California Milk Pricing

California has its own state milk pricing order

Share of U.S. Milk Production, California and Wisconsin, 1990 & 2000

Year CaliforniaProduction &

% Share

WisconsinProduction &

% Share1990 20.95 Billion

Lbs (14.1%)24.40 BillionLbs (16.5%)

2000 32.24 BillionLbs (19.2%)

23.26 BillionLbs (13.9%)

% Change inproduction

+53.9% - 4.7%

Change in milk production1990 to 2000

Tennessee

Wyoming

Arkansas

Alabama

North Dakota

North Carolina

Mississippi

Missouri

Alaska

Illinois

0-10-20-30-40-50-60

% Change

Largest Per Capita Decreases

21

9

1

38

6

23

13

48

42

10

19

24

33

30

7

25

29

12

5

32

36

17

18

35 41

28

16

27

22

11

4026

15

45

31

20

4

3

46

28

1443

44

39

34

4937

2000 Milk Production RankingTop Ten States Highlighted

495

949

952

238

5,582

755447

588 2,878

349 1,9301,092

2,165

565

732

196375

404

191158

78

4,336

169

1,344

175275

2000 Per Capita Milk Production

154 574

418

247

393389

154

269147

92

148

908

628

255

4,578251

32190

524

6227

140

Per Capita Milk ProductionU.S. Average = 596 Lbs.

Less Than 300 Lbs. (22)300 To 600 Lbs. (12)Greater Than 600 Lbs. (14)

-16-29

-13

+5

+35

+91

-13

-14

-44

+31

+11

+186

+3

-12-14

-5

+13 -32

-44

Percent Change In Per Capita Milk Production

2000 vs 1990

-34 -38

-16-37

-12 -13

+9

+2

-32 -5 -9

-45

-32

-21

-28

-3 +3

+2

+9

-11-17

-36

-8

-31

+5

-21

-10

-19

-21Percentage Changes

Decreasing (34)Increasing (14)

Regional Cheese Production As A PercentOf 1999 Total U.S. Production

With Percent Change In Production: 1999 vs 1994

17%-8%35%

+65%

1%-72%

32%+8%

16%+18%

Share of U.S. Cheese Production, California & Wisconsin, 1990 &1999

Year CA Share WI Share

1990 11.6% 31.5%

1999 17.4% 27.1%

% change inproduction

96.4% 12.5%

Regional Butter Production As A PercentOf 1999 Total U.S. Production

With Percent Change In Production: 1999 vs 1994

36%-18%

10%-17%

8%-0%

16%+6%

31%-7%

Share of U.S. Butter Production, California and Wisconsin 1990 & 1999

Year CA Share WI Share

1990 21.5% 24.6%

1999 26.9% 22.8%

% Change inproduction

22.7% - 9.4%

Regional NFDM Production As A PercentOf 1999 Total U.S. Production

With Percent Change In Production: 1999 vs 1994

69%+41%

7%-31%

4%-55%

4%-47%

16%+28%

Share of U.S. Nonfat Dry Milk Production, California & Wisconsin 1990 & 1999

Year CA Share WI Share

1990 36.7% 5.1%

1999 47.8% 1.5%

% Change inproduction

102.3% -51.3%

California viewed as an early adopter of alternative milk pricing.• 1962 adopted multiple component pricing for

class 1 milk; 1969 for all other classes.• Decoupling class 1 price--class 1 price

determined from economic formula• Advanced pricing of class 2 (not until 1981 in

federal orders)• 1962- Higher minimum standards for beverage

milk• Use of product price formula to establish fat and

solids-not-fat values (not until 2000 in federal orders)

Existing U.S. FDA & California butterfat (BF) & solids-not-fat (SNF) for beverage milk products

Fluid MilkProduct

FDA BF FDA SNF CaliforniaBF

California

Wholemilk

3.25% 8.25% 3.5% SNF

Lowfatmilks

0.5 to 2.0% 8.25% 1.9 to 2.1% 8.7%

Skim milk Less than0.5%

8.25% Less thanor equal to

0.25%

10.0%

9.0%

Five classes of milk:

• Class 1: Fluid products, sterilized or UTH milk (in-state), and lactose reduced milk

• Class 2: Fluid creams, sour cream, cottage cheese, buttermilk, sterilized creams, yogurt, and UHT milk (out-of-state)

• Class 3: Ice cream, ice milk, light dairy desserts, frozen mixes, frozen yogurt and other frozen products

Classes continued:

• Class 4a: Butter and dried milk

• Class 4b: Cheese

Calculating 1a price:

• 1a minimum price for milkfat

- use higher of USDA support price or CME butter price

- make allowance is subtracted

-results multiplied by yield factor of 4.2 pounds

1a pricing continued

• Minimum price for solids-not-fat:

- use higher of USDA support price for nonfat dry milk or nonfat dry milk price CA plants sold f.o.b.

- Minus a make allowance

-result multiplied by a yield factor of 8.613 pounds of nonfat dry milk (also reflects the value of buttermilk solids)

Calculating 1b price: (three steps)

• Step 1: Base Price

- USDA support price for 40-pound cheddar blocks X (1.0377 - make allowance) X 9.8

1.0377 is a moisture adjustment factor

9.8 is cheese yield

Step 2: Adjustment to base price:

- Base price is adjusted upward or downward in direction proportion to the relationship between the CME 40-pound cheddar block price and the USDA support price.

If CME price higher than support price adjusted upward, if lower, downward

Step 3: Value of whey cream

- whey cream as a by product of cheddar cheese is imputed and added to the adjusted price in step 2.

- (CME butter price - 9 cents) - make allowance x 0.27 yield of whey butter = adjustment to add

The final class 4b hundredweight price is converted to fat and solids-not-fat as follows:

• Class 4b fat is first set equal to to class 4a fat price

• 4a fat price X 3.6 pounds of fat = total fat value per hundredweight of milk

• Final class 4b price minus total fat value per hundredweight divided by 8.7 = 4b solids-not-fat price

• The final 4b price is reported on a 3.5% fat basis by fat price X 3.5 plus the SNF price by 8.7

Class 2 and class 3 prices:

• Class 2 and class 3 prices are based directly on class 4a component prices with fixed differentials added.

• Class 2 and 3 prices are set in advanced for a two month period

Class 1 price:

• A class 1 base price is set.

• This class 1 base price is adjusted with a Commodity Reference Price (CRP) which represents the wholesale revenue derived from a hundredweight of milk used to make butter/powder or cheese. A separate CRP is calculated for cheese and butter/powder

Butter/powder CRP:

• CME butter price

• X 4.2 yield

• Plus California nonfat dry milk price X 8.613 yield

Cheese CRP:

• CME 40-pound cheddar block price

• X 9.8 yield

• Plus (CME butter price - 9 cents) X .27 yield

Note: the higher of these two CRPs is used

Class I pricing continued:

• Changes in the values of class 1 components are calculated for a two-month period by averaging two month’s CRPs lagged three months, subtracting the statewide base price per hundredweight and allocating the difference to the components (MF, SNF and a fluid carrier) in proportions of 40:40:20

Example class 1 adjustment:

• Assume calculating two-month class I price for June and July

• The March and April CRPs averaged ($13.58 + $13.85)/2 = $13.7150 per hundredweight

• $13.7150 minus statewide base price of $10.1784 = $3.5366 which is allocated as follows:MF: (0.40 X $3.5366)/ 3.5 = $0.4042

SNF: (0.40 X $3.5366)/8.7 = $0.1626

Fluid carrier: (0.20 X $3.5366) = $0.0081

• These calculated changes are added to the respective component base prices for June & July

Pooling:• California milk producers receive a blend price

based on market-wide utilization of milk by class• However, producers are paid different blend

prices depending upon their production relative to individual quotas and production bases.

• Production base is total fat and SNF sales expressed on a daily basis

• Quota is class 1 MF and SNF sales• Quota may be traded among producers--sold in

dollars per pound of SNF• Some producers have no quota

Pooling continued:

• Individual farm production not restricted by quota• A uniform price is calculated• Subtracted from the revenue of all 5 classes is

total revenue from quota milk (quantity of quota milk X $1.70 per hundredweight)

• The residual is divided by total quantity of milk for the month to arrive at a non-quota price per hundredweight

• Thus, the difference between quota and non-quota milk is fixed at $1.70 per hundredweight

California class 4a price and federal order Class IV price, 2000

$10.00

$10.50

$11.00

$11.50

$12.00

$12.50

$13.00

$13.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Do

llar

s P

er H

un

dre

dw

eig

ht

CA 4aC IV

California 4b price and Federal Order Class III price , 2000

$8.00

$8.50

$9.00

$9.50

$10.00

$10.50

$11.00

$11.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Per

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CA 4b

C III

California class 1 price versus Upper Midwest Order Class I price, 2000

$12.00

$12.50

$13.00

$13.50

$14.00

$14.50

$15.00

$15.50

$16.00

$16.50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Do

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Per

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CA 1C I

Utilization of California Milk

• Class 1 = 20%

• Class 2 & 3 = 10%

• 4a = 30%

• 4b = 40%

Mailbox milk prices, Average all federal orders, Upper Midwest order and California

1999-00

$9

$10

$11

$12

$13

$14

$15

$16

$17

$18

Jan-9

9

Feb-9

9

Mar

-99

Apr-99

May

-99

Jun-9

9

Jul-9

9

Aug-99

Sep-9

9

Oct-9

9

Nov-99

Dec-9

9

Jan-0

0

Feb-0

0

Mar

-00

Apr-00

May

-00

Jun-0

0

Jul-0

0

Aug-00

Sep-0

0

Oct-0

0

Do

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Per

Hu

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t All markets

Upper MidwestCalifornia