Producer Price Differentials
DairyLine Archive

IT SEEMS FEDERAL ORDERS ARE A BIT "OUT OF ORDER"
(March 18, 2005) February Federal order blend price data shows that de-pooling and negative producer price differentials are back. Dairy Profit Weekly’s, Dave Natzke, said “It seems Federal orders are a bit out of order.”
 

“It seems like we're talking about negative PPDs and de-pooling more often,” he said. In February, three of six Federal orders using multiple component pricing reported negative PPDs, ranging from 66 cents per hundredweight in the Pacific Northwest , to 18 cents in the Upper Midwest . Three other orders using component pricing saw PPDs sharply lower than a year earlier.

Volatile cheese prices again led to a Class I Class III price inversion in February, Natzke reported. The Federal order February Class I base price was $13.79 per cwt. and the Class III price was $14.70.

With that inversion, affected Federal orders saw a February blend price below the Class III price, resulting in negative PPDs, and provided economic incentive for supply plants to de-pool milk.

De-pooling occurred in all but a couple orders, Natzke said, but was heaviest in the Upper Midwest where February Class III use was just 5 percent in February, compared to 74 percent in February 2004.

When asked if the Agriculture Department was trying to address the issue of de-pooling, Natzke pointed out that, in the past six months, USDA has announced changes to pooling provisions in the Northeast, Arizona-Las Vegas, and the Pacific Northwest orders.

Changes in three other orders, the Mideast , Central, and Upper Midwest , are

pending. Those three orders traditionally are among the largest orders in terms of Class III milk use, and Federal order supply plants are generally cheese manufacturers who can gain income for their producer members by de-pooling during Class I/Class III price inversions.

Even though public hearings have been held in each of those orders, the

debate isn't over, according to Natzke. Several large co-ops have asked USDA to reopen hearings in Central and Upper Midwest orders, charging that the de-pooling issue should be handled across multi-markets, and that actions in one market tend to have a domino effect in nearby markets. That has drawn the ire of large fluid processors such as Dean Foods and Dairy Farmers of America, which stand to benefit from tighter restrictions on de-pooling.

"The amount of total milk pooled, as well as milk pooled by class, both in actual volume and percentage, returned to seasonal and historical averages, he said. That's in stark contrast to November and December when high Class III prices, relative to Class I prices, resulted in heavy de-pooling and negative PPDs.

Compared to December, Federal order uniform prices were fairly steady in most orders, according to Natzke, and the all-market average was $16.05 per cwt. in January, compared to $16.00 in December.

Natzke warned however that we may not be done with de-pooling and negative PPDs. National Milk economist, Roger Cryan, expects some of both in February, especially in those orders where Class III utilization is usually high. Click here for complete details.

NEGATIVE PRODUCER PRICE DIFFERENTIALS AND DE-POOLING OCCURRED IN ORDERS ACROSS THE COUNTRY
(January 21, 2005) Federal milk market orders have announced their December 2004 blend prices, producer price differentials (PPDs) and pooling levels last week and, as Dairy Profit Weekly editor Dave Natzke warned in his Friday report a couple of weeks ago, several orders reported negative PPDs for the month.

"It seems like it's been a common refrain in the last year," Natzke said, "But a run up in cheese prices in late November and early December, combined with the lag in the Federal order advance milk pricing formula, resulted in Class III milk prices that were above the blend price in six orders.

As a result, substantial de-pooling occurred as supply plants diverted milk out of the order pool and into higher-valued Class III uses. The tell-tale sign of de-pooling, Natzke said, is the wide variation between the Class III utilization within an order for a month compared to the same month a year earlier.

For example, the Central order’s December 2004 Class III utilization was 15%, compared to 53% last December, according to Natzke. The Upper Midwest Class III use was 13% in December, compared to 43% last year. The Pacific Northwest December Class III use was 8%, compared to 33% in 2003. And, the Southwest order December Class III use was just 1%, compared to 28% in 2003. The negative PPDs ranged from 47 cents per hundredweight in the Southwest order to $1.31 in the Pacific Northwest. 

THE OLD NEMESIS IS BACK......
PPD's (.pdf)   PPD's (text)
(January 7, 2005) December class utilizations, blend prices, and producer price differentials (PPDs) will be announced next week around the country and, just as we reported in mid December that the old nemesis of negative PPDs and de-pooling had returned to the Pacific Northwest, it now looks like it will also occur in other Federal orders.

Dairy Profit Weekly editor, Dave Natzke, reported in his Friday DairyLine broadcast that as much as 20 to 25 percent of Federal order milk may be de-pooled. Blame the recent volatile dairy product price swings, said Natzke. The run up in cheese prices in late November and early December, combined with the lag in the Federal order advance milk pricing formula, could make for a perfect storm of de-pooling this month.

“With the December Class I base price of $14.43 per hundredweight, many Federal orders will see a December uniform or blend price well below the Class III price,” Natzke warned, and “Depending on the class utilization rate, the difference could be as much as $2 per hundredweight in some orders.”

Based on estimates from National Milk’s Roger Cryan, any order with a Class I differential less than $1.71 will likely see a negative PPD, Natzke said, and that usually triggers de-pooling by supply plants who can make more money for their cooperative members by keeping milk out of the pool. Natzke adds, “When you pull the higher valued Class III milk out, it further enhances negative PPDs.”

On the bright side; with cheese prices falling in late December and the Federal order advance pricing formula “catching up” with market conditions, Cryan adds that this should only be a one-month situation. And, while several orders have worked on pooling and de-pooling rules that could slow de-pooling to some extent, Natzke concludes; “It's an issue that is probably going to keep coming up every time we have a spike in cheese prices."

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