Sunday, May 17, 2009

Northeast Order #1 - PPD

Northeast Federal Order (FO) #1 is very different from the Upper Midwest FO #30 (May 13 post). In FO #1 the Producer Price Differential (PPD) is a very significant part of the milk paycheck. The table below shows the makeup of the FO #1 milk check based on the most recent pricing - April, 2009.

While payments in a component pricing milk order are typically described as being made up of component quantities only, the PPD, based on cwt of milk in FO #1, is the third largest piece of the check and is significant. In other words, volume matters in FO #1.

To the right is a pie chart based on the most current 4+ years. The relatively large PPD is a result of the relatively large volume of Class I fluid milk in FO #1 - 45%. Class I typically carries the highest price and therefore drives up the average price of milk vs. the Class III price.

Shown below are two charts - the PPD by month since 2005 and the volume of milk by class during that same period. Note that in early 2009, the PPD peaked above $3.00. The rapidly increasing cheese prices can cause a negative PPD, but rapidly decreasing cheese prices like early 2009, can have exactly the opposite effect, significantly increasing the PPD. This would be only a temporary situation before the PPD returns to more normal levels.

The PPD has dipped negative only a few times in the recent history of FO #1. Therefore, there has been a minimal impact on depooling (dropping out of the FO pricing pool) in this order.
The decrease in volume can be detected in the chart below the PPD chart. The change in volume is minimal and infrequent.

Where is FO #1 headed? Overall milk volume is very steady in this order. There is no growth or decrease in overall lbs. However, we do see small shifts among the various classes that does have an impact on overall order pricing.

Class I fluid milk shows a slight decline, while Class IV shows a slight increase. Because Class I is typically the highest priced and Class IV is typically the lowest priced, this will over time shrink the PPD portion of the milk check. There will be a much more dramatic example of this when the Pacific Northwest Order is examined in a future post to this blog.

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