Friday, August 14, 2009

Make Allowance Changes hurt Class III Prices

The Federal Milk Marketing Order (FMMO) pricing model uses formulas to determine the prices paid to the milk producer. These prices are based on a system which takes the prices of the end products like cheese, butter and dry whey and subtracts the cost of making these products to arrive at the value of the raw materials (the milk and milk components). The higher the cost to make the product, the less the raw material is worth.

In most competitive manufacturing environments, the cost to make the product typically drops from year to year as improved production techniques and automation improve the efficiency of the operation. It appears that manufacturing efficiencies are not being realized in the dairy industry.

Between the beginning of 2007 and the end of 2008, the make allowances in the formulas increased dramatically.

The cost to product cheese went from $.165 to $.2003, a 21% increase

The cost to product butter went from $$.115 to $.1715, a 49% increase

The cost to product dry whey went from $.159 to $1991, a 25% increase

While international events have put great financial pressures on the cheese markets, the Cheese processors are getting a bigger allowance.

What does this mean for the milk producer?

Regardless of where the cheese and butter prices are, it takes $.8149/cwt out of every milk check.

Protein is worth $.11/lb less!

Butterfat is worth $.07/lb less!

Other Solids are worth $.04/lb less!

Class III Skim Milk is worth $.60/cwt less!

Class III milk is worth $.81/cwt less!

It is obvious that these make allowances were increased when milk prices were high, and there was money to spread around. However, now that the dairy markets have collapsed there is no downward change to the make allowance.

To have a successful national dairy industry all parts of the production and distribution chain must become brutally cost effective. It seems like the milk producer is the one feeling all of the pressure and all the pain.

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