Tuesday, October 11, 2011

Milk Price – How Dairy Farmers Are Paid For Milk

The pricing structure for milk is different than many other products. Most businesses price their product or service by examining the cost of providing that product and service and then mark it up enough so they can make a profit. Milk pricing is not so simple. We as dairy producers do not set the price of our product and the cost of production is not considered in the milk pricing formula. We are price takers. We’ll learn the price of our milk 13 days after the end of the month in which that milk was produced. So how is the price of milk determined?

Our cows in the milking parlor
Dairy producers are paid per 100 lbs of milk - called a hundred weight (cwt). The amount a producer is paid per cwt varies depending on which part of the nation they are in and how milk is used in that region. There are four classes of milk; Class I is fluid/drinking milk, Class II is soft products like yogurt/ice cream, Class III is hard cheese and Class IV is butter and milk powder. Each class has a different dollar value which changes monthly based on a variety of factors such as supply, demand, export market, and the amount of each product in storage waiting to be sold.

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.

4 comments:

  1. Thank you for the explanation on the pricing of milk...it is a wonder that there are any dairy farmers at all after reading this! I was trying to discover what everyone was refering to when talking about the price of milk going to $7.00 if we returned to the 1948 formula for calculating the price of milk...but could not find that info! Good Luck in 2013!

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    1. Thanks for your comment. I don't believe there was much of a chance of the price of milk and dairy products doubling. Yesterday, the Senate and House Agriculture committees decided to extend the 2008 farm bill by one year. It was highly unlikely that milk prices were going to surge either way. All the recent news coverage was primarily hype and federal government scare tactics.

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  2. Great explanation...going to share. As you know in California we have been struggling with $2.00 less per hundred weight than the Federal orders. We need to find a better system as the CME is such a lightly traded venue and I believe easily manipulated.

    Thank you! Barbara AKA Dairy Goddess

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    1. Thanks for the comment Barbara. I've been following your efforts to change milk pricing in California. It's great you are taking action to receive a fair price for the milk you produce! I agree the CME is easily manipulated. There should be a better way for dairy farmers to receive a higher percentage of the retail dollar for dairy products.

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