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How Prices are Established
Currently there are two different groups of dairy farmers in Maine: Maine Market Producers (those who ship to dairies not subject to the Federal Order) and Boston Market Producers (those who ship to dairies subject to the Federal Order).
In September 2007, there were 3 farmers shipping to Houlton Farms Dairy and 10 other farmers, called producer-dealers, who process some or all of their milk, who, together, comprised the group known as Maine Market Producers. All other farmers were shipping to processing plants that come under the authority of the Federal Order and are in the group called Boston Market Producers.
Since the State of Maine is not part of the Federal Order, the Maine Milk Commission has full authority over processing plants that are exempt from the Federal Order, and has partial authority over Federal Order Plants that operate in Maine. (7 MRSA. Section 2954.1 and 9).
The Commissions authority has been shaped by a number of court decisions as well as revisions to statutory language. The Commission has authority to regulate milk that is produced, processed and sold in Maine. (7 MRSA. Section 2954.8 and 9).
The producer milk price is price that the producer receives for milk sold to a dairy. Pricing to individual producers is based on 100 pounds (CWT) of milk with standards of 3.5 % butterfat, 2.99 % Protein and 5.69 % Other Solids. Milk received at dairies is tested and individual producers payments are adjusted according to component percentages derived from the testing.
Milk is classified based on its actual end use, as follows:
- Class I - Fluid milk containing less than 9 % butterfat, skim, flavored milk, eggnog and buttermilk sold for human consumption.
- Class II - Packaged fluid cream, sour cream, cottage cheese, and product sold to produce ice cream, ice milk, custards, and semi-solid products resembling Class II products.
- Class III - Milk or cream used to manufacture hard products such as hard cheese and dry powder.
- Class IV - Milk used to make butter and nonfat dry milk.
On or before the 23rd of the month, the United States Department of Agriculture (USDA) Market Administrator announces the advanced pricing factors for the following month. On or before the 5th of the month, he announces class and component producer prices for the preceding month and on or before the 13th of the month announces the federal pool prices for the preceding month. Each of the above classes is assigned a different price using formulas established by USDA rules.
The Commission establishes minimum milk prices, monthly, for milk sold in gallons (the price also applies to quarts through 20-quart containers). The price per gallon established by the Commission is based on the Market Administrators price announcements; however, the Commission has the authority to add special premiums to the price based on market conditions in southern New England. (7 MRSA. Section 2954.1 and 2).
By rules of the Federal Order, Boston market producers are required to be paid for milk produced in a calendar month based on butterfat, protein, and other solids contents plus a Producer Price Differential (PPD). The PPD is sort of a clearinghouse method to distribute revenue left over in the federal milk pool after the producers obligations are set aside. Maine law was changed in 1999 to allow the same method of payment for Maine market producers. (7 MRSA. Section 2956.3).
The following is a hypothetical example of how a dairy pays a producer for milk.
Farmers current month production is 159,043 pounds (1590.43 CWT).
Butterfat test average = 3.90%; Protein test average = 3.15%; Other Solids test average = 5.66%
The Market Administrator announces a Butterfat Price of $1.6457 per pound, A Protein Price of $3.7059 per pound, an Other Solids price of $0.5831 per pound and a PPD at Suffolk County MA of $0.63 CWT. The Maine Milk Commission requires processors that are not federally regulated to pay the full PPD to their producers. Federal Order processors based in Maine are required by the Maine Milk Commission to pay their producers the full PPD, but only on milk produced, processed and sold in Maine. Thus, the minimum obligation is something less than $0.63 for producers selling to federal order plants.
|3.90% butterfat x||Butterfat $1.6457 x||159,043 pounds =||$10,207.75|
|3.15% protein x||Protein $3.7059 x||159,043 pounds =||$18,566.02|
|5.66% Other Solids x||Other Solids $0.5831 x||159,043 pounds =||$5,248.96|
|Component Value =||$34,022.73|
|Federal Order PPD||PPD $0.63 x||1590.43 CWT =||$1,001.97|
|Total minimum obligation at Suffolk County, MA =||$35,024.70|
In the above example, the farmer receives a minimum of approximately $22.02 for each one hundred pounds of milk ($35,024.70 divided by 1590.43 CWT = $22.02). This amounts to about $1.89 per gallon. To this base income, are added distributions from the Maine Milk Pool and from any prevailing premiums adopted by the Commission.
In the above example, a federal order plants minimum obligation to each of its producers would be something less than the full amount depending on the percentage of milk going into the Federal Order. (Milk outside of Maine is beyond the Maine Milk Commissions authority).
The Market Administrator in the Federal Order calculates the value of each Federal Order plants milk using the value of the components mentioned above. The plant is required to pay the difference between this value of their plants milk and their minimum producer obligation into the Federal Order Pool.
The Maine Milk Pool requires Non-Federal Order plants in Maine to calculate the value of their milk and to pay a minimum payment to their farmers as outlined in the example above and pay the difference into the Maine Milk Pool where it is distributed proportionately to Maine producers.
When the Maine Milk Commission adopts a premium on Class I milk for any month, it increases the minimum prices established for wholesale and retail for that month, consequently increasing the dealer margin at wholesale. This action provides more money for processors to use to pay for Maine milk. The theory being that prevailing premiums in Southern New England need be passed through in Maine in order to ensure a supply of fresh milk for Maine consumers.
As mentioned above, by rules of the Federal Order, Boston market producers are required to be paid for milk produced in a calendar month based on butterfat, protein, and other solids contents plus a Producer Price Differential (PPD). Maine law was changed in 1999 to allow the same method of payment for Maine market producers. (7 MRSA. Section 2956.3).
The Commission intends that any Class I Premium adopted will be passed on proportionately to Maine farmers by the processors paying them using the Class I utilization of Maine milk for that particular processing plant. For example, a Maine Dairy with 60% of its Class I sales in Maine would be obliged to pay 60 cents per CWT as a premium to its Maine farmers when the Commission adopts a Class I Premium of $1.00. Likewise, a Maine Dairy with 48% of its Class I sales in Maine would be obligated to pay 48 cents per CWT when a Class I Premium of $1.00 is adopted by the Commission. In other words, multiply the percentage of Class I Maine sales by the Class I Premium to get the amount payable to the farmer. See 7 M.R.S.A. Section 2954.9 and Grants Dairy Maine LLC v. Commissioner of Maine Department of Agriculture, et. al., F.3rd,n. 5 (1st Cir. 2000).
How are Minimum Milk Processing Prices Established by the Maine Milk Commission?
Minimum prices paid to processors (dairies) are established to reflect the lowest price at which milk purchased from Maine producers at Maine minimum prices can be received, processed, packaged and distributed to retailers within the state at a just and reasonable return. To arrive at the dairy processing cost, also known as the dealer margin, the Commission conducts a cost study for the operation of hypothetical model milk processing facilities. Using the models and current cost data for supplies, labor, electricity, trucking, etc., a theoretically, lowest achievable price is calculated, which is the theoretical price at which a dairy should be able to process milk from raw product to finished product and deliver it to the retailer. The Commission adjusts the theoretical price to take into account Maine conditions to arrive at a proposed processor margin. The Commission conducts a public hearing on the proposed processor margin and after considering the input of processors, any other interested parties, and the public, the Commission adopts a rule establishing the processor margin. This margin is the return that processors are guaranteed until a new study is completed. Processors may obtain a higher price for a gallon of milk from retailers, but the price paid by retailers cannot be below the minimum processor margin. By statute, a cost study is required every three years.
How are Minimum Retail Prices Established by the Maine Milk Commission?
Retail minimum prices paid by consumers are based on the minimum processor margin and a reasonable rate of return to the retailer. To arrive at the cost of selling milk at the retail level, the Commission conducts a cost study of Maine supermarkets. The cost study identifies methods now in practice for the delivery of milk to Maine supermarkets and for in-store handling and selling of milk. It also considers changes that could be made to make this process more efficient. The Commission conducts a public hearing on the proposed retail margin, and after considering the input of retailers, any other interested parties, and the public, the Commission adopts a rule establishing the retail margin. As with the dealer margin, the retail margin does not change until a new study is completed and a public hearing held to receive comment on the margin.