Sunday, May 10, 2009

Producer Price Differential

Producer Price Differentials (PPDs) for each of the 6 Federal Milk Marketing Orders on component pricing are announced between the 10th and the 13th of the month. The PPD is an adjustment for the previous month's milk payments based on the relative volumes of each class of milk and their respective prices. New PPDs will be announced this week for April, 2009.

The PPD is typically positive, however it can be negative and is another factor in the extreme volatility of milk prices.

When milk prices are at $10/cwt, a change of $4.00+/cwt can be a tremendous variation. Some of this variation can be accredited to the amount of Class III milk versus other Classes. Two examples are shown below.

The Upper Midwest has a smallest average PPD - $.32/cwt - and the smallest range of variation - $1.29/cwt.

This is primarily because most all the milk in this Federal Milk order goes to cheese. In the March 2009 time period, 78% of the milk in the Upper Midwest order (also the largest order) went to Cheese.

Therefore, there cannot be much variation between the weighted average of all Classes and Class III.

However when you look at the Northeast Federal Order, the average is $1.66/cwt and the range during the period between January 2005 and now is $4.37/cwt.

As can be seen below, the largest class of milk in the Northeast Federal Order is Class I, so the weighted average of all classes is significantly different from Class III which makes up only 23% of the total milk receipts.

Because the PPD is a very significant variable and the reasons for it's variability are very different among the Federal Milk Marketing Orders, each region will be examined separately in a future blog.

Should you be interested, the PPD announcements can be obtained at the following links.

Northeast Marketing Order #1

Upper Midwest Marketing Order #30

Central Federal Marketing Order #32

Midwest Marketing Order #33

Pacific Northwest Federal Order #124

Southwest Marketing Order #126

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