Transcript Lecture 10

Dairy Marketing
Dr. Roger Ginder
Econ 338
Fall 2009
Lecture #10
FUNCTION OF PRICE IN AN
OPEN MARKET ECONOMY
Allocative Function
• Direct resources (Land, Labor, Capital) to the highest and best
use, given the values tastes and preferences of consumers
• Rations the use of resources so that the available supply fits the
existing demand
Income Distribution Function
• For any given quantity produced of a product or service, a price
increase raises (or a price reduction lowers) the level of the
producers’ income
y = price * quantity sold
FUNCTION OF PRICE IN AN
OPEN MARKET ECONOMY
Income Distribution Function
Continued
• For any given quantity of product or service
consumed, a price increase reduces (or a price
reduction increases) the amount of other products
the consumer can buy (i.e., income)
If a consumer has $3.00 to spend on milk and
strawberries and….
Milk = 2.00/gal
Strawberries = $1.00/#
Milk = 1.00/gal
Strawberries = $1.00/#
MILK PRICE CONCEPTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
M-W price
NASS price
CME price
Basic formula price
Support price
Blend price
Class I price
Class II price
Class III price
Class IV price
Grade A price
12. Grade B price
13. Single basing point price
14. Multiple basing point price
15. Competitive price
16. Formula price
17. Administered price
18. Skim price
19. Butter fat price
20. Over order price
FUNCTION OF PRICE IN AN
OPEN MARKET ECONOMY
Competitive Price
• Established by market forces
• Supply and demand are dominant
• Significant volume
• Open access to market for buyers/sellers
Administered Price
• Established by non-market forces
• May be legislated
• May be set by government agency
• May be set by other outside entity with ability to enforce
FUNCTION OF PRICE IN AN
OPEN MARKET ECONOMY
Formula Price
• Established by defining a fixed set of relationships a formula
• A formula price may include some market prices
(i.e., competitive prices)
• A formula price may include some administered
prices (e.g., support)
• Specifies relationships among a number of prices
and/or product characteristics
MILK PRICE CONCEPTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
M-W price
NASS price
CME price
Basic formula price
Support price
Blend price
Class I price
Class II price
Class III price
Class IV price
Grade A price
12. Grade B price
13. Single basing point price
14. Multiple basing point price
15. Competitive price
16. Formula price
17. Administered price
18. Skim price
19. Butter fat price
20. Over order price
PRICING MANUFACTURING
GRADE MILK
Grade B prices were a critical component of milk pricing
system (least common denominator) until 12-31-99
• Reflect total supply of Grade A and Grade B production
available for storable products.
• Basis for federal price support programs
• Minnesota-Wisconsin Grade B prices historically used as the
basis for pricing Grade A milk used for Class I & II products in
Federal Milk Marketing Orders
• M-W was largely based on open market competitive prices not
formula prices
The Issue of the Minnesota-Wisconsin
Price Series (M-W)
M-W defined: The weighted average of Grade B
milk prices paid by Minnesota and Wisconsin
butter, milk powder and cheese plants.
Used 1961--2000 to set minimum producer pay
prices for Grade A milk in all federal milk
marketing orders.
The Issue of the Minnesota-Wisconsin
Price Series (M-W)
Purpose: To establish a uniform minimum pay
price in all federal milk orders for pricing Grade
A milk used in manufactured dairy products.
• Butter, non-fat milk powder and cheese are sold on
national markets.
• Minnesota and Wisconsin used because of the large
percentage of its milk is used for manufacturing.
• It also has the largest supply of Grade B milk, and
the most vigorous milk plant competition.
Utilization of Milk, Wisconsin, 1993-98
Use
Cheese
Ice Cream
Condensed milk
Other manufactured
Total Manufacturer
Fluid (beverage)
Shipped out-of-state
Kept on the farm
Percent of Total
86.5%
0.6%
2.0%
1.3%
90.4%
6.1%
2.1% (some to IA)
1.4%
Grade A of Milk, 1993--98
Grade A
Wisconsin
Minnesota
United States
90%
86%
95%
Grade B
10%
14%
5%
Basis for
pricing
95% of
U.S.milk
Class III Prices Used As the Class I
and Class II Mover
•
•
•
The Grade B Price Was Used To Set the
Class III Price
The Class I And Class II milk received a
fixed Premium Above Class III milk
When Class III ( a competitive price)
Moved Up or Down the Class I and II
Prices Moved Up and Down With it
FLUID MILK PRICING
(Single Basing Point)
.002$/mi from basing point
1. Class I differential reflects the cost of transporting milk from basing point
2. Usually < hauling cost to prevent interorder movement
Eau Claire
500 Miles
$1.00
FLUID MILK PRICING
(Single Basing Point)
.002$/mi from basing point
1. Class I differential reflects the cost of transporting milk from basing point
2. Usually < hauling cost to prevent interorder movement
Eau Claire
500 Miles
1,000 Miles
$1.00
$2.00
Questions?