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Milk Marketing

Milk Marketing. AS 472, AVS 472 Fall 2008 John Swain Lecture 2 Dec 8, 2010. Retail Pricing of Milk. Retail marketers operate on a Gross Margin Pricing system. Milk is an inelastic demand product. Total revenue increases as price increases and vice versa.

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Milk Marketing

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  1. Milk Marketing AS 472, AVS 472 Fall 2008 John Swain Lecture 2 Dec 8, 2010

  2. Retail Pricing of Milk • Retail marketers operate on a Gross Margin Pricing system. • Milk is an inelastic demand product. • Total revenue increases as price increases and vice versa. • The consumer will purchase the product at a wide range of cost. • Retailers respond if there is a loss of the market share or decrease in unit sales.

  3. Federal Milk Marketing Orders • A FMMO is a legal document issued to regulate the minimum prices paid to dairy farmers by handlers of grade A milk in a specific geographic marketing area. • Under the direction of USDA, Agricultural Marketing Service and administered by 10 FMMO administrators. • About 65% of the nations milk regulated by FMMOs.

  4. 10 FMMO Areas-Map • Pacific Northwest • Arizona-Las Vegas • Southwest • Central • Upper Midwest • Southeast • Mideast • Florida • Appalachian • North East

  5. FO’s as of May 2006

  6. Objectives of the FMMO • Promote orderly marketing. • Improve income situation of Grade A producers. • Supervise transactions between producer and handler. • Assure consumers adequate supply of milk at a reasonable prices.

  7. How objectives are obtained • Establish minimum prices handlers are to pay and at a level that will insure a sufficient quantity of Grade A Milk. • Value of milk as utilized by handler is equitably distributed among Grade A producers. • Audit handlers books and records. • Release of market information to the public.

  8. What FMMOs Cannot Do • Set wholesale or retail prices. • Set maximum prices to handlers • Establish sanitary or quality standards. • Regulate producers. • Guarantee producers a market. • Guarantee fixed level of prices to producers. • Regulate from whom handlers by or sell milk. • Be used as a means to restrict production.

  9. Federal Order Reform- Jan.2000 • Prior to January 2000 Basic Formula Pricing (M-W Price). • Class III cheese price for all FOs determined by the Class III price in Eau Claire Wisconsin. • Class III price increased as miles from Eau Claire increased. • 37 FMMOs at that time. • Butter Fat Differential.

  10. Current Federal Order System • Classified Pricing • Class II,III and IV set by survey of National Agricultural Statistical Services (NASS). Replaces Basic Formula Price System. • Prices set by surveys of amount of manufactured product output and marketing’s nation wide, two times per month. • Producer Price Differential -Class I price set $1.00 to $4.50 above Class III or IV, whichever is the highest, considering costs of production by region.

  11. Marketwide poolingStatistical Uniform Price • The total value of the milk in all classes in a market is divided by the total milk deliveries to determine a blend price for the market. • Class I 30% $18.50 = $5.55 • Class II 10% $16.10 = $1.61 • Class III 30% $17.30 =$5.19 • Class IV 30% $11.50 =$3.45 • Federal Order Blend Price = $15.80

  12. Blend Prices in the past 3 year • Pacific Northwest $10.94/cwt ($22.75) • Western $10.38/cwt ($21.19) • Arizona-Las Vegas $11.01/cwt ($25.13) • Florida $13.48/cwt ($29.21)

  13. Milk Price Supports • Commodity Credit Corporation- purchases cheese, butter and nonfat dried milk to create demand, reduce supply in order to maintain a minimum price to producers. • Milk price support values • 1983- $13.10/cwt • 1985- $11.60/cwt • 1990- $10.10 • Today-$9.80

  14. Class III vs. Support Price1979 to 2010

  15. Price support cont. • Due to increasing expenditures of milk products, in 1990 congress passed a bill, Food, Agriculture, Conservation, and Trade Act that, • Reduced the support price by $.50 if CCC purchased > 5 billion pounds of Milk Equivalent product. • No change if purchases were >3.5<5 billion lbs. • Increase support price by $.25 if purchases were <3.5 billion lbs.

  16. Risk Management -Forward Contracting • A program that offers producers the opportunity to determine in advance a price for a portion of their sales. • The handler offers Class III prices daily (Chicago Mercantile Exchange). • Producer submits a bid for the portion and time period of the proposed offer. • Handler can accept or reject the bid. • If accepted, the producer forfeits federal order minimum requirements.

  17. Forward Contracting cont. • Current NDA system. • Contract 12 months in advance • Contract in 10,000lb increments • Contract up to 100% of prior months production.

  18. Supply Management • Supply/Demand driven market • Reduction in Price Support,CCC Purchases • Dairy Diversion ,Buy Out Programs • Export Potential • National Advertising • New Product Technology

  19. Risk/Supply Management New Ideas • DPMPP- dairy producer margin protection program. An insurance policy- replace MILC payments and price support to fund the program. • Eliminate FMMO end product pricing and eliminate make allowances. Base on competitive Class III price. • DMSP-dairy market stabilization prog. Producer pays for producing over base. Is this a quota program?

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