Dairy January 2000 What Producers Can Expect from the New SE Federal Milk Marketing Order Ms. Sue Mosely Atlanta Milk Market Administrator A new Southeast Milk Marketing Order is scheduled to take effect on January 1, 2000. This is an explanation of some of the new provisions, as they affect milk producers. This article explains the new Class prices and outlines the steps in the calculation of the uniform price at Atlanta. Skim Milk and Butterfat Pricing Under the Southeast Order the most apparent change in the calculation of both Class prices and uniform prices will be the separate pricing of skim milk and butterfat. Federal order calculations will be made separately for the pounds of skim milk and for the pounds of butterfat contained in a volume of milk. Plants will pay separate Class prices for skim milk and butterfat. These values will go into the calculation of separate uniform prices for skim milk and butterfat that will be paid to producers and cooperative associations. The Market Administrator will announce Class and uniform prices per hundredweight (cwt.) of skim milk and per pound of butterfat. Class and uniform prices at 3.5% will continue to be announced, but only for informational purposes. Classes and Class Prices The Class prices for skim milk and butterfat will be calculated from the prices of manufactured dairy products. USDA's National Agricultural Statistics Service (NASS) asks dairy manufacturing plants around the U.S. what price they were paid for their products during the week; each week NASS calculates a weighted average of the responses. These are the prices used in the Class price formulas. Four Classes of milk use will be pooled under the new order. Each Class will have a skim milk price and a butterfat price calculated from the prices of dairy products. Class IV contains butter and milk powder. Class IV skim milk price is based on nonfat dry milk powder prices. Class IV butterfat price is based on butter prices. Class III contains most cheese, including cream cheese. Class III skim milk price is based on the value of milk going into cheese and cheese whey, minus the value of the butterfat if it had been used for making butter. This formula causes the Class III skim milk price to go up with a higher cheese price and down with a higher butter price. Class III butterfat price is the same formula used in Class IV, based on butter prices. Class II contains soft manufactured dairy products and other commercial food processing. Class II skim milk price equals the Class IV skim milk price (calculated from the nonfat dry milk powder price), plus 70¢ per cwt. Class II butterfat price is the Class IV butterfat price (based on butter prices), plus 0.7¢ per pound Class I contains fluid milk products. Class I skim milk price is the higher of two formulas: the Class III formula, using cheese, butter, and whey prices; or the Class IV formula, using nonfat dry milk prices; plus a Class I differential. Class I butterfat price is based on butter prices, plus the Class I differential. Class Price Announcement Dates and Data Used Skim milk prices for Classes III and IV and butterfat prices for Classes II, III and IV will be announced on the last Friday on or before the 5th of the month after delivery, using weighted averages of the four or five weeks of NASS survey prices available since the previous 5th (i.e., the October 1999 price will be announced on Friday, November 5, using the prices for the five weeks ending October 2, 9, 16, 23, and 30): Skim milk prices for Classes I and II and the butterfat price for Class I will be announced on the last Friday on or before the 23rd of the month before delivery, using weighted averages of the last two weeks of NASS surveys (i.e., the October 1999 price will be announced on Friday, September 17, using prices for the weeks ending September 4 and 11). Calculating Uniform Prices The Federal order uniform prices are calculated for butterfat and skim milk at Atlanta (Fulton County), Georgia. Here is a (slightly) simplified pool calculation of the uniform prices for butterfat and skim milk. Calculation of Uniform Butterfat Price The uniform butterfat price is simply an average of the Class butterfat prices at location, weighted by the pounds in each Class. This is calculated as follows:     Pounds   x Price/Lb.   = Dollars Class I   20,000   $1.6402   $32,804.00 Class II   15,000   1.5500   23,250.00 Class III   7,000   1.5430   10,801.00 Class IV   3,500   1.5430   5,400.50 Total Butterfat   45,500     $72,255.50 Uniform Butterfat Price:   $1.5880   Upcoming Events February 5 Dixie Junior Round Up Dairy Show, Jackson, MS February 15 Mississippi DHIA and Mississippi ADA Annual Meeting, MS Farm Bureau Bldg., Jackson, MS Calculation of Uniform Skim Milk Price at Atlanta The uniform skim milk price is a little more complicated. An explanation follows.   Pounds X Price/unit = Dollars Cl. I Skim   980,000   $10.57 /cwt.   103,586.00 Cl. I Bf.   20,000   $1.6402 /lb.   32,804.00   Total   1,000,000   Class I Value:   $ 136,390.00 Cl. II Skim   85,000   $8.37 /cwt.   7,114.50 Cl. II Bf.   15,000   $1.5500 /lb.   23,250.00   Total   100,000   Class II Value:   $ 30,364.50 Cl. III Skim   93,000   $7.79 /cwt.   7,244.70 Cl. III Bf.   7,000   $1.5430 /lb.   10,801.00   Total   100,000   Class III Value:   $ 18,045.70 Cl. IV Skim   96,500   $7.66 /cwt.   7,391.90 Cl. IV Bf.   3,500   $1.5430 /lb.   5,400.50   Total   100,000   Class IV Value:   $ 12,792.40 Producer Milk   1,300,000   Total Value:   $ 197,592.60 Less: Net adjustments   (2,500.00) Less: Producers' Butterfat Value:         (45,500)   $1.5880 /lb.   (72,254.00) Total Skim Milk   1,254,500   $9.79184 /cwt.   $ 122,838.60 Less: PSF Reserve   $0.04184 /cwt.   (541.15) UNIFORM SKIM MILK PRICE AT ATLANTA:   $9.75 /cwt.   UNIFORM BUTTERFAT PRICE:   $1.5880 /lb.     UNIFORM PRICE at 3.5% at ATLANTA*   (Skim x .965) + (Butterfat x 3.5) =   $14.97/cwt. *Announced for information purposes only. All producer milk is allocated to the four Classes of utilization, according to the order. The skim milk price for each Class is multiplied by the hundredweight of skim milk in producer milk in that Class. The butterfat price for each Class is multiplied by the pounds of butterfat in producer milk in each Class. The results are summed together for a total value of producer milk at receiving locations ($197,592.60 in this example). Adjustments are added and subtracted for various items, including (among others) changes in plant inventories and the net effect of location adjustments. Then the value of butterfat in producer milk is subtracted (in this case 45,500 pounds times $1.588, the uniform butterfat price). This adjusted total value is divided by the sum of skim milk in total producer milk. (In some months, "other source Class I milk" will enter into this calculation, but for simplicity, we'll assume no other source Class I milk in this example.) Finally, about 4.5¢ per hundredweight is rounded off for the producer settlement fund reserve, and the result is the uniform skim milk price at Atlanta ($9.75). A uniform price will also be announced every month for milk at a 3.5% butterfat test at Atlanta, but this is for information purposes only. Uniform Price at Location Under the Federal order producer milk is priced at the location of the receiving plant, so the uniform skim and butterfat prices are each different for each location of a receiving plant. For the uniform skim milk price at the plant receiving your milk, simply add (or subtract) the location adjustment for the plant's county to the uniform skim milk price at Atlanta. For example, the location adjustment at Montgomery, Alabama, is 20¢ per hundredweight; so the skim milk price, using the pool calculated on this page, would be $9.75 plus 20¢, or $9.95 per hundredweight. For the uniform butterfat price at the plant, divide the location adjustment by 100 (the number of pounds in a hundredweight) and add the result to the uniform butterfat price at Atlanta. For butterfat Montgomery's 20¢ per hundredweight location adjustment becomes $0.002 per pound, and the uniform butterfat price equals $1.5880 plus $0.002, or $1.5900 per pound. NOVEMBER 1999 HONOR ROLL HERDS*   DAIRY       COUNTY   NO. COWS   LBS. ECM   2X 3X   ROLLING HERD AVERAGE MILK FAT PROT DOT RONALD H CLARK LINCOLN 93 70.0 2X 19900 683 657 11/22 MACTOC FARM OKTIBBEHA 196 63.5 2X 25446 965 810 11/29 STEWARD FARM INC TATE 411 60.4 2X 23242 859 744 11/03 J & J JERSEY JONES 13 60.1 2X 16599 696 611 11/18 NORTH MS BR EXP STATION MARSHALL 91 59.5 2X 19473 695 638 11/09 J & L DAIRY WALTHALL 220 56.3 2X 19669 555 633 11/22 JEFCOAT & WILLIAMS DAIRY JONES 70 55.9 2X 20097 657 631 11/18 COASTAL PLAIN EXP STA NEWTON 175 54.0 2X 20490 744 652 11/14 ROWZEE JERSEY FARM NEWTON 160 53.5 2X 17160 787 657 11/16 MS.STATE UNIVERSITY OKTIBBEHA 177 53.0 2X 16956 657 572 10/28 FREEMAN DAIRY PIKE 122 52.3 2X 20085 672 689 11/22 A L BOYD JR WALTHALL 81 51.1 2X 19837 676 639 11/21 PAUL W EDWARDS NEWTON 151 51.0 2X 18001 655 597 11/01 JERRY CORKERN LEAKE 98 50.4 2X 15816 582 538 11/06 MILTON & TERRY JEFCOAT JONES 214 49.7 2X 21345 712 677 11/03 SIMMONS DAIRY MONROE 86 49.1 2X 14676 477 486 11/20 DANNY WALTER SISCO LINCOLN 108 48.9 2X 17665 532 561 11/15 MCREYNOLDS & RIVERS OKTIBBEHA 126 48.3 2X 15591 518 492 11/10 FREEMAN DAIRY PIKE 121 47.3 2X 20024 673 687 10/30 THOMPSON BROTHERS MARSHALL 142 46.9 2X 20226 711 639 11/01 FLOWERS DAIRY JONES 86 46.8 2X 16226 574 550 11/17 MAX & TAMMY STINSON WALTHALL 235 46.3 2X 16728 599 542 11/17 CORY CLEVELAND PIKE 28 45.0 2X 13548 550 504 11/16 NUNNERY DAIRY PIKE 160 44.5 2X 12754 469 426 11/24 WAYNE JACOBSEN PIKE 115 44.5 2X 0 0 0 11/05 *Top 25 herds enrolled on supervised DHIA testing programs by test day energy corrected milk for all cows. ** ECM = (.3246 x test day milk) + (12.86 x test day lbs. fat) + (7.04 x test day lbs. protein) December 1999 BFP Price Dr. C. W. "Bill" Herndon Dairy Economist, MSU November BFP Plunges to a 20-year Low, $9.79 The Basic Formula Price (BFP) continued to respond to declining dairy product prices and, more specifically, cheddar cheese and nonfat dry milk prices at or very near the USDAís support price levels. The November BFP fell by $1.70 per hundredweight (cwt.) which follows a $4.77 collapse in the October price, thus the BFP has plummeted by $6.47 per cwt. (or 40%) from the $16.26 recorded for the September milk price. The November BFP of $9.79 per cwt. is the lowest price recorded since August 1979 and is one cent below the $9.80 USDAís support price for milk. Dairy producers are certainly very concerned about the dismal status and outlook for milk prices as the new century begins. The sharp downturn in milk prices has been blamed on the over-abundance of milk supplies that are exceeding the demand for dairy products. Three fundamental factors have contributed to the current imbalance in the milk demand and supply situation resulting in burdensome excess milk output. First, a perpetuation of moderate grain/feed prices which affords dairy farmers the flexibility to provide ample, high-quality protein and other nutrients to dairy cows. Second, record high dairy product and milk prices experienced in 1998 and 1999 have provided incentives to milk producers to retain and add cows in their dairy herds. Third, favorable weather conditions experienced during 1999 in most areas in the U.S. have bolstered milk output per cow. Each of these elements has aided in producing a "flood" of milk (see Milk Production section below for more details) several months prior to the usual "spring flush" period and these excess supplies are overshadowing the dairy market. For Southeastern states, these factors have lead to a reduction in the rate of long-term decline in milk production. For example, most states in the Southeast have experienced annual declines in milk output ranging from 5 to 8% during the 1990ís-- however, 1999 has witnessed declines of only 2 to 3% and the states of Florida, Georgia and Virginia recorded increased milk production. Weekly milk imports into Florida and other Southeastern states have declined to virtually zero when, during the second week of December NO loads were shipped into Florida (compared to 40 during 1998) and only 15 truckloads were imported into the remainder of the Southeast. As schools recessed for the Christmas and New Yearís holidays, the resulting decline in fluid milk demand places an additional hardship to cooperatives and processors in attempting to find a manufacturing uses for these milk supplies. As the year begins, the dairy industry is expecting the BFP to remain below the $10.00 level when the December BFP is announced and be reported near the $9.75 per cwt. level. The November BFP was reported at $9.79 per cwt. representing a DECREASE of $1.70 per cwt. (-14.8%) BELOW the October BFP of $11.49. The November 1999 BFP is $7.05 per cwt. (or ñ41.9%) LOWER than the November 1998 BFP of $16.84. Dairy producers need to remember that the November BFP will be used as the base price to calculate the January 2000 Class I and Class II milk prices and this Novemberís Class III milk price. Because about 80-85 percent of Mississippi milk is utilized as Class I and Class II products, farmers will not realize any decrease in revenues caused by this $1.70 decrease in the November BFP until they receive their "settlement" checks in mid-February as payment for milk sold in January 2000. Milk Production. Milk production continues to increase across ALL regions of the U.S. which has added even more pressure to the usual end-of-year plight of excess milk supplies caused by the closure of schools for the holiday recess period. During November, dairy farmers produced 555 million more pounds (+4.4%) of milk compared to the same month of 1998 by milking 58,000 more cows which gave an average of 51 more pounds per head. Through the first 11 months of 1999, milk farmers have produced 4,851 million pounds more (3.4%) than during the same period of 1998. November 1999 milk output statistics indicate that in the 20 major milk states, volumes were also up 4.4 percent compared to the same month of last year. Reviewing these November data for individual states reveals again amazing increases in California (+12.1%), Idaho (+14.9%), New Mexico (+11.7%) and Arizona (+7.2%) including expanded output in the Southern states of Virginia (+6.8%) and Texas (+2.5%). Of the 20 reporting states, only six states reported a decrease in milk output between these two months of November, where Florida (-2.8%) was the singular Southeastern state to record a decline in milk production. Because of the imbalance in milk supply and demand situation, there is a very real prospect for much lower milk prices during 2000 and this will probably severely limit dairy profitability. Therefore, dairy farmers should remain very cautious and carefully weigh any and all production and/or investment decisions related to their dairy business operations. Dairy Product Prices. Dairy product prices continue to be depressed by excess supplies of milk that are being used to manufacture cheeses, milk powders and butter. While cheese prices have stabilized and increased slightly in November and December, cheddar cheese prices have been propped up by the USDA through its Commodity Credit Corporation (CCC). The CCC provides processors with the assurance that the U.S. government will purchase 40# blocks and 500# barrels of American cheddar at the support prices of $1.10 and $1.085 per pound, respectively. However, a very bright spot in the dairy market continues to be the persisting strong demand for cheese products that is being sustained by the robustness of the U.S. economy. Since cheese prices reached the support level of $1.10 per pound (for 40# blocks) on November 10 and 11, the Chicago Mercantile Exchange (CME) has witnessed cheddar prices hovering between $1.12 and $1.22. Grade AA butter prices have seen a steady decline where CME butter prices have declined about 20% between mid-November and mid-December. On the CME, 40# block prices were reported at $1.125 on November 12 and "bounced around" over the subsequent five weeks and were recorded at $1.1475 on December 17-- a 2.25-cent (+2.0%) increase over this period. Barrel prices also went up by 5.25 cents (+4.8%) from $1.0975 on November 12 to $1.15 on December 17. On November 12, the Grade AA butter price was $1.095 compared to $0.905 on December 17 -- a decrease of 19 cents (-17.4%) per pound. Once again this newsletter must report that nonfat dry milk (NDM) prices on the CME have remained absolutely flat near the government support price level of $1.03 per pound since September 29. The CCC continues to purchase nonfat dry milk and in recent weeks the USDA has been forced to increase the amount of these weekly procurements to a level of about six to seven million pounds. Between October 1 and December 17, the CCC has bought almost 28 million pounds of non-fortified NDM. Near-term Market Outlook. The prospects for economic prosperity and profitability for dairy farmers appears to be very bleak as this century ends and the new millenium begins. Growing supplies of milk have and will become more and more burdensome where the market has already seen that milk prices have been forced down to government supports and to levels not experienced in over 21 years. Dairy market forecasters are projecting that the farm-level milk prices during 2000 will average $1.00 to $1.25 less than in 1999. However, many industry observers are not sure how the changes in federal milk orders will affect milk prices as the USDA begins to implement a new system for pricing milk on January 1, 2000. In spite of this confusion and uncertainty, it appears that the year 2000 will be a very trying and stressful year for dairy farmers. However, a silver lining of this very dark cloud is that feed prices are expected to remain near the current moderate to low levels throughout in coming year. The December BFP (which will be the last BFP ever reported) is expected remain at or slightly below the milk price support level of $9.80. Cheese prices seem to have recovered slightly and are expected to stabilize 5 to 10 cents above the support prices levels while NMD will stay stuck at the CCC support price. The CME recorded on December 17 BFP futures contracts settlement prices were $9.67 for the December contract, $10.48 for next January, $10.65 for next February, and $10.70 for March. (All BFP contracts will be terminated and will be replaced with Class III milk price futures contracts as the USDA implements its federal milk order reforms on January 1, 2000.) If weather conditions remain conducive for milk production, a deluge of "spring flush" milk will overpower the dairy market and compel the USDA to purchase large quantities of dairy products at support prices which will, in turn, hold down farm-level milk prices throughout 2000. Producers should be planning for the anticipated financial difficulties associated with cash flow problems as their monthly milk revenue plunge due to very low milk prices. Summary of Changes in National Dairy Policy During late November, the U.S. Congress passed and President Clinton signed into law the Consolidated Appropriations Act for Fiscal Year 2000 and this legislation contained several features related to Federal Milk Order reform and national dairy policy. Specifically, the FY2000 Appropriations Act included four provisions related to national dairy policy: Mandates the adoption of the Class I pricing differential scheme described as Option 1A and forces the USDA to execute Option 1A location differentials under the Federal Order reforms implemented on January 1, 2000; Requires the USDA to adopt formal rulemaking procedures and hold public hearing to reconsider Class III and Class IV milk pricing formulas. This process must be completed and implemented on January 1, 2001; Establish a temporary pilot programs which will be monitored by the USDA where milk producers/cooperatives may enter into forward pricing contracts with handlers/processors to price Class II, III and IV milk, only; and, Re-authorizes Congressional consent for the continued operation of the Northeast Dairy Compact in the original six states until September 30, 2001. More importantly, Congress did NOT approve adding any additional states to the Northeast Compact and did NOT authorize the establishment of the Southern Dairy Compact. Additionally, this legislation extends the deadline for the termination of dairy product price supports until January 1, 2001 (extends the deadline for one year). The most important element of this bill was that Congress gave the USDA approval to implement Federal Order reform effective on January 1, 2000. The two provisions that were of most interest to Mississippi and Southeastern dairy farmers were the Option 1A Class I pricing scheme and the Southern Dairy Compact. First, the Option 1A Class I pricing surface maintains location differentials which are somewhat similar to those differentials that existed under the previous pricing procedure. The debate and conflict over the schemes described as Option 1A and the USDAís preferred Option 1B received most of the attention in Washington and across all dairy production regions. Adoption of Option 1A is expected to restore about $200 million per year in milk revenues to dairy farmers compared to the Option 1B plan, especially to milk producers in the Southeast, Southwest and Northeast. So, the Congressional mandate requiring the USDA to implement Option 1A Class I location differentials was a huge win for Mississippi dairy producers. Second, the lack of congressional consent for a Southern Dairy Compact was a blow to southeastern dairy farmers striving to stabilize their revenues and incomes through the operation of a regional compact. The very contentious debate on Capital Hill and, especially in the U.S. Senate, over dairy compacts almost brought the entire process to pass the Appropriations Act to a standoff between the Senators from Wisconsin and Vermont. Senate Majority Leader, Trent Lott (from Mississippi), had to promise that the issue of dairy compacts would be debated again in sometime during 2000 to get these Senators to agree to stop their filibuster and complete the passage of the FY2000 Appropriations Act. However, supporters of the Southern Dairy Compact interpret that continuation of the Northeast Dairy Compact as a victory and have promised to strive for gaining approval of a compact in the South. Southeast "Blend" Price Increases to $18.25 in Nov. The Southeast Federal Order Milk Market Administrator reports that the November 1999 "blend" or uniform price for milk delivered in Federal Order (FO) #7 at $18.25 per cwt. (for 3.5% Butterfat milk) in Zone 7, see the Mississippi map for zones (Zone 5 minus $0.25, Zone 6 minus $0.10, Zone 8 plus $0.10, Zone 9 plus $0.20, Zone 10 plus $0.32, Zone 11 plus $0.50, and Zone 12 plus $0.57 per cwt.). The November "blend" price of $18.25 for Zone 7 of FO #7 represents an INCREASE of 29cents per cwt. (+1.6%) compared to the October price of $17.96. The November 1999 blend price is 33 cents (or +1.8%) ABOVE the November 1998 blend price of $17.92. This 33 cent per cwt. increase in the November blend price occurred because two of the three classes of milk prices increased -- an increase of 47 cents for Class I and Class II milk versus a $1.70 per cwt. decrease for Class III. The November Zone 7 "blend" price was calculated using: (1) the September BFP price of $16.26 plus the $3.08 Zone 7 Class I differential for a Class I price of $19.34; (2) the September BFP price of $16.26 plus the 30 cents per cwt. Class II differential for a Class II price of $16.56; and, (3) the November Class III price of $9.79 (which is the BFP). Because of the substantial decrease (+$4.77) recorded for the October BFP, the December "blend" price is expected to be significantly lower and fall to the $13.50 level. Please consult the map in this newsletter to determine which Zone the plant you sell your milk to is located in FO #7.

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