Basic Milk Pricing Concepts for Dairy Farmers
Published : Oct 2008
Authors : Jesse, E., and B. Cropp
In this publication, we explain milk pricing concepts for dairy farmers and others who don’t need to know all of the intricate details but seek a basic understanding of how milk is priced — in particular, how federal milk marketing order prices are derived and how orders and other federal milk pricing rules affect dairy farmers’ farm-level milk prices. We begin by discussing how markets for manufactured dairy products operate, since minimum federal order prices have been based exclusively on these markets since 2000. That discussion includes a brief review of the federal Dairy Product Price Support Program. Next, we describe the federal order system. We cover basic principals of classified pricing and pooling, show how milk component and class prices are derived, and demonstrate the calculation of pool values and producer pay prices. Finally, we discuss some controversial issues surrounding milk pricing — issues that have occupied economists and politicians for several decades.

