Markets and Component Pricing

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Markets and Component Pricing

• Ken Bailey
• Penn State University

Penn State is committed to affirmative action,
equal opportunity, and the diversity of its
workforce
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My Talk Today

• Markets have changed
• This change affects profitability
• What can farmers do?

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Changes in Milk Pricing Over Time

• Blend price adjusted for butterfat
• Started with Babcock test
• Component pricing tested in federal orders (80s
  90s)
• Federal order reform in 2000
• Market based
• Uses multiple component pricing
• Not everyone gets the same price

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Why Were These Changes Made?

• Federal policy makers
• To encourage a more competitive market
• Address what processors wanted
• Processors
• Fluid lower SCC
• Cheese greater cheese yields

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Who Uses MPC Plans in the U.S.?

• Federal orders
• 7 of 11 orders
• State orders
• California has their own MPC pricing plan (since
  1962)
• Unregulated markets
• Priced outside of federal orders
• May use proprietary pricing plans

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Composition of Milk Solids
Milk contains 87.4 water, 12.6 solids
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Cheese Per Capita Consumption
Both Italian and American are growing!
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New Pricing Plans
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Butter Price
Nonfat whey Prices
Cheese Price
Component Values
Federal Order Prices
How milk is priced under Federal Orders
Farm-gate milk prices
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Example Upper Midwest August 2002
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Example Northeast Order 1 August 2002
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Farmers Dont Produce Same Level of Components
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Histogram of Protein Jan 2000, Mideast Fed Order
9,856 Farms
Mean of 3.13
Source Mideast Federal Order
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Histogram of Class III ValueJan 2000, Mideast
Fed Order
9,856 Farms
Mean of 10.75/cwt
Source Mideast Federal Order
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Economic Considerations of Component Pricing

• Farmers paid on the basis of
• Lbs of protein fat
• Volume of milk sold
• Fat may be inversely related to daily production
• Protein is hard to improve
• Feed costs should be considered when evaluating
  profitability of components

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Example Tom and Ed
Both produce 115,000 lbs of milk/month

• Ed
• Component levels
• Butterfat 3.50
• Protein 2.85
• Class III 9.62
• Sales 11,063

• Tom
• Component levels
• Butterfat 3.70
• Protein 3.05
• Class III 10.23
• Sales 11,764

Assumes a butterfat price of 0.90/lb, a protein
price of 2.17/lb, and other solids price of
0.05/lb.
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What Can Farmers Do?

• Do nothing, thats the way its always been
• Take action
• Compare yourself to the order average
• Evaluate your feeding program
• Look at cows, equipment, cow comfort
• Improve genetics of your herd

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Conclusions

• Economic incentives have changed
• Not everyone producing the same level of protein
• Progressive producers will look for an advantage
  in the market place