Breaking down the monthly milk check
When we shop in a store a sign on or near the product indicates what we must pay to buy it. Take it or leave it.
When a manufacturer builds a snow blower the company figures out the cost of production plus a reasonable profit. Dealers, in order to also make a profit, add a bit to that price and the buyer must pay the stated price or shovel snow by hand.
Pricing milk is a whole different story. Understanding it is difficult.
With that in mind the University of Wisconsin-Madison Division of Extension’s Heart of the Farm-Women in Agriculture coffee chat this month took a look at how to understand the milk check.
Mark Stephenson, Director of Dairy Policy Analysis and Center for Dairy Profitability and UW-Madison Division of Extension explained what all the numbers and calculations on the milk check mean. He described how the numbers are calculated and how they help indicate whether the price paid is on par with what other producers are receiving.
He notes that milk is priced differently than other consumer products because it is perishable, produced 365 days a year, requires special assets for production and has more sellers than buyers.
Over the years buyers have taken advantage of this and that has resulted in government intervention.
“In the 1930’s Federal milk orders stepped in to police the pricing,” he said. “Coops tried to do this but no one coop was big enough to do it on their own.”
The Federal Milk Marketing Order (FMMO) system provides structure for milk price discovery and equitable distribution of proceeds to dairy farmers. These functions are often called “pricing and pooling” and they are done monthly. Pricing is basically about the way that money is collected from dairy plants and pooling is the method of paying those funds out to dairy producers.
Milk pricing establishes a minimum price that must be paid for milk depending on what products are made from it. It is a floor price and premiums are often paid above those levels. Currently there are four milk classes:
- Class I — milk components used in fluid milk products
- Class II — components used in so-called “soft products” like creams, yogurt, ice cream, sour cream, etc.
- Class III — components used to make hard cheeses like cheddar, mozzarella, etc. and whey products
- Class IV — components used in butter and milk powders.
Milk Checks and the PPD
“In the 1980’s there were 80 federal orders. Today there are 11,” he said. “In the 1950’s there was less milk produced than today but 65% of it was fluid milk and 35% was used for manufacturing cheese and other products. Now that is turned around.”
In 7 of the 11 Federal Orders, farms are paid on the basis of the Class III component values for protein, butterfat, and other solids (mostly lactose). When Class prices behave according to the usual expectations – Class I price is the highest value – there is money left over in the pool after withdrawing the Class III component values and that remainder is distributed to producers based on the volume of milk sold. Expressed in dollars per cwt., that remaining value is called the Producer Price Differential, or PPD.
He explains that the PPD can be thought of as an accounting exercise, but there is a purpose to this approach as well. For the seven orders in which this system is used, there is a notable volume of cheese production, and it was believed to be a good idea to reward farmers for producing higher protein milk.
“Price discovery and classified pricing is all about ‘how big is the pie?’” he said.
According to Stephenson, “Pooling is all about how to split the pie up. There is a negative PPD now but years ago it was positive. Now we pay out more in component pricing than the price in the pool.”
In addition, milk checks will also reflect any money paid in premiums for volume or quality and, in some cases, credit for supplying a tanker load.
Milk checks also include deductions for hauling, national and state dairy promotion and CWT (Cooperatives Working Together) or any other deductions determined by the individual buyer or cooperative.
The final Heart of the Farm-Women in Agriculture “Coffee Chat” will be March 8. The topic will be “Value Added Enterprises and Farm Diversification” featuring Jenni Gavin, Gavin Farms, Reedsburg.
For information about participating in the coffee chat visit the Heart of the Farm website: http://fyi.extension.wisc.edu/heartofthe farm, or call Jenny Vanderlin at 608-263-7795.