Milk Market Insight

AMPI expert examines pricing

The farm broadcaster reports, “Class III futures are unchanged from yesterday’s mark at $17.75. Blocks settled at $1.65 and barrels at  $1.56. Butter remains unchanged at $1.55.”

Though the daily report takes less than 10 seconds, AMPI Vice President of Fluid Marketing Neil Gulden has spent more than 43 years measuring the short- and long-term impact it will have on dairy farmer returns. From his desk at 315 North Broadway in New Ulm, Minn. He tracks market activity, anticipates highs and lows, and uses that information to guide milk pricing for the cooperative.

In this issue he talks about the U.S. milk pricing system and what it means to the dairy farmer-owners of AMPI.

Law of averages
“Daily market activity is good to keep an eye on,” Gulden says. “But it’s really monthly averages of manufactured dairy products that dictate the majority of the price paid to dairy farmers. In this part of the country, those prices are driven mostly by cheese.”

About 75 percent of the milk marketed in the Upper Midwest is used for cheese production, denoted as a Class III product under the federal order classified pricing system. The remaining goes to fluid milk
(15 percent), creams and soft cheeses (7 percent), and butter and powder (3 percent).

 
Wholesale cheese and butter markets operated through the Chicago Mercantile Exchange (CME) serve as pricing bases for these products.

“There is a small volume of cheese bought and sold on the CME compared to total U.S. commerce, but the price established at the end of the trading day becomes a reference price used for selling cheese throughout the country,” Gulden says. “The CME provides a price everyone — buyers and sellers — can relate to. The actual selling prices can be above or below the CME price, depending on cheese type, quality and availability.”

“The Class III price, and other government-calculated prices like federal order blend prices, do not set AMPI farm milk prices,” Gulden says. “Prices are set primarily by market value through net returns from AMPI manufacturing plants, plus net returns from fluid milk sales and federal order pooling values.”

Federal order observations
The Agricultural Marketing Act of 1937 authorized federal milk marketing orders. These orders evolved from local markets in the Midwest to other markets across the country and grew to a high of 83 orders in 1962. Through mergers and congressional action, 10 orders are in force today.

About 64 percent of AMPI’s Grade A milk is associated with the Upper Midwest Order — Minnesota, Wisconsin, North Dakota and northern South Dakota. The balance is associated with the Central Order — Iowa, Nebraska and southern South Dakota.

“The main function of federal orders was to provide rules and regulations for orderly marketing of Grade A milk for bottling plants — milk for drinking,” Gulden says. “The original intent was to create a monetary incentive to move milk for bottling from the highest areas of production (Midwest) to population areas that had very low milk production. At the same time, the orders are an incentive for more milk production in those areas.”

To accomplish this, a per hundredweight differential is added to the Class III value to create a minimum price paid by bottlers for Class I milk. This differential value ranges from an average of $1.75 in AMPI country to more than $5 in other areas of the U.S.

Gulden says the amount of the differential depends on the distance from the Midwest milk supply (as originally determined) and has changed very little over the years.

“Milk production, however, has changed,” he says. “More milk is being produced throughout the U.S. and Class I needs are being filled with closer, more local milk. And yet, the large Class I differentials from north to south still remain.

“With fluid milk consumption in a steadily declining annual pattern, excess milk produced in these areas has been moving into manufacturing (cheese/whey, butter/powder). In effect, an increasing portion of milk production in most high differential areas is being ‘subsidized’ through the federal milk market order system.”

Gulden further notes that manufactured products produced in high differential areas are in direct competition with the same products produced in the Midwest, an area of the country where manufactured products represent the largest portion of dairy farmers’ milk checks.

Marketing milk with AMPI
Gulden credits the diversity of products made at multiple AMPI plant locations as two key benefits for AMPI members.   

“AMPI primarily produces cheese, but we also have butter and nonfat dry milk plants,” he says. “We don’t have all our eggs in one product basket, enabling us to weather market lows and take advantage of market highs.”

About 15 million pounds of milk are received each day at AMPI manufacturing plants. Moving and processing that volume of milk is a balancing act that keeps the co-op moving.

“AMPI’s network of plants provides us the internal ability to keep milk within our system,” Gulden says. “If, for example, a single plant is unable to accept milk due to weather, breakdowns, maintenance or capacity issues, we can reroute to another location. Selling milk to outside plants can be costly. Most times we yield higher returns for our members if we can keep the milk in an AMPI plant and make our products.”

Just as the spring flush of milk production ramps up, Gulden will be winding down his career and retiring at the end of April. AMPI Executive Senior Vice President Donn DeVelder will oversee the cooperative’s fluid marketing, while continuing to manage member services.

“I’ve always found it important to remember why we do what we do and who we’re doing it for,” Gulden says. “The success of a co-op relies on the commitment of its dairy farmers and our commitment to them, the member-owners.”  DD