Dairy Futures and Options Tutorial

An Overview of Class II Milk Prices

The General Class II Price Formula:

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

Overview of Class II Pricing:

Under the previous Federal order pricing system, Class II milk was determined in a similar manner as was Class I, by adding a fixed differential to the announced BFP two-months previous . It was asserted that under this system the separate product class for nonfat dry milk (Class III-A) resulted in a competitive advantage over producer milk used to producer Class II products. Similar to the Class I inversion problem, this Class II problem was intensified by the use of the two month previous BFP and the fact that the BFP value may change dramatically between the time and the announced BFP.

The current rule addresses this problem using an advanced pricing procedure similar to that used in Class I, but tied to the Advanced Class IV skim milk price. The Class II skim milk price will be the Advanced Class IV skim milk price (the advanced Class IV non solids price per pound times 9) plus a fixed differential of $0.70. The $0.70 is an estimate of the cost of drying condensed milk and re-wetting the solids in Class II products.

Click here to review a detailed example of the calculation of the Class II price for Aug 2017