Wednesday, May 13, 2009

Upper Midwest Order #30 - PPD

The largest Federal Milk Marketing Order (FMMO) is the Upper Midwest - FO #30. As mentioned in the previous post, each of the Producer Price Differentials (PPDs) in the six orders paid on components will be analyzed separately as they are all very different.

The Upper Midwest Order is all about Cheese - Cheese - Cheese. Over the course of the last 4 + years, Class III milk for hard cheeses have consumed 75% of the milk reported by this Order. Class III usage is really greater, but the ability to withdraw from this Federal Order "Pool" or not "touch base"when the Producer Price Differential (PPD) is negative reduces the amount of Class III milk reported. "Depooling" is a major problem in this Federal Order.

The average PPD over this same 4+ year period was only $.28 -the lowest in all the 6 orders. The out sized scale used for the graph below was chosen so all orders could be compared in a later post. Because the PPD is primarily a comparison of the weighted average of all milk classes to the Class III price, it not surprising that with 75% of the milk being Class III, the difference between Class III and the average is pretty small.

Immediately below the graph on PPD is a graph showing milk volume by class in the order. The graphs were arranged in this way to identify the impact of "depooling". When the PPD becomes negative, a significant amount of the Class III milk is "depooled" from the FMMO. Frankly, this seems like a major issue that needs to be addressed in the Upper Midwest Order - they do make their own rules on this. The "depooling" increases the volatility of the PPD and producers don't need more volatility in their milk prices.

Why does the PPD become negative? It happens primarily when cheese prices are escalating quickly and due to the timing difference of about 6 weeks between when Class I milk pricing is established and when the Class III pricing is established, the Class III price can be higher than the Class I price. The volatility due to the timing difference in pricing Class I and Class III milk is exaggerated by the "depooling".

Where is the Upper Midwest Order going? The graph below shows the same trends we have seen in many places. Cheese usage grows while fluid milk remains flat or shrinks. When will this order hit 80% to 85% cheese? The trends show that it will probably reach these levels.

With the very high cheese production in the Upper Midwest Order the milk checks are minimally impacted by changes in the PPD. It would appear that the biggest issue in FO #30 is the very lenient rules on "touching base", "pooling", and "depooling".

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