September 1998
Volume 1, Issue 10

Inside this Issue
Milk Price Inversion in Ohio
Federal Milk Marketing Orders
Using Belt Press Technology for Dairy Manure
Milk Price Outlook
Hay Auction Prices
News Updates
 

Milk Price Inversion
in Ohio Federal Milk
Marketing Orders

Cameron Thraen
Dairy Economist, OSUE
Agricultural, Environmental & Development Economics

Consider the following set of events.  You open up the envelope from your favorite milk buyer expecting to find a price per hundredweight of $14.77 plus some additional money.  BIG SUPRISE, instead you find that your milk price is short of $14.77!  What is going on here?  You know that the announced July BFP is $14.77 and that this price represents the Class 3 price for milk in Ohio.  You also know from experience that Class 1 and Class 2 prices are always higher than the Class 3 price.  You know that your milk is being pooled under one of the Ohio Federal Milk Marketing Orders, either FMMO 33 or 36.  As an informed milk producer you also know that the utilization for Class 1 typically runs about 50% (53% #36) and Class 2 about 25%(13% #36) in July of the year.  That leaves Class 3 at 25%(34% #36).  With these typical utilization rates and Class 1 and Class 2 price higher than the Class 3 price, then how could your milk check be for a price LESS than the Class 3 or BFP price?  This raises a number of questions.  The primary one of course is why is there a deduction in my milk price for July?  And, second, what happened to the money that was deducted?

In this short article I will attempt to provide an answer to each of these questions.  In case you are in a hurry and inclined not to read the entire explanation, I will provide a short answer to each of these questions before a more detailed explanation is offered.

First, why is there a deduction in my milk price?  The answer is that in July of 1998 sets of events occurred that are not typical of Ohio milk markets.  Class 1 and Class 2 milk prices are LESS than the Class 3 price.  Because of this "class price inversion" the typical addition to the Class 3 price becomes a subtraction from the Class 3 price.

Second, why are Class 1 and Class 2 prices less than Class 3 price?  The BFP has increased very strongly after reaching its low price in May of $10.88.  Your Class 1 and Class 2 milk prices are based on the May price of $10.88, NOT the July Class 3 price, $14.77 and the relative amounts of milk being pooled in each class.

Third, what happened to the money represented by the deduction?  Who received this money?  The answer here is simple.  From the perspective of the market pool the deduction is an accounting adjustment only.  It keeps the current total value of the milk in the Federal Order Pool in line with the Uniform Milk Price based on all uses of milk in the pool; Class 1 and 2 as well as Class 3.

Fourth, when will I see the benefit of these high Class 3 prices?  Your milk check for milk delivered in August, September and October will reflect the high Class 3 prices recorded in June ($13.10), July ($14.77) and August ($14.99).  If you are in Order 33 these prices (not accounting for farm specific factors) for August, September and October will be $15.14 and $16.81 and $17.03.  If you are pooled in Order 36 the August Class I price will be $15.10, the September $16.77 and October $16.99.

Now, having read the short answer version of my explanation if you are interested in the details about how your milk price is determined get a cup of coffee, have a chair and read on!  Here is my explanation (as brief as I can be and still get across the key points) for why the Uniform Milk Price announced for July of 1998 is $ 12.47 in the Ohio Valley Federal Milk Order-33 and $13.33 in the Eastern-Ohio Western Pennsylvania Order-36, while the announced July BFP is $14.77.

The key to understanding why there can be an announced BFP price that is greater than the announced Uniform Price is (1) the timing of the pricing calculation for the Class 1 and Class 2 prices, (2) a rapid rise in the BFP from May 1998 to July 1998, and (3) the effect of less Class 3 milk being pooled in an Order and therefore an increase in the Class 1 and 2 utilization rates.  I will explain each of these items in turn but first we need to review the calculation of the Uniform Price for both Orders 33 and 36.

Uniform Price Calculations and Component Prices:
In the Ohio Orders, multiple component pricing is used as the basis to determine the value of a producer's production up to the Class 3 level.  Producers are paid based on the calculated value of protein and butterfat.  Because these protein and butterfat values are calculated at the current market values and Class 1 and 2 prices are calculated at the values reflecting the BFP two months before there must be an adjustment made to bring these two valuations into line.  The implications of this adjustment in markets where prices can change by a large dollar amount from one month to the next will be discussed in some detail below.  First let us calculate the July 1998 Uniform Price based on class utilization in each Ohio Order:

Table 1.  Federal Order 33 / 36 Uniform Price Calculation July 1998

(A)-(B) The amount needed to reconcile the          $ (2.30) $ (1.44)
current BFP with the Uniform Price
 

The Ohio FMMO's stipulate that the current month Uniform Price will be calculated by taking the current month announced BFP($14.77) and adjusting by an  amount  that  is  called  the   weighted
 average differential value WADV.  It is the calculation of this WADV that either increases or decreases the announced current month BFP to arrive at the Uniform Milk Price which is the base for what the producer gets in his or her milk check.  (Individual producer checks will differ based on other farm specific factors such as protein, butterfat and somatic cell adjustments.)

The actual calculation, for each month, of the WADV is a somewhat complex matter of accounting.  However, without being too far off, it can be said that the WADV reflects either an increase in the value of Class 1 and 2 milk or a decline in the market value of Class 1 and 2 milk in the current month.  The key to this determination is the calculation that takes the current month Class 1 and 2 prices and subtracts the current month announced BFP from each.  Because the current month Class 1 and 2 prices are based on the BFP from TWO MONTHS prior, this calculation turns out to be:

(BFP 2 months prior minus the BFP in the current month) + $2.04  for Class 1 milk
For July 1998:  $10.88(May's BFP) - $14.77(July's BFP) + $2.04 =  - $1.85

(BFP 2 months prior minus the BFP in the current month) + $.30  for Class 2 milk
For July 1998:  $10.88(May's BFP) - $14.77(July's BFP) + $0.30 =  - $3.59

Item #2: A Rapid Rise in the BFP May to July:
Notice that these adjustments in the market value of Class 1 and 2 milk are both negative.  This reflects the rapid rise in the BFP from May through July which produces a negative adjustment that is larger than the constant $2.04 Class 1 differential or the $0.30 Class 2 differential stipulated in FMMO 33.  The final adjustment to arrive at the WADV of a minus $2.30 involves a set of accounting calculations that essentially (but not exactly) come down to dividing the total milk deliveries in the Ohio Valley Order by the change (in this case negative) in the value of that milk.  For example the July calculation is essentially:

Change in Value of the Class 1 and 2 Milk ( - $ 4,687,507.38) DIVIDED BY Total Milk In the Pool in cwts.
( 2,049,112.48) = - $2.30.  Note that this is exactly what is required to reconcile the current BFP with the Uniform Price calculation, Table 1.

Item #3: Class 1 and 2 Utilization Rates:
A last piece of information necessary to get a full understanding of the WADV is to recognize that it is based on a weighted average of the change in Class 1 and 2 milk value where the weights are the percentage utilization of milk in each class.  In the Order 33 these percentages are typically around 50.0% for Class I and 26.0% for Class 2 based on a pooled milk quantity of about 250-257 million pounds.  Because of the current price structure for all classes of milk the quantity of milk delivered to the Order 33 Pool in July 1998 was 22% less in July than in June of 1998.  This affects the weights in the WADV.  For example, in June of 1998 the Class 1 utilization was 49% and Class 2 was 27%.  In July Class 1 utilization was 65% and Class 2 reported at 30.2%.  These rates are higher than typical for this time of year in Order 33.  They are higher because less milk was pooled as Class 3 in the Federal Order, which places less weight on the highest priced class, Class 3 in this instance.

Using Belt Press Technology for Dairy Manure
Chris Zoller, Extension Agent, Tuscarawas County and Alice McKenney, Tuscarawas SWCD

In 1994, the Tuscarawas Soil and Water Conservation District received funding from the Ohio Environmental Protection Agency under provisions of the Clean Water Act to investigate belt press technology to remove water from dairy manure.  The idea came from farmers and consultants in and out of the Sugar Creek watershed who had worked with or learned about municipal and industrial wastewater treatment methods.  The question became, can these same methods be applied to dairy manure?

The East Branch of the Sugar Creek Watershed is located near Sugarcreek, a popular tourist area and one with a long history of dairy farming.  The watershed contains 19 dairy farms in its 29 square miles with many of these farms milking over 200 cows.  This concentration of animal units has made manure management a critical task of farm managers.  Farmers in the watershed have done an excellent job of working to adopt new technology and management practices to move manure away from those fields closest to the barn.  However, because farms in this narrow valley are so close, and because of concerns about elevated soil nutrient levels, it became apparent that the manure would need to be moved out of the valley and into other areas in or out of the watershed.

The grant application proposed exploring the use of belt press technology to squeeze water from the manure and concentrate the majority of the nutrients into the solids.  The first field testing began in October of 1995 and continued through August of 1997 with mixed results.  On average, the same quantities of nitrogen and phosphorus found in unprocessed manure was concentrated into separated solids weighing only half as much.  The separated solids stacked well for storage and were easily land applied with a box spreader.  Unfortunately, the amount of polymer chemical needed to make the process work with dairy manure was much higher than for treating municipal waste.  This amounted to a cost of $6 to $7 per cow per day for the chemical alone!

The project accomplished its primary objective of finding out if wastewater treatment methods could be used to treat dairy manure.  The project also helped educate the belt press and polymer manufacturers about issues facing dairy farmers and what role they may someday have in helping to solve manure management issues.  As one Tuscarawas SWCD Board member said, this project was similar to building a house.  We have built the frame and it is now time to have the “finish carpenters” complete the job.

Milk Price Outlook
Cameron Thraen, Dairy Economist
thraen.1@osu.edu

The announced Basic Formula Price (BFP) for August is $14.99 per cwt. for milk testing 3.5 percent butterfat.  This price is up $0.22 over the last month price and $2.92 higher than a year earlier.  The current butterfat differential is 24.5 cents.  A year earlier the butterfat differential was 10.6 cents.  Milk production is rebounding slightly in the Midwest and Southeast, and it’s declining in California and the Northwest. The Southeast is still buying lots of loads of fresh milk.  The good news for dairy producers is that dairy markets are tight and prices are expected to remain firm for cheese, butter and powder.  The cheese market is tightening slightly with prices moving up to $1.705 on the CME block market.  CME AA Butter price is unchanged at $2.79, and some in the industry expect the price to move up to the $3.00 level.

What is ahead for the September BFP?  The CME BFP futures September contract traded at $15.28 on September 15th.  Over the last few days the contract has traded in the $15.26 - $15.30 range on news that California milk production is off due to high temperatures and may not recover until next spring.  From here it looks like the September BFP should be in the $14.85 to $15.10 range.

Hay Auction Prices (September 11, 1998)

Location                         First                 Second                     Third                Large Round/bale
Damascus (/bale)      $ .60 - 4.00         $ .60 - 4.00           $2.00 - 4.00
Carrollton (/bale)      $ .75 - 1.35         $1.65 - 2.35
Farmerstown (/ton)   $45.00                $100.00 -105.00                                 $9.00 - 10. 00
Kidron (/ton)            $95.00                $45.00 - 95.00      $60.00 - 125.00     $15.00 - 16.00
West Salem (/ton)    $45.00 - 65.00    $65.00                   $80.00
 

News Updates

Looking for Someone to Raise Your Heifers?

A farming operation located in Morrow and Marion counties is completing preparations, including expanded acreage in forages, and will be offering dairy heifer raising services.  A wide range of options will be offered, from short-term boarding to full service, including breeding.  Contact Ron Cass at Cass Stock Farm, P.O. Box 402, Caledonia, OH 43314, (419) 845-3823.
 

August Production Down.

Market strength was undoubtedly due, at least in part, to USDA’s September 15th release of August milk production numbers—down 0.4% from  year earlier production.  This is the third consecutive month that production has been down from year earlier levels.  For the year, however, U.S. milk production is still running 0.3% ahead of 1997.  California was off 3.2%, Wisconsin was down 0.3% and Minnesota was down 1.5%.  New Mexico and Idaho were the big gainers, up 10.1% and 7.7%, respectively.

Reprinted with permission of Dairy  Today.