|Our cows in the milking parlor|
The milk price paid to dairy farmers is based on the Chicago Mercantile Exchange (CME) price for Class III milk. In Ohio, dairy farmers are part of Federal Milk Marketing Order 33 (FO 33). On the 13th of each month, FO 33 will announce the price for milk produced in the previous month. That is the minimum price milk processors must pay dairy farmers.
In addition to this minimum price, producers will receive more or less money based on the Producer Price Differential (PPD) and percentage of fat and protein components in the milk. The PPD is determined by how milk in our federal order is utilized - what percentage of the milk is used for Class I, II, III and IV. Each use has a different dollar value. For example, milk used for drinking commands a higher price than milk used to make cheese. So if a higher percentage of milk is used for drinking vs. cheese or butter, then the PPD will be higher.
Producers might also receive a premium from their processor depending on the supply and demand in that region. For example, Ohio is a milk deficit state, so dairy producers receive a bonus from their processor because milk demand is higher than supply.
The Federal Order 33 milk price formula looks like this:
CME Class III price +/ - PPD +/- components (fat & protein) + premium = final price
Over the last three years, the FO 33 milk price has ranged between $10.73/cwt to $22.29/cwt. As you can see, there is extreme volatility in the milk price. Add to that the severe swings in feed price (corn, soybean meal and hay) and you’ve got a challenging business setting.