Federal Milk Marketing Orders define four classes of milk and set minimum processor prices for each. Such a system has come under increasing scrutiny as products become more complex (which class do they fit?) and global markets demand new and different products. Dairy economists at the Universities of Missouri and Wisconsin have outlined the issues in a series of policy briefs.
Class I consists of all forms of beverage milk. Class II is perishable manufactured products such as cottage cheese, yogurt and ice cream. Class III is hard cheese. And Class IV is butter and nonfat dry milk.
The Class I minimum price is usually considerably higher than the other three classes, enhanced by adding a location differential. These differentials range from $1.60/cwt to Grafton, N.D., to $6/cwt in Miami, FL. In addition, class utilization also varies substantially, from less than 20% in the Upper Midwest to more than 80% in Florida.
The issues:
• Determining the right class. Classification is not always clear because new products are often a complex combination of milk components. Some new dairy beverages, for example, have been classified at Class II rather than Class I. Producers argue this reduces their revenue to the extent these new Class II products compete with beverage milk. But processors argue they are expanding total dairy sales, and that pricing them as Class I would make the products uncompetitive.
• How many classes? Some argue that more classes should be added to accommodate new products and exports. But others say such an expansion is a lost cause as product development continues to evolve. They argue for two classes: Fluid milk and all other manufactured products.
• Changing price elasticities. The price elasticity of fluid milk is smaller than that of manufactured products, which supports a relatively high price for fluid products. However, fluid milk is facing more substitutes, causing demand to become more elastic. At the same time, the rapid growth in cheese consumption, and its use as a food ingredient, has made cheese demand more inelastic over time. This raises the question of whether class prices are properly aligned.
For the complete briefing on classification issues, click here.
