SALEM, Ohio – Area dairy farmers who opened their milk checks last month expected to see an increase in their milk checks, but instead were glued to a line that said producer price differential negative $1.20.
In some cases, this deduction meant a few hundred dollars, but for larger dairy operations it meant thousands.
The truth is, some farmers didn’t even notice the differential until it was taken out of their checks – never mind the fact it’s been adding money to their checks for years.
But farmers aren’t being cheated. While a negative differential may make it appear that somehow, someone is taking money out of the milk check, this is not the case.
Instead, it’s all part of the master plan – also known as the Federal Milk Marketing Order Program – to balance the dairy market.
“A majority of dairy farmers don’t understand the workings of the federal system that ultimately determines the prices they receive for milk components,” said Ohio State’s dairy expert Cam Thraen.
To put the complex world of dairy pricing into its simplest form, the producer price differential can be negative when cheese prices increase rapidly to more than the fluid milk price.
Nothing new. This differential isn’t anything new in the milk check; it’s just that it usually isn’t so drastic. In fact, the differential was adding $1.25 a hundredweight in March.
Although 10 cents were deducted in the July 2003 check, the differential hasn’t been negative in four years.
The average producer price differentials for the last four years were:
* 1999 – +$1.81
* 2000 – +$2.34
* 2001 – +$1.42
* 2002 – +$1.12
Complicated. The producer price differential is based on a complex accounting definition, Thraen said.
That value is calculated monthly and is equal to the price of the Class I milk minus the Class III. Therefore, when the Class III price is higher than the Class I price, the number – or differential – will be negative.
This accounting process is administered by the Federal Order 33 administrator’s office on behalf of dairy farmers.
Class I vs. Class III. The Federal Order requires the Class I fluid price of milk be higher than the price of Class III milk used for butter and cheese.
The Class III price increased so quickly this summer that it surpassed the price of Class I milk.
The Class I milk price is set a month ahead and can’t change if cheese prices increase. Therefore, the producer price differential is now balancing those discrepancies.
If farmers follow milk pricing, they will know ahead of time whether the differential will be positive or negative, Thraen said, stressing the importance of farmers understanding the system.
Pooling system. Under normal market conditions, when the Class I price is higher than the Class III price, it is in the interest of milk buyers to participate in the federal order milk pool.
In those rare occasions when the Class I and Class III milk price are inverted, then it is not in the financial interest of the milk buyer to participate.
This is called depooling, and when milk buyers depool a sufficient amount of milk from Class III, the producer price differential may become negative.
Component pricing. Although the differential was negative in the August check, the prices farmers received for components were higher.
In past months when the differential was positive, component prices and the bottom line price were both less than in the August check.
Producer price differential, however, will be back in the black for September milk checks, Thraen said. This is because the cheese price that pushed the Class III price up has now pushed the Class I price up by more than $3, he said.
Check blend price. Regardless of positive or negative differentials, dairy pricing experts urge farmers to look at the bottom line price.
The blend price is the component values plus or minus the producer price differential. Although the differential was substantially higher for the August check, the bottom line price was higher than in past months.
For more information about dairy pricing, visit http:/aede.osu.edu/programs/ohiodairy.
(Reporter Kristy Hebert welcomes reader feedback by phone at 1-800-837-3419, ext. 23, or by e-mail at khebert@farmanddairy.com.)
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