Dairy Futures and Options Tutorial

An Overview of Classified Pricing under Order Reform

Below is a general review of the classified price system for milk after Federal Order Reform which took effect on January 1st, 2000. Besides a general overview of the pricing system (see Example of Classified Pricing) , a more detailed explanation can be obtained by clicking on highlighted items throughout the following discussion.  An more detailed overview of classified pricing under the FMMO system can also be found by examining Jesse and Cropp(2001) publication.

Four Classes of Milk

Milk is priced depending on its use (class)

Basics of the Pricing System after 2000

The Class I Milk Price

The Class II Milk Price

The Class III Milk Price

Weekly averages of NASS price surveys are used as basis for these calculations

Class IV Milk Price

Weekly averages of NASS price surveys are used as basis for these calculations.

How Producers are Paid

  • The minimum Producer Payment (TV) is determined as follows:
    TV = (price/lb of protein x total lbs of protein) + (price/lb of butterfat x total lbs of butterfat) + (price/lb of other solids x total lbs of other solids) + (producer price differential x hundredweights of milk x quality adjustment)
  • Producer Price Differential (PPD)

    Quality Adjustment

    For a detailed presentation of the pricing of all classes of milk using current NASS survey prices, click here