Pricing Grade A Milk Used in Manufactured Dairy Products

The continued conversion of manufacturing grade milk to Grade A in the upper Midwest means the oncoming loss of a competitive price base for establishing reserve milk prices in federal and state order markets. Alternative methods for pricing reserve milk, including competitive pay prices, product price formulas, public hearings, and economic index formulas, are evaluated. Specification of the multiple objectives of reserve pricing is advanced. The four alternatives are analyzed in relation to the several objectives plus administrative criteria including efficiency, workability, and complexity. No recommendation is made relative to multiple reserve classes. However, identical reserve prices are recommended for all regulated markets, and the reserve price should reflect average manufacturing efficiency in the upper midwest. The fundamental conclusion is that some type of a directly market-based price is essential for establishing reserve milk prices. Either retention of a competitive pay price or use of a product price formula is acceptable. Suggestions also are advanced for appropriate price, yield, and make allowance factors to use in product price formulas.