Margot Rudstrom, Extension Economist

October 7, 2005

Part I (August 27 th publication) in this series of three articles on milk marketing gave a framework for answering the question “What do I need for a milk price?” Your answer to this question provides you with a target price. The next question to ask is Part II in this series, “What is a good price for the Market?” Can you expect to receive your target price consistently?

There are a couple of points I will touch on in this article. First, a good price for the market needs to be assessed month my month. Second, there are a number of milk price information sources that you can access.

There usually is a seasonal pattern in milk prices. I say usually, because the pattern did not hold in 2004. Milk price is usually lower in the spring months and higher in the fall months. Figure 1 shows the average monthly Class III price from 1999-2003. The lower price in the spring is the result of increased milk production from the spring flush. The higher prices in September and October are usually the result of cheese and butter processors building stocks for the holiday baking season and Super Bowl parties.

Figure 1: Class III Monthly Milk Prices

It is much easier to predict the past than the future. One marketing service provides the disclaimer “Past performance does not indicate future results.” The high milk prices in 2004 provide a good example of past performance not being indicative of future results. In fact, they ran counter-cyclical to what is normal. That is, the highest milk price month in 2004 was May, which is normally the lowest milk price month.

What’s a good price for the market? I have a set of numbers that I look at in judging whether a price being offered is a ‘good’ price. I look back over the past 10 years because it gives me a long enough history to feel comfortable in making a marketing decision. The benchmarks I use in my marketing plan are monthly median and top third for Class III prices. I also look at the all-time highs (maximum) and lows (minimum) for each month. The 10-year monthly minimum, maximum, average, median and top third prices are listed in Table 1.

Table 1 : 10-year Minimum, maximum, average, median and top third Class III monthly milk prices ($/cwt)

I keep a copy of this table close by when I check where the Class III milk futures contracts close for the day on the Chicago Mercantile Exchange (CME). I can tell at a glance where futures contracts are trading, relative to my benchmarks. You can check the closing milk prices at the Chicago Mercantile Exchange website.

The University of Wisconsin provides a number of useful graphs on the daily CME cash settle prices. These graphs let you see at a glance, where contracts settle relative to an average, top third and bottom third prices.

There are a couple of key points that must be made about identifying a ‘good’ price from the market. First, you must be comfortable with the benchmarks you choose. Table 2 gives the 15, 10, 5 and 3-year average prices. You will notice there are differences in the numbers when they are calculated over different time periods. Take January for example, the 3 year average price is higher than the 5-year average price but lower than the 10 year-average price.

Table 2 : Average Class III milk prices ($/cwt)

The second point is that the price that you need to be profitable must be a good price for the market. During our marketing workshops, we often make the comment that “The market doesn’t care what you need for a price.”

Where do we stand? We have target prices that we determined for our individual farming operations. We have information about what are historically good prices for the market. If the price you need is being offered by the market, the next step in implementing your marketing plan is taking action. There are several pricing tools available that can be used to be proactive in pricing your milk. Pricing tools is the topic for the third and final part of this series coming up with the November 26 issue.