Dairy Marketing

1
Dairy Marketing

• Dr. Roger Ginder
• Econ 338
• Fall 2007
• Lecture 11

2
CHEESE PRICING

• Bid/offer rules same as for butter on CME
• Daily cash trading Mon.-Fri.
• price change possible without transaction
• An uncovered offer or unfilled bid during the
  session can change the price even without a
  transaction
• if no transaction occurs or no bids or offers are
  made the price does not change

3
CHEESE PRICING

• Similar to butter pricing
• Up to 1998, it was based on wholesale price at
  National Cheese Exchange (NCE) Green Bay,
  Wisconsin
• Only cash cheese market in U.S.
• Forty trading members (represent 80 cheese
  market)
• Trading for 1/2 hr. Friday a.m.
• Trades only in 40 blocks and 500 barrels
• Car lot quantities 33,000 or 42,000
• Prices FOB sellers warehouse on nearest rail
  siding
• Prices do not include transport, freight
  differentiation, moisture adjustments, barrel
  deposit

4
CHEESE PRICING

• Up to 1998, it was based on wholesale price at
  NCE Green Bay, Wisconsin
• Farmers came to mistrust the NCE after market
  forces caused much wider fluctuations in prices
  in the mid1990s
• Really due as much to the lack of government CCC
  activity in the markets removing surplus product
  as anything done by traders
• Trading was moved to the CME where the oversight
  was thought to be better
• CME had also established dairy futures contracts

5
CHEESE PRICING

• Blocks used for cutting packaging
• Barrels used for further manufacturing or
  processing
• CME prices used for pricing American type cheeses
  (incl. Cheddar,Colby, etc.)
• Large or excessive supplies usually cause prices
  to rest at support level (Has not occurred since
  2003.)
• Also a thin market where only a small
  percentage of total volume is traded
• Cheese plants usually sell under contract using
  NCE (Now CME) opinion

6
CHEESE PRICING

• Cheese prices also have a leveraged effect
  roughly 10 of cheese can be made from 100 milk
• Change in cheese price of 1 causes approx.
  10/cwt change in milk price
• By-product values (whey) are becoming more
  important
• less dumping
• more sophisticated processing in some plants

7
CME Cash Market Session

• Cash Trading from 1045 am (CDT or CST) For
  Cheese
• Daily trading for Blocks and Barrels
• Bids, Offers, and Trades May be Made For Either
  Size at the Session
• All Trades Must Be Settled With Product
• Cash Trading From 1105 am (CDT or CST) for
  Butter
• Trading on Monday thru Friday
• All Trades Must Be Settled With Product

8
CME Cash Market Session 7-18- 07

• ---No Budget To Travel To Chicago
• ---Transcript of Session From the CME Trading
  Chatroom
• ----Audio of Session from E Dairy

9
Milk Pricing By Cheese Plants

• A Cheese Plant Purchase Milk From Producers and
  Manufactures Cheese
• How Does the Plant Decide How Much to Pay For the
  Milk It Needs?
• Pay What Everybody Else Pays
• Pay As Little As Possible
• Pay As Much As It Takes
• Other

10
WHAT INFORMATION IS NEEDED TO DETERMINE PAY PRICE
OF A CHEESE MANUFACTURER?

• Product price /
• Product yield / cwt milk
• By-product price /
• By-product yield / cwt milk
• Manufacturing cost / cwt milk

11
MANUFACTURED MILK PRICING BASED ON MANUFACTURED
PRODUCTS AugustSeptember 2007

• Price of 40 block of cheddar cheese 1.9300/lb
• Value of dry whey .50/lb
• Yield of cheese / cwt milk 10.1/
• Yield of dry whey 5.5
• Plant manufacturing cost 1.31/cwt

12
CHEESE MANUFACTURER As PRICE CALCULATION

• Milk Price/cwt
• Cheese _at_ ____ / x 10.1/cwt ____
• Plus Whey _at_ ____ / x 5.5/cwt ____
• Less Plant manufacturing cost/cwt ____
• Plant value of milk ____
• Other Deductions
• Less Hauling .36
• Less Assessment advertising .15
• Less Unit retain (Coop) .05
• Net farm price _____

13
CHEESE MANUFACTURER As PRICE CALCULATION

• Milk Price/cwt
• Cheese _at_ 1.9300/ x 10.1/cwt 19.49
• Plus Whey _at_ .50/ x 5.5/cwt 2.75
• Less Plant manufacturing cost/cwt 1.31
• Plant value of milk 20.93
• Other Deductions
• Less Hauling .36
• Less Assessment advertising .15
• Less Unit retain (Coop) .05
• Net farm price 20.37

14
CHEESE MANUFACTURER As PRICE CALCULATION

• How would it differ if manufacturer A is more
  efficient than its competitor? Less efficient
  than the competitor?
• How would the Grade B (Class III price) differ if
  manufacturer A subsidizes transportation costs of
  its producers by .10/cwt?
• 3. Who would be affected by this change? Why?

15

• Grade B Producer Level Milk Pricing Based on
  Manufactured Products (9-17-07)
• Price of butter / 1.3700
• Price of nonfat dry milk 1.9600
• Butter yield/cwt milk 4.48
• Nonfat dry milk yield/cwt milk 8.5
• Manufacturing cost/cwt 1.21

16
Questions?