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Dairy Marketing

Dairy Marketing. Dr. Roger Ginder Econ 338 Fall 2007 Lecture #11. CHEESE PRICING. Bid/offer rules same as for butter on CME Daily cash trading Mon.-Fri. price change possible without transaction

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Dairy Marketing

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  1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture #11

  2. CHEESE PRICING • Bid/offer rules same as for butter on CME • Daily cash trading Mon.-Fri. • price change possible without transaction • An uncovered offer or unfilled bid during the session can change the price even without a transaction • if no transaction occurs or no bids or offers are made the price does not change

  3. CHEESE PRICING • Similar to butter pricing • Up to 1998, it was based on wholesale price at National Cheese Exchange (NCE) Green Bay, Wisconsin • Only cash cheese market in U.S. • Forty trading members (represent 80% cheese market) • Trading for 1/2 hr. Friday a.m. • Trades only in 40# blocks and 500# barrels • Car lot quantities 33,000# or 42,000# • Prices FOB sellers warehouse on nearest rail siding • Prices do not include: transport, freight differentiation, moisture adjustments, barrel deposit

  4. CHEESE PRICING • Up to 1998, it was based on wholesale price at NCE Green Bay, Wisconsin • Farmers came to mistrust the NCE after market forces caused much wider fluctuations in prices in the mid—1990’s • Really due as much to the lack of government CCC activity in the markets removing surplus product as anything done by traders • Trading was moved to the CME where the oversight was thought to be better • CME had also established dairy futures contracts

  5. CHEESE PRICING • Blocks used for cutting packaging • Barrels used for further manufacturing or processing • CME prices used for pricing American type cheeses (incl. Cheddar,Colby, etc.) • Large or excessive supplies usually cause prices to rest at support level (Has not occurred since 2003.) • Also a “thin” market where only a small percentage of total volume is traded • Cheese plants usually sell under contract using NCE (Now CME) “opinion”

  6. CHEESE PRICING • Cheese prices also have a leveraged effect roughly 10# of cheese can be made from 100# milk • Change in cheese price of 1¢ causes approx. 10¢/cwt change in milk price • By-product values (whey) are becoming more important • less dumping • more sophisticated processing in some plants

  7. CME Cash Market Session • Cash Trading from 10:45 am (CDT or CST) For Cheese • Daily trading for Blocks and Barrels • Bids, Offers, and Trades May be Made For Either Size at the Session • All Trades Must Be Settled With Product • Cash Trading From 11:05 am (CDT or CST) for Butter • Trading on Monday thru Friday • All Trades Must Be Settled With Product

  8. CME Cash Market Session 7-18- 07 • ---No Budget To Travel To Chicago • ---Transcript of Session From the CME Trading Chatroom • ----Audio of Session from E Dairy

  9. Milk Pricing By Cheese Plants • A Cheese Plant Purchase Milk From Producers and Manufactures Cheese • How Does the Plant Decide How Much to Pay For the Milk It Needs? • Pay What Everybody Else Pays • Pay As Little As Possible • Pay As Much As It Takes • Other

  10. WHAT INFORMATION IS NEEDED TO DETERMINE PAY PRICE OF A CHEESE MANUFACTURER? • Product price / # • Product yield / cwt milk • By-product price / # • By-product yield / cwt milk • Manufacturing cost / cwt milk

  11. MANUFACTURED MILK PRICING BASED ON MANUFACTURED PRODUCTSAugust—September 2007 • Price of 40# block of cheddar cheese = $1.9300/lb • Value of dry whey = $.50/lb • Yield of cheese / cwt milk = 10.1/# • Yield of dry whey = 5.5# • Plant manufacturing cost = $1.31/cwt

  12. CHEESE MANUFACTURER A’s PRICE CALCULATION • Milk Price/cwt • Cheese @ $____ /# x 10.1#/cwt = $____ • Plus Whey @ $____ /# x 5.5#/cwt = ____ • Less Plant manufacturing cost/cwt = ____ • Plant value of milk ____ • Other Deductions • Less Hauling = .36 • Less Assessment advertising = .15 • Less Unit retain (Coop) = .05 • Net farm price = $_____

  13. CHEESE MANUFACTURER A’s PRICE CALCULATION • Milk Price/cwt • Cheese @ $1.9300/# x 10.1#/cwt = $19.49 • Plus Whey @ $.50/# x 5.5#/cwt = $2.75 • Less Plant manufacturing cost/cwt = $1.31 • Plant value of milk $20.93 • Other Deductions • Less Hauling = .36 • Less Assessment advertising = .15 • Less Unit retain (Coop) = .05 • Net farm price = $20.37

  14. CHEESE MANUFACTURER A’s PRICE CALCULATION • How would it differ if manufacturer A is more efficient than its competitor? Less efficient than the competitor? • How would the Grade B (Class III price) differ if manufacturer A subsidizes transportation costs of its producers by $.10/cwt? • 3. Who would be affected by this change? Why?

  15. Grade B Producer Level Milk Pricing Based on Manufactured Products (9-17-07) • Price of butter / # = $1.3700 • Price of nonfat dry milk = $1.9600 • Butter yield/cwt milk = 4.48# • Nonfat dry milk yield/cwt milk = 8.5# • Manufacturing cost/cwt = $1.21

  16. Questions?

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