California Milk Pricing

1. California Milk Pricing California has its own state milk pricing order

3. Share of U.S. Milk Production, California and Wisconsin, 1990 & 2000

4. Change in milk production 1990 to 2000

5. Largest Per Capita Decreases Tennessee Wyoming Arkansas Alabama North Dakota North Carolina Mississippi Missouri Alaska Illinois -60 -50 -40 -30 -20 -10 0 % Change

6. 2000 Milk Production Ranking Top Ten States Highlighted 9 33 43 42 14 5 34 2 24 21 6 8 3 39 48 12 49 30 4 37 11 18 16 44 38 23 19 46 25 17 45 22 20 1 28 27 31 29 36 13 10 40 26 41 35 32 7 15

7. 2000 Per Capita Milk Production 1,092 349 949 1,930 251 4,578 524 4,336 2,165 495 5,582 62 154 628 574 27 1,344 732 908 140 169 393 389 32 238 755 447 190 565 147 404 418 269 255 952 247 148 375 196 588 2,878 92 191 175 78 158 275 Per Capita Milk Production U.S. Average = 596 Lbs. 154 Less Than 300 Lbs. (22) 300 To 600 Lbs. (12) Greater Than 600 Lbs. (14)

8. Percent Change In Per Capita Milk Production 2000 vs 1990 -37 +5 -8 -14 +9 -16 +5 -13 -12 -13 +2 +91 -19 -44 +2 -12 -21 -14 -10 +9 -9 -5 -32 -31 -13 +3 +11 +3 +13 -3 -32 -17 -32 -11 +35 -45 -36 -5 -44 +186 +31 -28 -38 -34 -21 -29 -16 -21 Percentage Changes Decreasing (34) Increasing (14)

9. Regional Cheese Production As A Percent Of 1999 Total U.S. Production With Percent Change In Production: 1999 vs 1994 32% 17% +8% -8% 35% +65% 16% +18% 1% -72%

10. Share of U.S. Cheese Production, California & Wisconsin, 1990 &1999

11. Regional Butter Production As A Percent Of 1999 Total U.S. Production With Percent Change In Production: 1999 vs 1994 31% 10% -7% 36% -17% -18% 16% +6% 8% -0%

12. Share of U.S. Butter Production, California and Wisconsin 1990 & 1999

13. Regional NFDM Production As A Percent Of 1999 Total U.S. Production With Percent Change In Production: 1999 vs 1994 4% 7% -47% 69% -31% +41% 16% +28% 4% -55%

14. Share of U.S. Nonfat Dry Milk Production, California & Wisconsin 1990 & 1999

15. California viewed as an early adopter of alternative milk pricing. • 1962 adopted multiple component pricing for class 1 milk; 1969 for all other classes. • Decoupling class 1 price--class 1 price determined from economic formula • Advanced pricing of class 2 (not until 1981 in federal orders) • 1962- Higher minimum standards for beverage milk • Use of product price formula to establish fat and solids-not-fat values (not until 2000 in federal orders)

16. Existing U.S. FDA & California butterfat (BF) & solids-not-fat (SNF) for beverage milk products

17. Five classes of milk: • Class 1: Fluid products, sterilized or UTH milk (in-state), and lactose reduced milk • Class 2: Fluid creams, sour cream, cottage cheese, buttermilk, sterilized creams, yogurt, and UHT milk (out-of-state) • Class 3: Ice cream, ice milk, light dairy desserts, frozen mixes, frozen yogurt and other frozen products

18. Classes continued: • Class 4a : Butter and dried milk • Class 4b : Cheese

19. Calculating 1a price: • 1a minimum price for milkfat - use higher of USDA support price or CME butter price - make allowance is subtracted -results multiplied by yield factor of 4.2 pounds

20. 1a pricing continued • Minimum price for solids-not-fat: - use higher of USDA support price for nonfat dry milk or nonfat dry milk price CA plants sold f.o.b. - Minus a make allowance -result multiplied by a yield factor of 8.613 pounds of nonfat dry milk (also reflects the value of buttermilk solids)

21. Calculating 1b price: (three steps) • Step 1: Base Price - USDA support price for 40-pound cheddar blocks X (1.0377 - make allowance) X 9.8 1.0377 is a moisture adjustment factor 9.8 is cheese yield

22. Step 2: Adjustment to base price: - Base price is adjusted upward or downward in direction proportion to the relationship between the CME 40-pound cheddar block price and the USDA support price. If CME price higher than support price adjusted upward, if lower, downward

23. Step 3: Value of whey cream - whey cream as a by product of cheddar cheese is imputed and added to the adjusted price in step 2. - (CME butter price - 9 cents) - make allowance x 0.27 yield of whey butter = adjustment to add

24. The final class 4b hundredweight price is converted to fat and solids-not-fat as follows: • Class 4b fat is first set equal to to class 4a fat price • 4a fat price X 3.6 pounds of fat = total fat value per hundredweight of milk • Final class 4b price minus total fat value per hundredweight divided by 8.7 = 4b solids-not-fat price • The final 4b price is reported on a 3.5% fat basis by fat price X 3.5 plus the SNF price by 8.7

25. Class 2 and class 3 prices: • Class 2 and class 3 prices are based directly on class 4a component prices with fixed differentials added. • Class 2 and 3 prices are set in advanced for a two month period

26. Class 1 price: • A class 1 base price is set. • This class 1 base price is adjusted with a Commodity Reference Price (CRP) which represents the wholesale revenue derived from a hundredweight of milk used to make butter/powder or cheese. A separate CRP is calculated for cheese and butter/powder

27. Butter/powder CRP: • CME butter price • X 4.2 yield • Plus California nonfat dry milk price X 8.613 yield

28. Cheese CRP: • CME 40-pound cheddar block price • X 9.8 yield • Plus (CME butter price - 9 cents) X .27 yield Note: the higher of these two CRPs is used

29. Class I pricing continued: • Changes in the values of class 1 components are calculated for a two-month period by averaging two month’s CRPs lagged three months, subtracting the statewide base price per hundredweight and allocating the difference to the components (MF, SNF and a fluid carrier) in proportions of 40:40:20

30. Example class 1 adjustment: • Assume calculating two-month class I price for June and July • The March and April CRPs averaged ($13.58 + $13.85)/2 = $13.7150 per hundredweight • $13.7150 minus statewide base price of $10.1784 = $3.5366 which is allocated as follows: MF: (0.40 X $3.5366)/ 3.5 = $0.4042 SNF: (0.40 X $3.5366)/8.7 = $0.1626 Fluid carrier: (0.20 X $3.5366) = $0.0081 • These calculated changes are added to the respective component base prices for June & July

31. Pooling: • California milk producers receive a blend price based on market-wide utilization of milk by class • However, producers are paid different blend prices depending upon their production relative to individual quotas and production bases. • Production baseis total fat and SNF sales expressed on a daily basis • Quotais class 1 MF and SNF sales • Quota may be traded among producers--sold in dollars per pound of SNF • Some producers have no quota

32. Pooling continued: • Individual farm production not restricted by quota • A uniform price is calculated • Subtracted from the revenue of all 5 classes is total revenue from quota milk (quantity of quota milk X $1.70 per hundredweight) • The residual is divided by total quantity of milk for the month to arrive at a non-quota price per hundredweight • Thus, the difference between quota and non-quota milk is fixed at $1.70 per hundredweight

34. California 4b price and Federal Order Class III price , 2000 $11.50 CA 4b C III $11.00 $10.50 $10.00 Dollars Per Hundredweight $9.50 $9.00 $8.50 $8.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

35. California class 1 price versus Upper Midwest Order Class I price, 2000 $16.50 $16.00 $15.50 CA 1 $15.00 C I $14.50 Dollars Per Hundredweight $14.00 $13.50 $13.00 $12.50 $12.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

36. Utilization of California Milk • Class 1 = 20% • Class 2 & 3 = 10% • 4a = 30% • 4b = 40%

37. Mailbox milk prices, Average all federal orders, Upper Midwest order and California 1999-00 $18 All markets $17 Upper Midwest $16 California $15 $14 Dollars Per Hundredweight $13 $12 $11 $10 $9 Jul-99 Jul-00 Oct-99 Oct-00 Jan-99 Apr-99 Jan-00 Apr-00 Mar-99 Mar-00 Feb-99 Jun-99 Sep-99 Dec-99 Feb-00 Jun-00 Sep-00 Nov-99 May-99 Aug-99 May-00 Aug-00