Wednesday, June 3, 2009

Central Federal Order #32 - PPD

The Central Federal Order (FO) #32 is the fourth largest FO. As stated in an earlier post, all six of the orders paying on components are being reviewed separately as they are all very different. The three larger ones have been reviewed in previous blogs. The Central Order is really the norm of the six orders.

The Central FO is balanced between classes of milk in a pretty typical way, with a fairly even split between Class I & III milk and smaller pieces of the pie for Classes II and IV.

The Producer Price Differential (PPD) has rather average spikes, higher than the Upper Midwest that is exceptionally strong in cheese production and less than the Northeast order that is exceptionally strong in fluid milk.

When the price of cheese escalates rapidly and the PPD become negative, those that can, depool from the order to avoid the pay deduction caused by the negative PPD. This increases the burden for those who cannot depool.

At the root of the depooling issue is the six weeks timing difference between the pricing of Class I and Class III milk. While this is financially convenient for the Class I processors, it results in a price volatility for producers that should not exist.

So what makes FO #32 different? The significant lose of Class III milk going to cheese. This lose of Class III milk shows up in both the trend charts below and the overall milk by class chart above - 2006 was a major shift.

Friday's post will review the May component prices and the Class III milk price. The May 30 post predicted some pretty low prices for May. Unfortunately, not much has changed to improve this prediction.

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