Econ 337, Spring 2013 ECON 337: Agricultural Marketing Chad Hart Associate Professor [email protected] 515-294-9911 Lee Schulz Assistant Professor [email protected]

Econ 337, Spring 2013

ECON 337:Agricultural Marketing

Chad HartAssociate [email protected]

Lee SchulzAssistant [email protected]


Today’s Topic


Source: USDA-NASS, http://quickstats.nass.usda.gov/


Source: USDA-NASS, http://quickstats.nass.usda.gov/


1

RI 1

2

DE 5

6

NJ 8

10

10

11

MA 12

14

14

NH 14

16

18

18

CT 1929

32

4550

MD 52

52

56

75

78

90

90

93 9699

120

123

123

131

VT 133

175

190

205

263

270

335

371

435

465

540

581 6101265

1780

0 to 1414 to 5050 to 9999 to 270270 to 1781

MILK COWS THAT HAVE CALVED JANUARY 1, 2012(1000 Head)

Livestock Marketing Information CenterData Source: USDA-NASS

U.S. Total: 9230

Top 5 States (2013)

CA = 19.3%WI = 13.8%NY = 6.6%ID = 6.3%PA = 5.8%


-5

-5

-3

-2-2

-2

-2

-2

VT -2

MA -2

-1

-1

-1

MD -1

-1

NH -1

CT -1

0

0

DE 0

0

00

NJ 0

0

0

RI 0

0

0

0

0

0

0

1

1

1

1

1

2

33

5

6

7

8

10

10

11

13

30

-5 to -1-1 to 00 to 33 to 31

CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2011 TO JANUARY 1, 2012(1000 Head)


U.S. Total: 80

Largest Increases (2012-13)KS = 9,000 (7.3%)MI = 6,000 (1.6%)WI = 5,000 (0.4%)

CO = 4,000 (3.1 %)

Largest Decreases (2012-13)NM = -15,000 (-4.5%)OK = -6,000 (-11.5%)PA = -5,000 (-0.9%)KY = -3,000 (-4.0%)


-65

-50

-45-41

-34-31

MD -28

-27

-27

-20

-20

VT -20

-19

-19

-18

-15

-15

-10

-9

MA -8

-7

NJ -6

-5

-5

CT -5

DE -4

-4-4

-4

-3

NH -3

-1

-1

RI 0

02

4

6

6

10

11

16

21

3033

35

70

110

115

191

-70 to -20-20 to -7-7 to 00 to 200

CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2003 TO JANUARY 1, 2012(1000 Head)


U.S. Total: 88

Largest Increases (2004-13)ID = 168,000 (40.8%)TX = 118,000 (37.2%)CA = 80,000 (4.7%)MI = 77,000 (25.7%)CO = 37,000 (37.8%)

Largest Decreases (2004-13)NY = -48,000 (-7.3%)KY = -40,000 (-35.7%)OK = -34,000 (-42.5%)MO = -32,000 (-25.6%)TN = -29,000 (-37.7%)


Source: USDA-ERS, http://www.ers.usda.gov/data-products/commodity-costs-and-returns.aspx


Source: USDA-ERS, http://www.ers.usda.gov/data-products/dairy-data.aspx


Source: USDA-ERS, http://www.ers.usda.gov/data-products/dairy-data.aspx


Average Milk CompositionSOLIDS Whole Milk Skim Milk

Butterfat 3.50 lbs 0.10 lbs

Protein 3.50 lbs 3.60 lbs

Lactose 4.90 lbs 5.10 lbs

Ash/Minerals 0.70 lbs 0.70 lbs

WATER 87.40 lbs 90.50 lbs

TOTAL 100.00 lbs 100.00 lbs


Classes of Milk

Source: Dr. Ginder, ISU

CLASS I CLASS II CLASS III CLASS IV

Milk used for beverage purposes

Milk used for “soft” mfg. products and aseptic fluid prod.

Milk used for “hard” cheeses

Milk used for butter and dry milk products

(e.g., whole and reduced fat milk, skim milk, flavored milk, eggnog, fluid buttermilk

(e.g., cream, ice cream, cottage cheese, yogurt, sour cream, dips, cream cheese products, aerosol and whipping cream)

(e.g., hard American cheeses, hard Italian cheeses)

(e.g., butter and butter based spread, whole milk powder, nonfat dry milk)

Poured Spooned Cut with a knife

Spread with a knifeMixed with water or fluid


Milk Prices by Class

• Given milk’s 4 classes, the Federal government has developed pricing formulas for each class

• The class prices rely on average prices for dairy products, such as butter, cheese, and skim milk

• The class prices are set monthly

• Class I prices are set before the month begins

• Classes II, III, and IV prices are set after the month ends


Milk Prices by Class• Class I and II prices depend on advanced prices,

dairy product prices before the pricing month, and are announced before the month begins

• Advanced prices are two-week average prices for butter, nonfat dry milk, cheese, and dry whey

• These advanced prices are taken roughly in the middle of the preceding month– So for example, the Class I milk price for March

depends on the dairy product prices from mid-February


Source: USDA-AMS, http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5100832

Timing of Advanced Prices…


Milk Prices by Class• The other class (III and IV) prices depend on dairy

product prices during the pricing month, and are announced after the month ends

• These prices are four-to-five-week average prices for butter, nonfat dry milk, cheese, and dry whey

• These prices are taken throughout the month– So for example, the Class III milk price for March

depends on the dairy product prices from March and will not be announced until April


Timing of Prices…

Source: USDA-AMS, http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5100832


Class IV PriceClass IV Price = (Class IV Skim Milk Price * 0.965) +

(Butterfat Price * 3.5)

The formula values 100 pounds of Class IV milk as:96.5 pounds of Class IV Skim Milk and3.5 pounds of Butterfat

The formulas for the other classes follow this rule as well

There are several make allowance and yield factor adjustments in milk pricing




Butterfat Price = (Butter Price – 0.1715) * 1.211

0.1715 is a make allowance, USDA’s estimate of the additional costs to produce butter

1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter




Class IV Skim Milk Price = Nonfat Solids Price * 9

9 is a yield factor, USDA’s estimate of the percent of nonfat solids content of skim milk




Class IV Skim Milk Price = Nonfat Solids Price * 9

Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99

0.1678 is a make allowance, USDA’s estimate of the additional costs to produce nonfat dry milk

0.99 is a yield factor


Class IV Price for Feb 2013Class IV Price = f(Butter Price, Nonfat Dry Milk Price)

Butter Price = $1.5438/poundNonfat Dry Milk Price = $1.5559/pound

Butterfat Price = (Butter Price – 0.1715) * 1.211 = $1.6619/pound

Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99 = $1.3742/pound

Class IV Skim Milk Price = Nonfat Solids Price * 9 = $12.37/cwt.

Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) = $17.75/cwt.


Simplifying Class IV PriceClass IV Price = (Butterfat Price * 3.5) +

(Class IV Skim Milk Price * 0.965)

Class IV Price = (((Butter Price – 0.1715) * 1.211) * 3.5)+ (((Nonfat Solids Price * 9 )* 0.965)

Class IV Price = (((Butter Price – 0.1715) * 1.211) * 3.5)+ ((((Nonfat Dry Milk Price – 0.1678) * 0.99) * 9) * 0.965)

Class IV Price = 4.23850 * Butter Price + 8.59815 * Nonfat Dry Milk Price – 2.16967


Class III PriceClass III Price = (Class III Skim Milk Price * 0.965) +


Butterfat Price = (Butter Price – 0.1715) * 1.211

0.1715 is a make allowance, USDA’s estimate of the additional costs to produce butter

1.211 is a yield factor, USDA’s estimate of the conversion from butterfat to butter




Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9)

3.1 is a yield factor, USDA’s estimate of pounds of protein in skim milk

5.9 is a yield factor, USDA’s estimate of pounds of other solids in skim milk




Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price – 0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17)

0.2003 is a make allowance, USDA’s estimate of the additional costs to produce cheese

1.383 (1.572) is a yield factor, USDA’s estimate if an additional tenth of protein (butterfat) is contained in a cwt of milk

0.9 is a yield factor, USDA’s estimate of the percent nonfat solids content in milk

1.17 is a yield factor, USDA’s estimate of the ratio of butterfat to protein in cheese

The first part of the protein price reflects the value of the protein in cheese

The second part of the protein price reflects the additional value of butterfat to cheese versus butter




Other Solids Price = (Dry Whey Price – 0.1991) * 1.03

0.1991 is a make allowance, USDA’s estimate of the additional costs to produce dry whey

1.03 is a yield factor, USDA’s estimate of pounds of dry whey obtained from a pound of other solids


Class III Price for Feb 2013Class III Price = f(Cheese Price, Butter Price, Dry Whey Price)

Cheese Price = $1.6623/poundButter Price = $1.5438/poundDry Whey Price = $0.6393/pound

Butterfat Price = (Butter Price – 0.1715) * 1.211 = $1.6619/pound

Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price – 0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17)

=$2.9610/poundOther Solids Price = (Dry Whey Price – 0.1991) * 1.03

= $0.4534/poundClass III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9)

= $11.85/cwtClass III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5)

= $17.26/cwt


Class II PriceClass II Price = (Class II Skim Milk Price * 0.965) +

(Class II Butterfat Price * 3.5)

Class II Butterfat Price = Butterfat Price + $0.007

Class II Butterfat Price depends on Butterfat Price from Class III & IV

Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + $0.70

estimate of the cost of drying condensed milk and re-wetting the solids in Class II products


Class II Price for Feb 2013Class II Price = f(Butterfat Price from Class III & IV,

Advanced Class IV Skim Milk Pricing Factor)

Advanced Class IV Skim Milk Pricing Factor = $12.41/cwtButterfat Price = $1.6619/pound

Class II Butterfat Price = Butterfat Price + $0.007 = $1.6689/pound

Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + $0.70 =$13.11/cwt

Class II Price = (Class II Skim Milk Price * 0.965) +(Class II Butterfat Price * 3.5)

= $18.49/cwt


Class I PriceClass I Price = (Class I Skim Milk Price * 0.965) +

(Class I Butterfat Price * 3.5)

Class I Skim Milk Price = Higher of Advanced Class III or IV Skim Milk Pricing Factors +

Applicable Class I Differential

Class I Butterfat Price = Advanced Butterfat Pricing Factor + (Applicable Class I Differential /

100)

Applicable Class I Differential = Adjustment for Location


Source: USDA-AMS, http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELDEV3101903&acct=dairy

Class I Price Differentials


Class web site:http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2013/index.htm

Documents

Econ 337, Spring 2013 ECON 337: Agricultural Marketing Chad Hart Associate Professor [email protected] 515-294-9911 Lee Schulz Assistant Professor [email protected]