Determining the value of milk, which is known as price discovery, is one of the intrinsic capabilities of the federal order system. But as these prices are often volatile, it raises the question of if a different strategy is needed to reflect the true market value of milk.

In a perfect world, how would we discover the price of milk?

“I’m an economist, so I would use this thing that we call supply and demand,” said Mark Stephenson of the University of Wisconsin-Madison on the November 18 Hoard’s Dairyman DairyLivestream sponsored by Diamond V.

“We’ve done that in the past, and there are places where that does happen. Clearly, markets are going to determine what the value is for milk,” Stephenson said, referring to the previous use of the Minnesota-Wisconsin price that represented a survey of prices paid for Grade B milk used in processed dairy products. But as the Grade B supply dried up, a different strategy was needed.

“What we’re trying to do with regulation is to say, ‘Is there some means in which we can determine where those supply and demand lines, that are not perfectly known, actually cross?’” he explained of an alternative.

Some variations
In terms of discovering the price of milk, there are only a few strategies that are really possible, Stephenson said.

“Product price formulas are one of them in which we say, ‘We need to go up the marketing chain one level where we don’t have regulation,’ and that’s wholesale dairy product prices,” he identified. “And by the way, for those products, we do have a daily spot market at the Chicago Mercantile Exchange where we can observe those prices. Many companies have contracts for their products that reference those spot prices. So, it does work its way back into a very high correlation between those survey prices that are conducted weekly across plants, and the spot markets.”

Another option would be administrative pricing, where a board of individuals analyze market fundamentals to estimate milk value. Some other countries use that kind of system.

At the end of the day, these ideas come down to essentially the same function. “Although there are lots of variations on a theme, there aren’t very many fundamentally different ways in which we could price milk, in my opinion,” Stephenson added.

An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast, “What we want and what we might get from Washington,” will be on Wednesday, December 2 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.

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(c) Hoard's Dairyman Intel 2020
November 23, 2020
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