An Overview of Class III Milk Prices
Class III Pricing Formula Summary:
- Base milk assumed to have 3.5% milkfat and 9.0% nonfat solids in skim milk
- Class III skim milk price = (Protein Price x 3.1) + (Other solids price x 5.9)
- Protein price = ((Cheese price - 0.1682) x 1.383) + ((((Cheese price - 0.1682) x 1.572) - Class III Butterfat price) x 1.17)
- Other solids price = (Dry Whey price - 0.1956) x 1.03
- Class III Butterfat price = (Butter price - 0.1202) x 1.2
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:
Butterfat price per pound = (NASS AA Butter survey price - 0.1202) x 1.20
- The 0.1202 value is the assumed butter make allowance. The 1.20 value is the assumed pounds of butter obtained from a pound of butterfat (i.e., butter is assumed to have a fat content of 83%)
Protein price per pound = ((Average NASS Cheese survey price - 0.1682) x 1.383) + (((Average NASS cheese survey price - 0.1682) x 1.572) - Butterfat price) x 1.17)
- The 0.1682 is the assumed cheese make allowance. The 1.383 and 1.572 values are the assumed cheese yields if an additional tenth of a pound of protein or butterfat is contained in a cwt of milk. It should be noted that these yields are based on a true protein test rather than the total nitrogen, as was the previous standard. The Van Slyke cheese yield formula is used to determine these cheese yield factors.
- The formula recognizes that the combination of protein and butterfat in milk contribute to the cheese yield. The 1.17 factor is the assumed ratio of butterfat to protein in cheese. An alternative to incorporating the additional value of butterfat to the protein price would be to compute a separate butterfat price for Class III. But having multiple butterfat prices would complicate the procedure for plants when accounting for all milk components.
- As in the calculation of butterfat values, NASS survey prices are used. Both average 40 pound cheddar block and 500 pound barrel prices are used. The weighted average NASS survey cheese price is calculated by adding $0.03 to a moisture-adjusted barrel price and then computing the weighted average price using the block and the adjusted barrel price times the pounds of each type in the NASS survey as the weights. This total cheese revenue is then divided by the total pounds of block and barrel cheese in tha NASS survey to yield an average barrel/block cheese price. The $0.03 adjustment to the barrel price is used to account for the additional cost of manufacturing barrel relative to block cheese.
Other Solids price per pound = ((NASS Dry Whey survey price - 0.1956) x 1.03
- The 0.1956 value is the assumed dry whey make allowance and the 1.03 represents the pounds of dry whey obtained from a pound of other solids.