Dairy Futures and Options Tutorial

An Overview of Class I Milk Prices

Below is the general Class I Pricing Formula:

Class I price = (Class I skim milk price x 0.965) + (Class I butterfat price x 3.5)

Class I Pricing (Milk Used for Fluid Milk Products):

A major change from the previous system in Class I pricing is the use of a mover other than the lagged Class III price.

Previously, the Class I price was determined by adding a Class I differential to the announced BFP two months previous. For Example, the April Class I price would be the February BFP plus the Class I differential. This two month advanced pricing experienced problems when the BFP increased by more than the Class I differential over the two months. When this happened, the Class III price was greater than the Class I price, that is, a price inversion occurred.

Price inversion was experienced during the Summer and Fall months of 1998, and when this occurred, the price incentive to supply Grade A milk for Class I use was gone. This is because the Class I price is lower than both the Class III price and the Blend price (weighted average producer price). Cheese plants rather than drawing out the Federal order pool (pool draw) the difference between the blend and the Class III price to share with dairy producers, they had to pay into the pool the price difference. As a result, some cheese plants decided to depool their milk from the FMMO.

A better decision for these cheese plants was to share the higher returns from making cheese with their dairy producers rather than paying into the pool and sharing some of the funds with the Class I handlers. De-pooling reduced the total pool dollars and lowered the blend price. Class I handlers found themselves at a price disadvantage to cheese plants in competing for producer milk. This situation is contrary to the purpose of Federal orders, that is, to assure an adequate supply of Grade A milk. Because Handlers compete for the same milk for different uses, Class I prices should exceed Class III and Class IV prices to ensure an adequate supply of milk for fluid use.

The Class I Pricing System After Order Reform:

Under Federal Order Reform, the above price inversion problem is addressed through the development of a separate mover for Class I prices. The advanced pricing procedure now uses a Class I price that is based on a more recent manufacturing price, that is, it ties the Class I price closer to changes in the manufacturing use prices. The Class I skim milk price is determined by adding the fixed Class I differential for each order to the higher of an advanced Class III or Class IV skim milk price. These advanced prices are calculated using the same product price formulas discussed with respect to Class III pricing but instead uses the most recent two-week period for which NASS product prices are available on the 23rd of the current month. These prices will then apply to the following month. Thus, the Class I price for a given month will be announced on or before the 23rd of the previous month.

Example: Class I Pricing for the Month of Sep 2017

The advanced Class III and Class IV prices for Sep 2017 are based on the product price formulas using NASS survey prices available the most recent two-weeks prior to Aug 23. Prices announced on Friday, Aug 18, 2017 for the weeks ending Aug 05 and Aug 12 are used to compute average product prices. Similarly, the Class I handler knows on Aug 18, 2017 the Sep 2017 Class I price.

Click to See Class I Price Differentials by County

Click to see a detailed example of the calculation of the Class I price for Sep 2017.