Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets...

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Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist [email protected] 515-294-9911

Transcript of Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets...

Page 1: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

ECON 339X:Agricultural Marketing

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]

Page 2: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Today’s Topic

Page 3: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Marketing Orders

A federal (or state) regulation which places requirements on market transactions in a given area

Exists for several commodities, including milk, fruits, and vegetables

Biggest requirement: minimum prices for the commodities, based on usage

Page 4: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Federal Milk Marketing Orders

Source: USDA-AMS

Page 5: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Jobs of Marketing Order

Source: Dr. Ginder, ISU

Regulate milk prices

Classify milk by its final use

Establish minimum class and component prices

Enforce payments for milk in supply chain

Verify weights and test results

Audit records

Provide market information

Page 6: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Not Part of a Marketing Order

Source: Dr. Ginder, ISU

Production controls/limits

Sanitary/quality production standards

Retail price setting

Guaranteed markets/forced sales

Government support• Such as the Milk Income Loss Contract (MILC)

Page 7: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Milk Pricing for Producers

Source: Dr. Ginder, ISU

All producers receive the same price for milk components

Payments are based on amount of milk delivered

Three factors differentiate milk payments for producers:

• Milk composition (quantity of components)• Milk quality (somatic cells)• Location of producer

Page 8: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Milk Pricing for Producers

For central Iowa, milk producers receive payments based on:

• Protein• Butterfat• Other solids• Somatic cells• Producer price differential

The protein, butterfat, and other solids prices come from the Class III prices for each component

Page 9: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Somatic Cell Adjustment

Low somatic cell counts in milk are correlated with• Higher cheese yields• Longer shelf life

Adjustment is based on formulaCheese price * 0.0005 * (Count – 350)

where Count is the somatic cell count in thousands of cells per milliliter

The lower the count below 350, the higher the payment

Counts above 350 lower payments

Page 10: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Producer Price Differential

Pricing factor that captures location impact

Based on the value of milk in the marketing order region versus the value of the components using Class III prices

Adjusted by the relative difference in the Class I Price Differential by county

Can be positive or negative

Page 11: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Class I Price Differentials

Source: USDA-AMS

Page 12: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Prices for Feb. 2010

Source: www.fmmacentral.com

Page 13: Econ 339X, Spring 2010 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911.

Econ 339X, Spring 2010

Example ProducersProducer A Producer B

Location/County Story Buena Vista

Class I Price Differential $1.80 $1.75

Butterfat 4.5% 3.3%

Protein 3.7% 2.8%

Other solids 6.0% 5.7%

Somatic cell count 110,000 420,000

Milk sold 1,000 cwt. 1,000 cwt.

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Econ 339X, Spring 2010

Producer A’s Milk ValuesAmount Rate Value

Protein 3,700 lbs. $2.7066 $10,014.42

Butterfat 4,500 lbs. $1.4404 $ 6,481.80

Other solids 6,000 lbs. $0.1992 $ 1,195.20

Somatic cell count 240 $0.00076 $ 182.40

Prod. Price Differential $0.31 $ 310.00

Total value $18,183.82

Value per cwt. 1,000 cwt. $18.18

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Econ 339X, Spring 2010

Producer B’s Milk ValuesAmount Rate Value

Protein 2,800 lbs. $2.7066 $ 7,578.48

Butterfat 3,300 lbs. $1.4404 $ 4,753.32

Other solids 5,700 lbs. $0.1992 $ 1,135.44

Somatic cell count -70 $0.00076 $ -53.20

Prod. Price Differential $0.26 $ 260.00

Total value $13,674.04

Value per cwt. 1,000 cwt. $13.67

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Econ 339X, Spring 2010

Milk Supply Chain

Source: Dr. Ginder, ISU

Producer

10%-15%

85%-90%

Coop Handle

rCoop Processo

r

Independent

Processor

Governed by FMMO if Grade A

Government

Various types of market outlets

Various types of market outlets

Government

Final consumers

Final consumers

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Econ 339X, Spring 2010

Dairy Futures and Options

Contract Amount SettleClass III Milk 200,000 lbs. Cash

Class IV Milk 200,000 lbs. Cash

Nonfat Dry Milk 44,000 lbs. Cash or Delivery

Dry Whey 44,000 lbs. Cash

Butter 40,000 lbs. Cash or Delivery

Cheese (Spot Call)

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Econ 339X, Spring 2010

Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/