Transcript POOLING 101” - The Atlanta Market Administrator's Home Page

“Milk Marketing 101”
A Crash Course in Federal
Milk Marketing Orders
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MARKET STRUCTURE
•Number of firms in the industry
•Relationship among firms in the industry
•The structure of the industry determines the
conduct and performance of the individual profit
maximizing firm.
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Spectrum of Markets Structures
PERFECT COMPETITION
MONOPOLY
•Large number of small producers
•One seller of given product in given
market
•Homogeneous product
•No close substitutes
•No limits on entry/exit
•Entry to market is blocked
•Perfect knowledge
•Government regulation
•Resources are mobile
•Patent/copyright
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AGRICULTURAL MARKETING ORDERS
•Requested by vote of producers (farmers)
•Written by the Secretary of Agriculture
•Imposed on handlers (processors or packers) of highly
perishable commodities--fruits, vegetables, and milk.
•Impose uniform marketing practices among all handlers.
•Orders prevent handlers from having excessive market power
over the grower of perishables.
•Consumer ends up paying a higher price than would be the case
without orders.
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MILK MARKETING ORDERS
•Ensure Adequate Supplies of Fluid Milk to Consumers
•Establish Orderly Marketing of Producer Milk
•Achieve Price Stability
•Establish Uniform Pay Prices for Producer Milk
•Boundaries Based on Competition for Fluid Milk Sales
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Classes of Milk Products
•Class I – Fluid Products
•Class II – Ice Cream & Other Soft Products
•Class III – Cheese
•Class IV – Butter/Powder
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Different Prices for Different Classes
•Class IV- NASS Survey of Butter/Powder Prices
•Class III - NASS Survey of Cheese Prices
•Class II - Class IV Price + .70
•Class I – Higher of Class III or IV + Location Adj.
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NASS Survey
Class Prices
Class I Price
Class II Price
Class III Price
Class IV Price
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A Simple Fluid Milk Market
Class III Price = $14/cwt.
Class I Price = $18/cwt.
10,000 cwt. X $14/cwt. = $140,000
10,000 cwt. X $18/cwt. = $180,000
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A Simple Pool
Class III Price = $14/cwt.
Class I Price = $18/cwt.
10,000 cwt. X $18/cwt. = $180,000
10,000 cwt. X $14/cwt. = $140,000
___________
50% Class I
50% Class III
$320,000 /20,000 cwt. =$16/cwt. Uniform Price
Pooling in a Deficit Market
Class III Price = $14/cwt.
Class I Price = $18/cwt.
10,000 cwt. X $18/cwt. = $180,000
10,000 cwt. X $14/cwt. = $140,000
60% Class I
40% Class III
5,000 cwt. X $18/cwt.
= $ 90,000
_______________
$410,000 /25,000 cwt. =$16.40/cwt.
Absorbing Milk From a Surplus Market
Class III Price = $14/cwt.
Class I Price = $18/cwt.
10,000 cwt. X $18/cwt. = $180,000
10,000 cwt. X $14/cwt. = $140,000
40% Class I
60% Class III
5,000 cwt. X $14/cwt.
= $ 70,000
_______________
$390,000 /25,000 cwt. =$15.60/cwt.
The Seasonality Problem
1,200,000.00
Milk Production
1,100,000.00
1,000,000.00
Milk Consumption
900,000.00
800,000.00
Jan
Feb
Mar
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Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
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Dec
IV
Diversions: Paying for Flexibility
Class III Price = $14/cwt.
Class I Price = $18/cwt.
10,000 cwt. X $18/cwt. = $180,000
50% Class I
10,000 cwt. X $14/cwt. = $140,000
33% Class III
5,000 cwt. X $18/cwt. = $ 90,000
5,000 cwt. X $12/cwt.
= $ 60,000
_______________
17% Class IV
$470,000/30,000 cwt. =$15.67/cwt.
Skim and Butterfat
Fluid Plant Receipts
Butter Plant Receipts
3% Fat
97%
Skim
3% Fat
97%
Skim
Fluid Plant Product
Butter Plant Product
2% Fat
80% Fat
98%
Skim
20%
Skim
Pricing at 3.5%
Uniform Skim Calculation
Class Price
Volume
Value
I
6.85
3,000,000 $20,550,000
II
III
7.55
5.70
750,000 $5,662,500
1,000,000 $5,700,000
IV
6.87
1,700,000 $11,679,000
6,450,000cwt $43,591,500
43,591,500/6,450,000 = $6.76/cwt
Uniform Butterfat Calculation
Class Price
I
II
Volume Value
1.14 8,000,000 9,120,000
1.10 5,000,000 5,500,000
III
1.09
4,000,000 4,360,000
IV
1.09 2,000,000 2,180,000
19,000,000lbs $21,160,000
21,160,000/19,000,000 = $1.12/lb
(6.76 x .965) + (1.12 x 3.5) = $10.44/cwt @ 3.5% Butterfat
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Pool Settlement
Class I Plant
Class III Plant
.40
.40
Pays: Skim $6.80
Fat $1.30
.15
$6.40
.15
Pays: Skim $6.00
Fat $1.00
Farmer
$6.40
$1.15
$1.15
Receives: Skim $6.40
Fat $1.15
Market Price Signals and Feedback
Wholesale Level
Farm Level
Price
Price
Supply
Supply
Increased
Supply
P1
P1
P2
P2
Demand
Demand
Quantity
Q1 Q2
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Quantity
Q2 Q1
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