loss Contract (MILC) Econ 337, Spring 2012 Source: Dr. Ginder, ISU

Milk Pricing for Producers All producers receive the same price for milk components Payments are based on amount of milk delivered Three factors differentiate milk payments for producers: • Milk composition (quantity of components) • Milk quality (somatic cells) • Location of producer Econ 337, Spring 2012 Source: Dr. Ginder, ISU

Milk Pricing for Producers For central Iowa, milk producers receive payments based on: • Protein • Butterfat • Other solids • Somatic cells • Producer price differential The protein, butterfat, and other solids prices come from the Class III prices for each component Econ 337, Spring 2012

Somatic Cell Adjustment Low somatic cell counts in milk are correlated with • Higher cheese yields • Longer shelf life Adjustment is based on formula Cheese price * 0. 0005 * (350 – Count) where Count is the somatic cell count in thousands of cells per milliliter The lower the count below 350, the higher the payment Counts above 350 lower payments Econ 337, Spring 2012

Producer Price Differential Pricing factor that captures location impact Based on the value of milk in the marketing order region versus the value of the components using Class III prices Adjusted by the relative difference in the Class I Price Differential by county Can be positive or negative Econ 337, Spring 2012

Class I Price Differentials Econ 337, Spring 2012 Source: USDA-AMS

Prices for Feb. 2012 Econ 337, Spring 2012 Source: www. fmmacentral. com

Example Producers Location/County Class I Price Differential Butterfat Producer A Story $1. 80 4. 5% Producer B Buena Vista $1. 75 3. 3% Protein Other solids Somatic cell count 3. 7% 6. 0% 110, 000 2. 8% 5. 7% 420, 000 Milk sold 1, 000 cwt. Econ 337, Spring 2012

Producer A’s Milk Values Amount 3, 700 lbs. 4, 500 lbs. 6, 000 lbs. Rate $2. 6627 $1. 5739 $0. 4541 Value $ 9, 851. 99 $ 7, 082. 55 $ 2, 724. 60 Somatic cell count Prod. Price Differential Total value 240 $0. 00077 $0. 37 $ 184. 80 $ 370. 00 $19, 880. 94 Value per cwt. 1, 000 cwt. Protein Butterfat Other solids Econ 337, Spring 2012 $19. 88

Class I Price Differentials Econ 337, Spring 2012 Source: USDA-AMS

Producer B’s Milk Values Amount 2, 800 lbs. 3, 300 lbs. 5, 700 lbs. Rate $2. 6627 $1. 5739 $0. 4541 Value $ 7, 455. 56 $ 5, 193. 87 $ 2, 588. 37 Somatic cell count Prod. Price Differential Total value -70 $0. 00077 $0. 32 $ -53. 90 $ 320. 00 $15, 215. 90 Value per cwt. 1, 000 cwt. Protein Butterfat Other solids Econ 337, Spring 2012 $15. 22

Milk Supply Chain Producer 10%-15% 85%-90% Coop Handler Coop Processor Government Various types of market outlets Final consumers Econ 337, Spring 2012 Governed by FMMO if Grade A Independent Processor Various types of market outlets Government Final consumers Source: Dr. Ginder, ISU

Dairy Futures and Options Contract Class III Milk Cash Amount 200, 000 lbs. Settle Class IV Milk 200, 000 lbs. Cash Nonfat Dry Milk 44, 000 lbs. Cash Dry Whey 44, 000 lbs. Cash Butter 20, 000 lbs. Cash Cheese 20, 000 lbs. Cash Econ 337, Spring 2012

Class web site: http: //www. econ. iastate. edu/~chart/Classes/econ 337/ Spring 2012/ Lab in Heady 68 Econ 337, Spring 2012