Watch: Milk Pricing 101

An education session on one of agriculture’s most complex pricing systems

Map of united states with color highlights of federal milk order geographies

Milk pricing is one of the most complicated pricing systems in agriculture. Our team of risk management experts has put together a brief training video to discuss the basics of milk pricing and how Land O’Lakes, Inc. navigates this system.

Watch Milk Pricing 101 below

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In this education session, Jacob Thompson, senior dairy business advisor and Tom Wegner, director of corporate governance and leader development lead members through Milk Pricing 101; how milk gets priced and what that means for producers.
This twenty-minute webinar outlines the following topics:
•   Federal Milk Marketing Order (FMMO) overview
•   Three Cs of milk pricing
•   Make allowances
•   Blend pricing
•   Class pricing timeline
•   Class pricing formulas and blend calculations
•   Producer Price Differential (PPD)
•   Basis
Federal Milk Marketing Orders (FMMOs)
FMMOs establish conditions under which dairy processors buy fresh milk from dairy farmers who supply a marketing area, maintaining stable marketing relationships for all handlers and producers and organizing the complex process of marketing fresh milk1
USDA oversees the FMMO program, which includes 11 milk marketing orders and applies to about 75 percent of total U.S. milk production1.
Federal orders establish minimum prices paid to farmers, ensure payments to farmers are accurate and timely, and provide market information1.
Land O’Lakes, Inc. dairy members are included in four of the 11 orders: F.O. 1 (Northeast), F.O. 30 (Upper Midwest), F.O. 32 (Central) and F.O. 51 (California).
Check out this helpful brochure from the USDA on FMMOs2.
Make Allowances
Make allowances are an estimate of the cost of manufacturing a product; or more simply, an estimated cost (dollar amount) to make (manufacture a dairy commodity dairy product). In milk pricing, make allowances are based on an estimate of the costs associated with converting a hundredweight of raw milk into commodity dairy products including butter, cheese, whey or nonfat dry milk powder.
•   Make allowances are based on industry surveys of dairy processors’ manufacturing costs and are intended to account for (1) production costs of specific commodity dairy products, (2) a small sales and administrative component.
•   Make allowances are a fixed value, thereby allowing classified milk prices to reflect changes in wholesale prices for commodity butter, nonfat dry milk, cheese and whey.
•   Make allowances were last adjusted in 2008, based on surveys of dairy manufacturing costs from 2006.
•   USDA has contracted with the University of Wisconsin to conduct a survey of current dairy product manufacturing costs.
•   Land O’Lakes has two staff members that regularly participate in committees at NMPF and IDFA that will review this survey data.
Producer Product Differential (PPD)
The PPD is the total dollars in a federal order pool available for producer payment minus the total dollars paid to producers for their milk production at the Class III component values for butterfat, protein and other solids. The sum is divided by the total hundredweight (cwt.) of producer milk. The result is the PPD per cwt.
References and Resources
1 National Milk Producers Federation (NMPF)
2 The U.S. Department of Agriculture: Agricultural Marketing Service
3 Farm Bureau
PMVAP Education Opportunities
This education session is part one of three of the educational training offered as part of the Pandemic Market Volatility Assistance Program (PMVAP). Sessions two and three will be offered in January and February 2021. Session two will cover “What is Risk Management?” and session three will discuss “Risk Management Planning.” Watch for further details and invites on these continued opportunities through Land O’Lakes experts.
Want more? Our Risk Management Experts are available to all dairy members
Land O’Lakes has a team of risk management experts that can provide comprehensive and tailored education and services to all our dairy members at any time. If you would like to learn more about these services, please contact your Dairy Business Advisor or your Dairy Field Representative.