Thursday, June 18, 2009

Some Good News When Cheese Prices Drop

How can a rapid drop in cheese prices be a good thing?

It will increase the Producer Price Differential (PPD) for the six Federal Orders paying on components. For a basic definition of the PPD, please review the May 12 post to this blog.

Class I fluid milk is priced based on the advanced pricing model, which is also influenced primarily by cheese prices, just like the Class III hard cheese milk pricing model. However, the Class I pricing is based on cheese prices about six weeks ahead of the Class III model. When cheese prices are falling, the Class I prices will be higher due to timing and, therefore, the PPD will be more positive.

The PPDs for the six Federal Orders paid on components were announced at the start of this week. For the month of May, the prices increased significantly over April prices.

The pricing methodology for Class I provides fluid milk processors with a raw material cost that is known before production begins. This is an economic model that few consumer products enjoy. It increases the volatility of milk prices for producers as covered in many of the previous posts to this blog.

That said, the PPD model does provide a buffer for the producer. When Class III prices fall, the PPD will increase. When Class III prices increase, it will reduce the PPD and sometimes even create a negative PPD.

Why do some orders have a larger PPD? It all depends on who has the most Class I Milk

We all know that a big PPD caused by a drop in cheese prices is only a temporary gain, but in today's environment, any increase in the milk check is welcome - regardless of the cause.

Will there be more good signs this Friday? If so, they will posted here early next week.

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