The factors in the formulas are dairy product prices, which change monthly, and make allowances and product yields, which are set in the formulas. The dairy product prices are those collected by the National Agricultural Statistics Service (NASS) in USDA. NASS conducts weekly surveys of dairy product manufacturers that sell specific products on a bulk, wholesale basis; prices are f.o.b. processing plant or storage center. All dairy product manufacturers that meet NASS’s reporting criteria are mandated by law to participate in the survey. NASS collects prices and volumes traded for Cheddar cheese (40-lb. block and 500-lb. barrel styles), butter, nonfat dry milk, and dry whey. NASS releases information for the previous week’s trading period on Friday mornings in “Dairy Product Prices”. Federal milk order price formulas use two-week or monthly (the most recent four or five-week period) averages of these dairy product price series, which are calculated by the Agricultural Marketing Service. These averages are the average of the applicable weekly prices weighted by the sales volume for the week. The most recently released information for the week is used. Once an average price has been computed, it will not be revised, even if NASS issues revised data for a week used to compute the average.
The Class III and IV milk and component prices and the Class II butterfat price are based on the monthly average product prices. Butter, Cheddar cheese and dry whey prices are used to compute values for butterfat, protein, and other solids, respectively. The protein and other solids prices are used to calculate the Class III skim milk price which, combined with the butterfat price, determines the Class III milk price. Butter and nonfat dry milk prices are used to compute values for butterfat and nonfat solids, respectively. The nonfat solids price is used to calculate the Class IV skim milk price which, combined with the butterfat price, determines the Class IV milk price. The Class II price is determined by the Class II skim milk price, which is computed in advance (see Class I price description below), and the Class II butterfat price (the butterfat price plus $0.007). The Class II, III, and IV prices are the same in each Federal milk order and are announced by the 5th of the following month.
Class I prices vary across the Federal milk order system and are announced in advance by the 23rd of the preceding month. The Class I skim milk price is the higher of the advanced Class III or IV skim milk pricing factors plus a differential specific to each pricing point in the country. The Class I butterfat price is the advanced butterfat pricing factor plus the specific Class I differential divided by 100. The advanced pricing factors use the same product price formulas as the Class III and IV prices except that the product prices are for the most recent two weeks. The Class II skim milk price is the Class IV advanced skim milk pricing factor plus a differential of $0.70 and also is announced by the 23rd of the preceding month.
The Federal milk order program has two systems for paying producers, the component pricing system and the skim milk/butterfat pricing system. The component pricing system is used in seven orders (orders 1, 30, 32, 33, 124, 126, and 135). Under this system, producer prices are based on the value of components, butterfat, protein, and other solids, in the milk they market and the value of the producer price differential. The component values are those computed for the Class III price. The producer price differential, basically, is the weighted average value of the effective Class I and II differentials; the weights being the proportional volumes of milk used in Class I and II. The effective differentials are the actual differences in the applicable class prices for the month. Producers receive a price for each pound of milk component marketed and the producer price differential for each hundredweight of milk marketed. In four orders, producer payments are adjusted for the quality of the milk marketed based on the somatic cell count of the milk. For informational purposes, a statistical uniform price is calculated which equals the Class III price plus the producer price differential.
The skim milk/butterfat pricing system is used in four orders (orders 5, 6, 7, and 131). Under this system, producer prices are based on the uniform skim milk price and the uniform butterfat price. The uniform skim milk and butterfat prices are the weighted average values of each class’s skim milk and butterfat prices. The weights are the volumes of skim milk and butterfat used in each class. Producers receive the uniform skim milk price for each hundredweight of skim milk marketed and the uniform butterfat price for each pound of butterfat marketed. The uniform milk price under this pricing system is the weighted average value of the uniform skim milk and butterfat prices in 3.5% butterfat content milk.