Cost of Processing and the Make Allowance Issue

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Cost of Processing and the Make Allowance Issue

• Mark Stephenson, Ph.D.
• Cornell Program on Dairy Markets Policy

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Options for Regulated Pricing

• Observe market discovered price (MW)
• Cost of production
• Economic formula
• Product price formula
• Combination of the above (BFP, CA)

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Real Problem in Minimum Pricing is Setting Price
too High!
Price
Supply
Demand
Quantity
4
The Justification of MCP and Product Price
Formulas
Farm Milk
Cheese Plant
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Component Price Formulas

• Butterfat price /lb. (NASS AA butter survey
  price - 0.114) / 0.82
• Protein price /lb. ((NASS block cheese survey
  price - 0.1702) x 1.405) ((((NASS block
  cheese survey price - 0.1702) x 1.582) -
  butterfat price) x 1.28)
• Other solids price /lb. (NASS dry whey survey
  price - 0.114) / 0.82
• SCC Adj. /Cwt. (350 - SCC) x (NASS blk cheese
  /lb x .0005)

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Example The Butterfat Price

• (NASS AA butter survey price - 0.114) / 0.82

A market observed price
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Example The Butterfat Price

• (NASS AA butter survey price - 0.114) / 0.82

The make allowance
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Example The Butterfat Price

• (NASS AA butter survey price - 0.114) / 0.82

The yield factor
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The Issue Revisited

• Congress has said that USDA must take another
  look at the formulas.
• USDA estimated that formulas would yield a class
  III price that was 47 below the BFP
• In actuality, the class III tracks very closely.
• Blend prices are also about the same.

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The Class III Price
1
11
The Class IV Price
12
12
The Class I Price
16
13
The Class II Price
-94
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The Blend Price
-1
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At the Hearing

• Im concerned that producer organizations will
  try to bolster market prices with regulatory
  tools
• May argue for CME prices over NASS
• May want larger yield factors
• May want smaller make allowances
• Cost of processing will be a major point of
  discussion.

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Cornell has Been Conducting COP Studies for 30
Years

• DMIS fluid plant benchmarks
• Cheese and whey studies
• Butter/Powder study
• Revisit fluid processing and distribution
• Time again for cheese and perhaps open it up to
  all dairy products.

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Large Spatial Modeling Efforts

• Farm Level
• Structural Change
• Milk Quantity Composition
• Cost of Production
• Milk Assembly Costs
• Plant
• Cost of Processing
• Optimal Ingredient Mix
• Product Distribution Costs

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Different Approaches to COP

• Traditional Survey Approach
• Time consuming
• Not updated often
• Narrow selection of plants and benchmarks
• Economic Engineering
• Build plants with a computer model
• Expensive
• Relatively easily updated
• Can go where no plant has gone before.
• Requires verification (survey)

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New Technologies Address Old Criticisms

• Web-based product has advantages
• Fewer questions tailored specifically to each
  plant
• Plant summaries are instantaneous
• Quality of data can be first screened by computer
  then by me
• Accept submissions from any plant (not narrow)
• Can be perpetually updated
• Can choose your own benchmark

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Are There New Criticisms?

• What about false information
• What about confidentially of information
• Is the Internet a secure way to conduct a survey
  of sensitive data.
• Who benefits from this

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Let Me Show you an Example