ECON 337: Agricultural Marketing

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Today’s Topic

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

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

5. MILK COWS THAT HAVE CALVED JANUARY 1, 2015(1000 Head) U.S. Total: 9307 Livestock Marketing Information Center Data Source: USDA-NASS

6. CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2014 TO JANUARY 1, 2015(1000 Head) U.S. Total: 99 Livestock Marketing Information Center Data Source: USDA-NASS

7. CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2006 TO JANUARY 1, 2015(1000 Head) U.S. Total: 203 Livestock Marketing Information Center Data Source: USDA-NASS

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

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

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

11. Average Milk Composition SOLIDS Whole MilkSkim 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

12. Classes of Milk Source: Dr. Ginder, ISU

13. 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

14. 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

15. 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

16. Timing of Prices Source: USDA-AMS, http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5109786

17. Class IV Price Class 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 and 3.5 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

18. Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

19. Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

20. Class IV Price Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

21. Class IV Price for Jan. 2015 Class IV Price = f(Butter Price, Nonfat Dry Milk Price) Butter Price = $1.5633/pound Nonfat Dry Milk Price = $1.0202/pound Butterfat Price = (Butter Price – 0.1715) * 1.211 = $1.6855/pound Nonfat Solids Price = (Nonfat Dry Milk Price – 0.1678) * 0.99 = $0.8439/pound Class IV Skim Milk Price = Nonfat Solids Price * 9 = $7.60/cwt. Class IV Price = (Class IV Skim Milk Price * 0.965) + (Butterfat Price * 3.5) = $13.23/cwt.

22. Simplifying Class IV Price Class 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

23. Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

24. Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

25. Class III Price 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 Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

26. Class III Price Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) 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

27. Class III Price for Jan. 2015 Class III Price = f(Cheese Price, Butter Price, Dry Whey Price) Cheese Price = $1.5807/pound Butter Price = $1.5633/pound Dry Whey Price = $0.5875/pound Butterfat Price = (Butter Price – 0.1715) * 1.211 = $1.6855/pound Protein Price = ((Cheese Price – 0.2003) * 1.383) + ((((Cheese Price – 0.2003) * 1.572) - Butterfat Price * 0.9) * 1.17) =$2.6731/pound Other Solids Price = (Dry Whey Price – 0.1991) * 1.03 = $0.4001/pound Class III Skim Milk Price = (Protein Price * 3.1) + (Other Solids Price * 5.9) = $10.65/cwt Class III Price = (Class III Skim Milk Price * 0.965) + (Butterfat Price * 3.5) = $16.18/cwt

28. Class II Price Class 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

29. Class II Price for Jan. 2015 Class II Price = f(Butterfat Price from Class III & IV, Advanced Class IV Skim Milk Pricing Factor) Advanced Class IV Skim Milk Pricing Factor = $9.93/cwt Butterfat Price = $1.6855/pound Class II Butterfat Price = Butterfat Price + $0.007 = $1.6925/pound Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + $0.70 = $10.63/cwt Class II Price = (Class II Skim Milk Price * 0.965) + (Class II Butterfat Price * 3.5) = $16.18/cwt

30. Class I Price Class 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

31. Class I Price for Jan. 2015 Class I Price = f(Class I Skim Milk Price, Class I Butterfat Price) Advanced Butterfat at Pricing Factor = $2.1787/pound Advanced Class III Skim Milk Pricing Factor = $11.35/cwt Advanced Class IV Skim Milk Pricing Factor = $9.93/cwt Applicable Class I Differential = $0.25/cwt Class I Butterfat Price = Advanced Butterfat at Pricing Factor + (Applicable Class I Differential / 100) = $2.1812/pound Class I Skim Milk Price = (Higher of Advanced Class III or IV Skim Milk Pricing Factors) + Applicable Class I Differential = $11.60/cwt Class I Price = (Class I Skim Milk Price * 0.965) + (Class I Butterfat Price * 3.5) = $18.58/cwt

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

33. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2015/ Lab in Heady 68.