Dairy Marketing

1
Dairy Marketing

• Dr. Roger Ginder
• Econ 338
• Fall 2007
• Lecture 10

2
Dairy Model Homework

• First portion of class period was devoted to
  explanation of
• Dairy Model Homework Assignment
• due Monday, September 24, 2007.

3
MANUFACTURING MILK PRODUCT MARKETS

• Three major product categories for Grade B milk
• Cheese factories use majority
• Butter-powder plants are also important
• Butter
• Non-fat dry milk
• Production of these hard products creates
  by-products that also have value
• Cheese plants can recover
• whey cream (used to make butter)
• whey proteins
• lactose
• Butter-powder plants produce joint products
• cream produces butter and buttermilk powder
• skim produces nonfat dry milk

4
BUTTER PRICING

• Butter price is largely based on Chicago
  Mercantile Exchange (CME) Spot Market price
• Auction like bid-offer system
• Trading is done on Monday, Wednesday, and Friday
  mornings at the exchange
• Buyers bid for product and sellers offer product
  for sale
• Price is established when transactions occur
• Offer to sell is covered
• Bid to buy is filled
• Price at the close becomes the price used as the
  official price until the next session

5
BUTTER PRICING

• Price can even change without transactions
• Price changes from previous session if
• a transaction occurs at a higher or lower price
• price increases when an unfilled bid is made
  (_at_price higher than previous session)
• price falls when there is an uncovered offer is
  made (_at_ price lower than previous session)

6
BUTTER PRICING

• CME is a very thin market (less than 1 of U.S.
  volume)
• larger volume buyers and sellers
• well informed about supply and demand
• bid only if unable to buy elsewhere
• offer only if unable to sell elsewhere
• Buy and sell in carlot quantities
• Thus CME changes the price to reflect supply
  and demand conditions

7
BUTTER PRICING

• Commercial sales typically made through long term
  contracts pegged to the CME price
• Butter prices have a leveraged effect on milk
  price
• 4.5 butter/cwt _at_ 3.67 BF
• price change of 1 on butter moves Grade B milk
  price 4 1/2 cents

8
NONFAT DRY MILK PRICING

• No central cash or wholesale market existed for
  nonfat dry milk Until CME developed one in the
  late 1990s
• Private treaty pricing prior to that
• Production and price varied by region
• Heavy in California and Washington (lower prices)
• Midwest Mid Atlantic
• Some coops use for balancing supplies
• 1970-1988 nonfat dry milk was a heavily supported
  product with over 50 volume due to CCC purchase

9
NONFAT DRY MILK PRICING

• Improving since 1988
• Exports
• Use of nonfat dry milk and concentrated skim in
  making some cheeses
• The nonfat dry milk yield/cwt of whole milk is
  about 8.5
• Nonfat dry milk prices are also leveraged so that
  a 1 change in nonfat dry milk price moves farm
  Grade B price about 8.5

10
Questions?