Milk Pricing and Policy

Dr. Cameron Thraen, Additional milk marketing information by Dr. Thraen

Policy Watch

In the policy arena, the event to watch is the introduction of Federal legislation specifically aimed at stemming the flow of imported dairy proteins in the U.S. market. The Milk Import Tariff Equity Act (MITEA) of 2003 has been introduced into both the House and the Senate. Major sponsors of the legislation are Senators Larry Craig (R-ID), Mark Dayton (D-MN) and Representatives Don Sherwood (R-PA) and David Obey (D-WI). It has been reported that the Senate version has over 15 co-sponsors and the House version more than 55 co-sponsors. Look for a good battle on this one with the National Milk Producers Federation (supporting) squaring off against the International Dairy Foods Association (opposed). My viewpoint is that the real issue is not one of tariffs or lack thereof, but a support price for nonfat dry milk that is out of whack with market realities. Simply put, the net return for producing nonfat skim milk powder and selling it to the government is a better deal than producing milk protein concentrates and selling them to the food processing industry. Until this is fixed, the economic problem and political debate will be with us.

New Class 3 and Class 4 pricing rules: The new Class III and IV prices are set to go into effect for milk shipped starting April 1, 2003. These new rules will impact the calculation of the advanced pricing of Class I for April. There is the rumored threat of legal action to stay the implementation of the new rules. Western dairy interests, not in California, claim that the new rules will put them at a distinct disadvantage price-wise with the California industry. I expect they will find a sympathetic judicial ear in Seattle and the battle will be engaged. Let's hope reasoned judgment prevails.

Market Watch

The near-term outlook for dairy commodity prices, milk component prices, and Class prices is not very encouraging at this time. The one bright spot I can find shows up in my forecast for the April Milk Income Loss Compensation (MILC) payment. If I am correct on the dairy commodity advanced prices forecast, this payment could reach a record $1.87 per hundredweight. This is achieved for the April MILC payment through a combination of the new Class III / IV pricing rules and a forecast record low Class I mover of $9.53 for April.

Here is what the markets look like at the end of the first week of March 2003:

Table 1. Futures Class III Prices: Quarterly Average Settle Prices as of 03/07/2003.

1st Quarter 2003
2nd Quarter 2003
3rd Quarter 2003
4th Quarter 2003


Class III prices on the Chicago Mercantile Exchange (CME) lost substantial support for all quarters in 2003 with the release of the January and February milk and dairy products reports and the USDA dairy products and CME inventory reports. Until some news comes in that suggest a significant tightening of production relative to inventories and commercial demand, the markets will struggle to rise above these low levels.

Table 2. Forecast National Agricultural Statistics Service (NASS) average dairy product prices and the Class III price.

Dairy Product
January - March, 2003
April - June, 2003
Grade AA Butter ($/lb)
Cheddar Cheese ($/lb)
Whey ($/lb)
Nonfat Dry Milk Solids ($/lb)
Class III Milk Price
Class IV Milk Price
Producer Price Differential
MILC Payment Rate

Figure 3. Forecast average market pay prices for milk fat, protein, other solids, and nonfat solids.

Milk Component
January - March, 2003
April - June, 2003
Fat ($/lb)
Protein ($/lb)
Other Solids ($/lb)
Nonfat Solids ($/lb)


At this time, it seems that no ray of hope for better prices to the dairy producer are on the horizon. There is, however, a developing trend that may indicate higher prices by the third quarter of 2003. A careful evaluation of dairy cow slaughter numbers published in the weekly Dairy Market News by USDA/AMS indicates that for the first eight weeks of 2003, dairy cow slaughter is running about 12% ahead of last year. Looking back over the last 10 years at comparable periods of low milk prices and high feed prices, this pattern of increased slaughter pulled prices up by anywhere from $1.00 to $2.00/cwt by the third quarter of the year. If history is a reasonable guide, these high slaughter rates will put a brake on the rate of increase in milk production over the next two quarters. The effect of this will show up as a very modest increase in milk output from the first to the second quarter, and then a significant decline in output during the third quarter of 2003. If the general economy can muster some strength that translates into personal income growth and decent commercial demand over the next six months, we very well could see milk prices strengthen by one to two dollars.