Sept. 10 2017 08:00 AM

With 75 to 95 percent of milk checks included in some regions, USDA’s mailbox price series accurately reflects dairy farmers’ “take-home pay.”

It all began with a thoughtful phone call by an Ohio dairyman who wanted to learn more about his milk check. After answering a series of questions, via phone and email, our Hoard’s Dairyman editorial team decided to call in some additional experts. That led to a conference call with Randal Stoker, USDA’s mailbox price specialist; Lorie Warren, USDA’s dairy product marketing specialist; and Sharon Uther, USDA’s market administrator with the Mideast Federal Milk Marketing Order. By the end of that conversation, both the Ohio dairyman and our staff learned a great deal more about the details that go into reporting mailbox prices.

Why was this host of experts on the call?

The Federal Milk Market Administrator (MA) offices in conjunction with the Dairy Program of USDA’s Agricultural Marketing Service (AMS) has been publishing mailbox milk prices since January 1995. The prices are calculated each month from producer payroll data collected as part of the audit program of the Federal Milk Marketing Orders (FMMO). MA offices calculate prices on a state basis with staff from AMS Dairy Program combining states into common regions or subdivided to more accurately report differences in pay variation due to geographical boundaries. This takes place in Pennsylvania and Missouri, for example.

What contributes to mailbox prices?

The net pay price includes payment for federal order minimum prices, over-order premiums, quality premiums (low somatic cell or bacteria milk), and volume premiums. Digging a little deeper, mailbox prices include component values for butterfat, protein, and other solids; payouts from state-run over-order pricing pools for Class I beverage milk; payments from super pool organizations also known as marketing agencies in common; payouts from incentive programs offering seasonal production bonuses that incentivize milk during low milk flow and high demand periods found in the Southeast; and even monthly distributions of cooperative earnings. However, cooperative profit earning, sometimes referred to as the 13th milk check, and equity payments are not included on the revenue side of mailbox milk price calculations.

What items factor into mailbox milk price deductions?

Think mandatory charges that dairy farmers have little control over when looking at milk check deductions. Costs associated with marketing milk include such items as hauling charges, cooperative dues, and deductions, such as equity, capital retains, and reblends. Other items subtracted from the final mailbox price calculation include deductions for marketing services and state or federally mandated assessments such as the state and National Dairy Promotion and Research Program.

In most instances, dairy farms contributing to Cooperatives Working Together (CWT) also will have these financial contributions deducted from mailbox prices. Lately, deductions also have included marketing fees and adjustments from some co-ops dealing with oversupplies of milk, as well.

What costs are not included in mailbox milk prices?

Think of costs specific to your farm. These would include milk check assignments for loan repayments to a bank, feed mill assignments, or supplies such as teat dips that are more farm specific.

What are some of the largest variables in mailbox prices from farm to farm?

The great variation comes from component levels, producer price differentials, quality and volume premiums, and hauling costs. Hauling rates can vary considerably from dairy farmer to dairy farmer, depending both on size and location.

How are milk components considered in mailbox prices?

For all markets, the mailbox price is reported at the market average for butterfat and protein for the respective reporting area. That means that mailbox milk prices are not adjusted or standardized to a 3.5 percent butterfat level, for example. Component levels vary from state to state and region to region. Within a specific state or region, the overall price is a weighted component average for all dairy farmers.

When it comes to mailbox milk prices, individual dairy farmers have the largest control over components shipped in their milk. Some of this range is explained by difference in breed, but much of the spread in components is due to herd feeding and genetics. You can work with your nutritionist to balance component levels. But be careful to keep your eye on the main goal, as producers get paid for pounds of components, not percentages.

How can these component levels be found with a state or federal order?

In many cases, federal market administrators report components by state in their market order publications, which can be found on the website for each respective order. Additionally, USDA publishes component levels for each FMMO in USDA’s Dairy Market Information Branch. However, in that case, component levels would only be reported by federal order, not state level.

What is the difference between a federal order and a specific state?

In the case of the FMMO for the Mideast, for example, that order covers a number of states. It has almost the entire states of Ohio and Michigan, two thirds of Indiana, and portions of Pennsylvania, West Virginia, and Kentucky. Each FMMO has a different geography. When enough data is available, and in order to ensure confidentiality, federal market administrators break out mailbox milk data on the state level to give producers an even more specific comparison.

What are producer price differentials (PPD)? How can those PPDs help or hinder my mailbox milk prices?

That’s a complicated calculation. Six of the 10 FMMO derive a PPD value in their monthly pool price calculation. The “pool” is a pool of dollars, not milk. Processors contribute to the pool depending on what the milk they handle is used for at their dairy plants and how that milk is classified under the federal order classification price system.

The largest portion of the PPD comes from Class I or beverage milk. In most cases, the closer a plant is to a major metropolitan area, the higher the zone differential is for that plant and, correspondingly, the PPD value will be higher as well. So, if a farmer’s milk is delivered to a distant plant located in a high differential zone, the calculated PPD value will be greater to help compensate for the higher hauling cost generally incurred in delivering milk to more distant locations.

As you move away from those epicenters, the price shrinks to some degree. That’s one portion. Then there is the size of the Class I market in the respective marketing order. For example, on average, 86 percent of utilization of milk in the Florida FMMO went to Class I compared to just 11 percent in the Upper Midwest FMMO. That affects the pay ratio because, in general, if there is more Class I milk utilization on the particular order, there is more money eligible to be returned to producers via the PPD. The remaining four FMMO in the more southern parts of the country pay producers on a skim and butterfat basis where the comparable valuation accounted for by the PPD is incorporated into the skim milk price.

Finally, each class of milk within the federal order can have significant price variation each month. As Class II (yogurt, cottage cheese, and ice cream), Class III (cheese), and Class IV (butter and powder) vary each month, so do producer milk checks dubbed mailbox prices.

Do all farmers share the higher Class I beverage price?

Yes. The added Class I value gets shared with all dairy producers in the market. That’s part of the pool calculation each month. If there wasn’t federal order pooling, producers shipping to Class I beverage plants would reap the highest pay price.

How does data get collected for mailbox milk prices?

As part of the FMMO audit program, each month MA offices receive handler producer payroll records from handlers pooling on the order. This includes payrolls from dairy co-ops and individual handlers (also known as dairy processors or proprietary plants) that have their own independent producers. In the case of the Mideast FMMO, the administrator and her team collect data on a very large percentage of milk in the area. In fact, it would cover nearly 90 percent of the milk pooled on the Mideast FMMO. In most FMMOs, that number ranges from 75 to 95 percent.

Why do some regions or states not report mailbox milk prices?

There are two main factors. In order to have a mailbox price, at least 75 percent of the milk marketed under the FMMO must be included. Also, there must be enough competition in the region for milk so that proprietary pay prices remain anonymous.

Are both conventional and organic milk prices included in mailbox prices?

Yes, all milk in an FMMO is included in the calculation, regardless if it is produced and priced as conventionally produced milk or milk produced following organic production practices. AMS Dairy Program and the MA offices have been analyzing mailbox price data to determine if there is merit and sufficient data to publish separate mailbox milk prices for conventional and organic milk.