Under Federal Milk Marketing Order rules, producer milk value is determined through pooling. Total pool value is calculated by applying minimum class prices to the volume of milk used in each of the four classes of milk. Producers are paid a common price for their milk which is the total pool value divided by total pool volume. Plants must be part of the overall pooling process to share in the pool distribution.
Dairy economists at the Universities of Missouri and Wisconsin have outlined the issues surrounding these complex rules. They include:
• Distant pooling. When cooperatives pool producers’ milk outside the producers’ marketing area, all of the pooled milk receives the producer price differential (PPD) for the receiving milk. But not all the milk that is pooled has to be shipped to receive the PPD—the shipper need only demonstrate the capability to deliver. Therefore, there is a strong incentive to pool milk onto markets with high PPDs. But that increases the volume of pooled milk and decreases the average pool value in the receiving order. Several orders have recently amended rules to tighten qualification standards to reduce the incentive to distant pool.
• Depooling. Because Class I prices are announced six weeks before Class III prices, the monthly Class III price has occasionally ended up being higher than Class I. This price inversion causes the PPD to become negative. And that means Class III handlers, who normally draw money from the producer settlement fund, must pay into the fund. To avoid this payment, handlers will depool. The result is the removal of higher-priced milk from the pool, further reducing the PPD for those who remain. Some Orders have been or are being amended to make it more difficult to depool.
For the complete briefing on pooling issues, click here.
