Did Termination of Federal Order 135 Affect the Prices Received by Utah Dairy Farmers?

Dr. E. Bruce Godfrey
USU Extension Dairy Economist

April 1, 2004 was not only �April Fools� Day, but also the day federal milk marketing order (FMMO) 135 was terminated. This termination affected producers in Utah, southern Idaho and eastern Oregon. Several consequences resulted from this decision, but two of the most important were the following: 1) with termination of the order, milk processors are no longer required to pay a minimum amount for milk purchased from dairymen, and 2) no information is publicly available on milk shipments, production, percent utilization by class of use and prices paid to dairymen. Order 135 is not the first FMMO to be terminated, but this is by far the largest so far in area and milk production. Discussions before the vote to terminate the order indicated that processors would price milk after termination in the same manner that was used before the order was terminated. This article is designed to address this issue � what changes, if any, in the way milk is priced/paid to producers occurred after order termination.

The prices paid for milk sold under a milk marketing order are complicated and beyond the scope of this article, but a few fundamentals need to be understood. First, prices paid to producers for Class I (fluid), II (primarily ice cream and yogurt), III (cheese) and IV (butter and dry milk) milk are generally determined by formula. These formulas are based primarily on the cash price of cheese, butter and non-fat dry milk. Data collected in one month are used to set prices for the following month. For example, cash cheese prices in June will be used to set the prices paid to producers in July. This lag is especially important to remember during periods when cheese prices are rising rapidly, as they have for the last several months, because it results in a negative producer price differential (PPD). The PPD represents the difference between the weighted average milk value for a Federal Milk order less the Class III value of milk in that order. The PPD is normally positive because the value of Class I and II milk is generally greater than the value of Class III or IV milk. However, a negative PPD occurs when Class III (or IV) prices are higher than the formula prices for Class I and II milk. It should be noted that a PPD, by definition, exists when an order exists. As a result, several dairymen have asked me why they had a negative, or any PPD, after Order 135 was terminated. Several reasons may be given, but the simple answer is that most of the processors in Utah sell milk on several orders. As a result, milk that may be obtained in this area is pooled with milk in areas that remain in a FMMO. However, any PPD that is used by a processor following termination of order 135 is derived by that firm and is not the result of FMMO statistics.

In an effort to determine what changes (if any) may have occurred in the prices received by dairymen in Utah, milk checks were obtained from a sample of Utah producers for payment of milk produced in March, April and May of 2004. These three months were chosen because they represent the last month (March) of the existence of Order 135 and the first two months following termination. Checks were obtained from producers and/or processors at various locations within the state and included, to the degree possible, milk check data from more than one producer who sold milk to the same processor.

The sample included milk sold to all but one of the major milk processors who purchase milk in Utah (independent producer-bottlers were excluded). The data for each firm are summarized in Tables 1-3. The prices paid for components (butterfat, protein and solids) were essentially uniform before and after termination. Furthermore, I did a similar survey in the spring of 2003, and the differences between processors was essentially zero. One would therefore conclude that the variation in prices paid to producers by processors before termination was small. Following termination, the prices paid to producers changed dramatically and essentially all of the variation is reflected in the PPD. It should be noted that Firm E was not subject to FMMO requirements. As a result, the FMMO formula prices were not used as a basis for the prices paid to producers who sold milk to this firm. However, the prices for this firm were significantly higher last fall when prices paid by firms using the FMMO formula were at record low levels. It should be noted that there was some variation (the differences were generally less than $ 0.30 per cwt) in the PPD applied to producers by the same processor in various parts of the state, and that these data do not consider differences between producers for quality discounts or premiums or hauling. However, any producer should be able to use these data to compare the prices he/she received with those shown in the following tables. If a producer has prices that differ from those shown in these tables, I would appreciate having you contact me at (435) 797-2294 or bruceg@ext.usu.edu.

Table 1. Component prices and PPD paid by Utah firms, April 2004.

Butterfat
$/pound
Protein
$/pound
Solids PPD
Firm A $2.3813 $2.0133 $0.0234 $0.20
Firm B 2.3813 2.0133 0.0234 0.20
Firm C 2.3813 2.0133 0.0234 -0.37
Firm D 2.3813 2.0133 0.0234 0.0
Firm E 2.350 0.0 0.770 0.30


Table 2. Component prices and PPD paid by Utah firms, May 2004.

Butterfat
$/pound
Protein
$/pound
Solids
$/pound
PPD
Firm A $2.5013 $3.4465 $0.1042 $-2.27
Firm B 2.5013 3.4465 0.1042 -3.79
Firm C 2.5013 3.4465 0.1042 -1.38
Firm D 2.5013 3.430 0.1042 0.0
Firm E 2.420 0.0 0.980 0.28

These numbers are interesting, but it is not clear what difference this made in the prices received by farmers. As a result, these data were used to determine the price that would have been received by a �typical� dairy that sold 200,000 pounds of milk. This milk was assumed to have butterfat test of 3.5%, protein test of 3.0% and other solids of 5.75%. Table 4 shows a summary of the prices received by this �typical� dairy on milk checks received in April (March production), May and June for the five primary processors or organizations that purchase milk from producers in Utah. These data clearly show that the price differences between processors changed dramatically following termination of the order�the difference between the high and low price was $1.76 before termination and increased to $ 5.25 following termination. The impact of the termination is most clearly illustrated when firm E (they did not follow FMMO guidelines) is excluded. The difference in prices (between the high and low price firm) changed from $ 0.57 per cwt before termination to $ 3.74 in May and $ 2.86 in June, and essentially all of the change is due to differences in the PPD. One can therefore conclude that milk processors in Utah continue to use FMMO guidelines in setting prices for components (butterfat, protein and solids), but the PPD derived and used by these firms changed dramatically following termination of Order 135. Furthermore, these differences are not trivial. The differences shown in Table 4 may change over time (I intend to track this information with the assistance of producers in Utah), but it is clear that termination of the order has had a dramatic impact on the prices processors pay for milk purchased from producers in Utah.

Table 3. Component prices and PPD paid by Utah firms, June 2004.

Butterfat
$/pound
Protein
$/pound
Solids
$/pound
PPD
Firm A $2.4282 $3.7639 $0.1444 $-0.43
Firm B 2.4282 3.7639 0.1444 -0.82
Firm C 2.4282 3.7639 0.1444 -3.295
Firm D 2.40 3.40 0.09 0.0
Firm E 2.40 0.0 1.22 0.28


Table 4. Prices ($ per cwt.) that a typical dairy would have received for milk sold to five processors in Utah in April, May and June 2004.*

Firm April May June
A $14.71 $17.42 $20.19
B 14.71 15.90 19.80
C 14.14 18.31 17.33
D 14.51 19.64 19.12
E 12.95 14.39 15.70
*The prices shown do not take into account quality discounts or premiums,
differences in hauling costs or other deductions (advertising, etc.)
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