BASIC FORMULA PRICE

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• Dairy Marketing
• Dr. Roger Ginder
• Econ 338a
• Fall 2007
• Lecture 15a

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• How does CCC support maintain the price of milk _at_
  a target level
• What products are used by CCC?
• How does CCC decide which products to buy?
• How does CCC decide what price to pay for
  products purchased?

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IMPLEMENTATION OF CCC ACTIVITIES

• Milk supplies tight relative to demand
• Perishable products will take higher fraction of
  production
• Production of hard products low
• Prices higher for these products
• CCC will purchase little or none
• Milk moves to all users at competitive or formula
  price

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MILK SUPPLIES ARE LARGE RELATIVE TO DEMAND

• Surplus not used for perishables diverted to
  manufacturing
• Inventory of storable products grows
• Price falls as supply increases
• CCC becomes a more lucrative alternative compared
  to commercial outlets
• CCC prepared to buy unlimited quantity of hard
  product
• Manufacturers prepared to continue to buy milk,
  produce product, and sell to CCC at support
• Will pay support price to farmer to get supply
  needed

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EFFECTS ON PRICES OF MANUFACTURED MILK PRODUCTS
PURCHASED BY CCC

• CCC purchases only limited products
• Cheddar Cheese
• Butter
• Nonfat dry milk
• Price of all manufactured products are closely
  related
• Interplant competition forces uniform prices
  across all hard products
• If mozzarella cheese plant pays less, farmers
  divert to cheddar plant
• If other users do not pay the support price, they
  lose volume
• Large manufacturers can divert their supplies
  internally to their butter, powder and cheese
  plants in response to government purchases.

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CHARACTERISTICS OF THE THREE CCC PURCHASE PRODUCTS

• Storable for moderate to long period of time
• Concentrated in relation to quantity of milk used
  to produce them
• Transportable at relatively low freight cost
• Used by a wide range of domestic and foreign
  customers
• Account for a high percent of milk utilization
  (50)
• Continually produced in large volume
• Fungible and broadly defined commodity with a
  standard definition

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EFFECTS ON CLASS I AND CLASS II PRODUCTS

• Significant Grade A milk goes to manufacturing
  uses
• Even though only manufacturer grade milk is
  supported,Grade A is affected by a higher
  manufacturing price
• Formula price for Class I and II uses
  manufacturer product prices in pricing fat and
  skim components
  
  
  
  (Class III and Class IV products are used in
  calculating the base price)
• Higher manufacturer price raised base price
• Differentials added to that higher base price

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• How does the CCC maintain the support price of
  milk _at_ a target level (e.g. the 10.10cwt.
  Support level prior to 1996)?

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CALCULATING CCC PRICE - CHEESE

• Target support price /cwt 10.10/cwt
• (pay price)
• Plus plant make allowance (set by USDA) 1. 37/cwt
• Required plant value for cheese 11.47
• whey
• Less Whey cream value .15
• Cheese value of 100 lbs. Of milk 11. 32
• Cheese value/lb. 11. 32 per cwt.? 10.1 per
  cwt.
• 1.1208/lb.

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CALCULATING CCC PRICE - CHEESE

• CCC would purchase cheese when price falls below
  1.12/lb to support milk _at_ 10.10/cwt.
• Suppose the support price was increased to 10.
  35 as it was in 1996 under the provisions of the
  1995 Farm Bill. What would CCC purchase price
  be?

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CALCULATING CCC PRICE - CHEESE

• Target support price /cwt 10.10/cwt
• (pay price)
• Plus plant make allowance (set by USDA) 1. 37/cwt
• Required plant value for cheese 11.47
• whey
• Less Whey cream value .15
• Cheese value of 100 lbs. Of milk 11. 32
• Cheese value/lb. 11. 32 per cwt.? 10.1 per
  cwt.
• 1.1208/lb.

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CALCULATING CCC PRICE CHEESE

• Target support price /cwt 10. 35/cwt
• (pay price)
• Plus plant make allowance (set by USDA) 1. 37/cwt
• Required plant value for cheese 11.72
• whey
• Less Whey cream value .15
• Cheese value of 100 lbs. Of milk 11. 57
• Cheese value/lb. 11. 57 per cwt.? 10.1 per
  cwt.
• 1.1455/lb.
• . 0247 or approximately 2 ½ cents/lb of
  cheese
• (1.1455 minus 1.1208)

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CALCULATING CCC PRICE - CHEESE

• Until recently the make allowances had been held
  at the same level they were in the late 1970s
  and early 1980s
• Many have argued that they were too low.
• What would the impact on farm pay price be if the
  make allowance is higher or lower than 1. 37?
  (e.g. 1.65)

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CALCULATING CCC PRICE - CHEESE

• Target support price /cwt 10.10/cwt
• (pay price)
• Plus plant make allowance (set by USDA) 1.
  65/cwt
• Required plant value for cheese 11.75
• whey
• Less Whey cream value .15
• Cheese value of 100 lbs. Of milk 11. 60
• Cheese value/lb. 11. 60 per cwt./ 10.1
  per cwt.
• 1. 1485 /lb
• Cheese would be purchased at 1. 1485 /lb. Or
  approximately 2.77 cents more per lb. than at the
  old make allowance.
• Would this be a positive or negative change for
  farmers and the farm price of milk?

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Calculating CCC Purchase Prices for a Butter or
Powder

• Butter and Powder manufactured from whole milk
  are joint products
• Must know the price of the other joint product
  before a purchase price to be used by CCC can be
  identified
• Two examples

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CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE
PRODUCTS(butter tilt)

• Support Price (/cwt) 10.10
• Plus Make allowance (Convert cwt. Raw
• milk to butter and nonfat dry milk) 1. 32
• Total value required for 10.10 pay price 11.
  32
• Value nonfat dry milk 1.05 (established
• by secretary)
• Yield nonfat dry milk 8.13 (/cwt milk
• established)
• Value butter Unknown
• Yield of butter 4.48 /cwt milk
• Required value for 10.10 pay price 11. 42
• Less Value nonfat dry milk per cwt 8. 54
• Value of butter per cwt 2.88
• Implicit value of butter per lb. (2.88/4.48)
  .64

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CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE
PRODUCTSButter-Powder Plant(nonfat dry milk
tilt)

• Support price (/cwt) 10.10
• Plus Make allowance (to convert milk
• to butter and nonfat dry milk) 1.22
• To value required for 10.10 11.32
• Value butter .72 (established)
• Yield of butter 4.48 per cwt milk
• Value nonfat dry milk unknown
• Yield nonfat dry milk 8.13 per cwt milk
• Required value for 10.10 pay price 11.32
• Less Value of butter (.72 x4.48 per cwt)
  3.23
• Implicit value of nonfat dry milk per 8.09
• cwt milk
• Implicit value on nonfat dry milk per .996
• lb. or (8.09/8.13 per cwt)

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CALCULATING CCC PRICE---Butter and NDM Powder

• The current support price is 9.90/CWT. How much
  would the CCC pay for butter and NMP under the
  current support price?

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CALCULATING CCC PURCHASE PRICE FROM DERIVITIVE
PRODUCTSButter - Powder Plant(butter tilt)

• Support Price (/cwt) 10.10 ____
• Plus Make allowance (Convert cwt raw
• milk to butter and nonfat dry milk)
  1.32 ____
• ____
• Total value required for 10.10 pay price 11.42
• Value nonfat dry milk ___105_ (established
• by secretary)
• Yield nonfat dry milk 8.13 (/cwt milk
• established)
• Value butter Unknown
• Yield of butter 4.48 /cwt milk
• Required value for 10.10 pay price 11.42 ____
• Less Value nonfat dry milk per cwt 8.54 ____
• (1.05/lb x 8.13)
• Value of butter per cwt 2.88 ____

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Questions?