Dairy Futures and Options Tutorial

An Overview of Class III Milk Prices

Class III Pricing Formula Summary:

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

Class III Pricing:

The previous Basic Formula Price (BFP) served two functions - as the minimum price for Class III milk (hard cheese) and as the mover of Class I (beverage milk) and Class II (soft manufactured dairy products). Under the 2000 Federal Order Reform these functions are separated. The Class III MCP (multiple component pricing) provides the minimum price for Class III. A separate mover is used for Class I and Class II.

Component prices used to determine the value of Class III milk are: butterfat, protein, and other solids (i.e., nonfat, non-protein solids). Previous MCP programs decomposed the announced Class III into component values starting with butterfat value, then protein, and ending with a residual for other solids. The problem with this method is that when the price of butterfat was relatively high the value of protein had to be reduced, and the other solids price was set at zero for the sum of the component values per hunderdweight of milk not to exceed the announced BFP. When butter prices were relatively high producers raised the question as to why they were being paid a relatively low price for protein, and nothing for other solids.

Under Order Reform the above problem was addressed by not de-composing an announced BFP, but rather calculating a value for each component based on dairy product prices cheddar cheese, butter and dry whey. The value of butterfat is based on the price of butter, protein on the price of cheese and other solids on the price of dry whey. Formulas for each component value use yields of these products and plant make allowances (what it costs to make a particular dairy product excluding milk costs) to determine value.

Class III component values are computed as follows: