Agricultural 

Marketing Service

October 31, 2002

A Study of the

Dairy Forward Pricing Pilot Program and 

Its Effect on Prices Paid Producers for Milk

 

 

Prepared for

Senate Committee On Agriculture, Nutrition, and Forestry

And

House Committee on Agriculture
A Study of the 

Dairy Forward Pricing Pilot Program

and Its Effect on 

Prices Paid Producers for Milk

Prepared for

Senate Committee On Agriculture, 

Nutrition, and Forestry

And

House Committee on Agriculture

By

Dairy Programs

Agricultural Marketing Service

United States Department of Agriculture

October 31, 2002
Dairy Forward Pricing Pilot Program 

Study Team

USDA/AMS Dairy Programs, Washington, DC

John Mengel, Chief Economist

Howard McDowell, Senior Agricultural Economist

Jerry Cessna, Agricultural Economist

Clifford Carman, Associate Deputy Administrator for Formulation and Enforcement

Contributors From Federal Milk Order Marketing Administrator Offices

Federal Milk

Contributor City Marketing Order

Henry Schaefer Minneapolis, MN Upper Midwest

Steve Joy

Harold Ferguson

Ronald Bricker Kansas City, MO Central

Timothy Hjorth

Mike Hattemer

William Pollock Cleveland, OH Mideast

John Mykrantz Seattle, WA Arizona-Las Vegas 

Chis Werner Pacific Northwest

Western

Steven Duprey Atlanta, GA Florida 

Southeast

Peter Fredericks Albany, NY Northeast 

Brian Riordon

Harold Friedly Louisville, KY Appalachian

Jennifer Dupin

Cary Hunter Carrollton, TX Southwest

Vicki Smithey

Special thanks to USDA/AMS personnel Sarah Buikema, Jason Nierman, Lisa Stewart, 

Kimberly Becht, and Scott Karney for their assistance with this study.
Table of Contents

Chapters Page

1 – Introduction............................................................................. 1-1

2 – Milk Producers as Parties to Forward Contracts................................... 2-1

3 – Milk Handlers as Parties to Forward Contracts.................................... 3-1

4 – Prices for Forward Contract Milk Marketed Under the Program................ 4-1

5 – Summary and Observations.......................................................... 5-1

Appendices

A – Legislative Language: Dairy Forward Pricing Pilot Program................. A-1

B – Final Rule: Dairy Forward Pricing Pilot Program................................ B-1

C – Fact Sheet and Disclosure Statement................................................ C-1

D – Computation of Prices for Dairy Forward Pricing Pilot Program 

Study................................................................................... D-1

E – Producer Questionnaire, Plant Questionnaire, and 

Cooperative Questionnaire........................................................... E-1

F – Monthly Price Comparisons: Contract and 

Non-Contract Milk Prices.......................................................... F-1

G – Farm Cash Receipts Comparisons at Contract and 

 Non-Contract Milk Prices........................................................... G-1
1-1

A Study of the Dairy Forward Pricing Pilot Program

And Its Effect on Prices Paid Producers for Milk

Chapter 1

Introduction

The Consolidated Appropriations Act of 2000 amended the Agricultural Marketing 

Agreement Act of 19371 to mandate the implementation of a Dairy Forward Pricing Pilot 

Program (Program) through December 31, 2004. The law allows proprietary milk 

handlers2regulated under the Federal milk order programto contract for future deliveries 

of milk from milk producers or their cooperative associations at prices exempt from 

minimum Federal milk marketing order blend prices. The program is voluntary, and the 

exemption applies only to milk used for nonfluid purposes. The law further requires that 

a study be conducted on the Program to determine the impact of forward contracting on 

milk prices paid to producers in the United States. The results of the study were initially 

to be provided to Congress no later than April 30, 2002, but that date was later extended 

to fall, 2002. The extension allowed for the completion of the study based on data 

received through questionnaires, which were originally scheduled to be mailed during the 

period that anthrax disrupted mail deliveries. 

Forward Contracting in the Dairy Industry

In its simplest form, a forward contract between a milk buyer and a milk producer (or 

cooperative) is an agreement to sell a stated quantity of milk, for a stated period into the 

future, at a stated price.3 A forward contract is a type of risk management instrument that 

has potential benefits to both parties. Producers and handlers are able to “lock in” prices, 

thereby reducing risk associated with price and income volatility and enhancing their 

ability to obtain new or continued financing. A forward price contract is a tool that can 

be used alone or in conjunction with other pricing tools to manage price risk. 

 

1

 Section 23 of the Agricultural Adjustment Act (7U.S.C. 601 et seq.), reenacted with amendments by the 

Agricultural Marketing Agreement Act of 1937, as enacted in Public Law 106-113 (113 Stat.1501A -519), 

signed into law on November 29, 1999. See Appendix A for the legislative language. 

2

 Cooperative associations acting as milk handlers may participate in the Program to the extent that they 

receive pooled milk from non-member producers or other cooperatives.

3

 For a general discussion of agricultural risk management, see Managing Risk in Farming: Concepts, 

Research, and Analysis, by Joy Harwood, Richard Heifner, Keith Coble, Janet Perry, and Agapi 

Somwaru, Economic Research Service, U.S. Department of Agriculture. Agricultural Economic Report 

No. 774. http://www.ers.usda.gov/publications/aer774/aer774.pdf
1-2

It is common for dairy cooperatives to enter into forward contracts with their members. 

Prices paid by dairy cooperatives to their members are not subject to Federal order 

minimum blend prices. By contrast, prior to the Program, proprietary handlers receiving 

milk pooled under Federal marketing orders4 had limited ability to forward contract with 

producers or dairy cooperatives delivering to them. Such handlers could forward 

contract, but they were not allowed to pay less than the Federal minimum order blend 

price to their producers for pooled milk. A handler choosing not to pool a producer’s 

milk could pay the producer less than the Federal order blend. The Program was enacted 

to expand opportunities for forward price contracting between producers and handlers. 

In this study, “eligible handlers” are those handlers that have been enabled to enter 

forward priced contracts with Federal minimum order price exemption. Since dairy 

cooperatives receiving only milk from member producers do not have a Federal order 

minimum price requirement, the Program does not apply to them. Eligible handlers 

would include proprietary handlers and cooperative handlers that receive milk from 

sources other than their own members. Plants owned by eligible handlers are referred to 

as “eligible plants.” Likewise, “eligible producers” are those producers that have been 

enabled to enter forward priced contracts with Federal order price exemption. For the 

most part, these are independent producers who are not members of cooperatives. 

However, some producers are members of bargaining cooperatives that do not have a 

payroll. These producers are paid directly by a proprietary handler subject to Federal 

minimum order pricing and are therefore eligible producers for the Program. 

Description of Program 

The Program became effective July 19, 2000, and will expire December 31, 2004. 

Regulatory requirements are quite limited and apply only to initial contract length; 

handlers’ milk eligible for contracting; dates for signing, filing and making payment; and 

a disclosure form. (See Appendix B for the final rule published in the Federal Register.) 

Otherwise, milk handlers and producers, or their dairy cooperatives, are free to price milk 

under forward contracts through any type of mutual agreement. For example, even 

though milk on the Appalachian Order is accounted for on a skim milk and butterfat 

basis, forward contracts may be written to pay for milk on a protein, butterfat, other 

solids, and somatic cell count basis. However, in such markets, the market administrators 

will continue to account for milk on a volume and butterfat basis and may not have data 

on component weights and tests. Therefore, the producer will not receive data from the 

market administrator’s office to compare the contract price against the buying handler’s 

pay price for non-contract milk. Furthermore, there are numerous reference milk prices 

that may be used in writing a contract. Some handlers may offer to contract at a price 

comparable to the Class III price and add to that a producer price differential and 

 

4

 For a general discussion of milk pricing and Federal milk marketing orders, see Milk Pricing in the 

United States, by Alden C. Manchester and Don P. Blayney, Economic Research Service, U. S. 

Department of Agriculture. Agricultural Information Bulletin Number 761. 

http://www.ers.usda.gov/publications/AIB761/.
1-3

premiums, while other handlers may offer a price comparable to the milk order blend 

price plus premiums.5

A handler can only forward contract through the Program for milk to be used for nonfluid 

purposes, milk classified as Class II, III, and IV. If a handler’s volume of milk for 

nonfluid drops below the amount of milk covered by forward contracts and the contract 

price is below the order’s minimum blend price for the month, the handler is required to 

pay the higher minimum blend price for the quantity of over-contracted milk. The 

handler may determine which producers get the higher minimum order price for the overcontracted milk. If the handler fails to indicate which milk is over-contracted milk, the 

market administrator prorates the quantity of over-contracted milk to each producer 

having a forward contract with the handler. If a handler’s contract milk exceeds the 

handler’s volume of milk used in manufacturing and the contract price exceeds the 

order’s minimum blend price for the month, the issue is moot and the handler continues 

to pay the producer the agreed-upon contract price for the milk covered by the contract. 

In order to help dairy farmers adjust to forward contracting, any first-time contract under 

the Program is limited to 12 months. Thereafter, the producer or dairy cooperative may 

contract for a longer period of time, but the exemption from paying minimum Federal 

order blend prices provided by the Program extends only through December 31, 2004. 

Participation in the Program is voluntary for dairy farmers or their dairy cooperatives and 

handlers. For each contract, the handler must provide a fact sheet and disclosure 

statement to help insure that producers or their dairy cooperatives understand that 

contracting is voluntary and that they are giving up the minimum price protection 

provided by Federal milk orders. A signed disclosure statement must be on file with each 

contract in the market administrator’s office before the contract can be recognized as part 

of the Program. (See Appendix C for the fact sheet and disclosure statement and for 

Program questions and answers.) Handlers must submit a copy of their forward contracts 

under the Program to the market administrator’s office of the market under which the 

milk will be regulated. The market administrator reviews each contract to ensure that it 

complies with regulations. Forward contracts must be signed and dated by the 

contracting handler and the producer or dairy cooperative prior to the first day of the first 

month for which they are to be effective and must be in the possession of the market 

administrator by the fifteenth day of that month. Payments for milk covered by a forward 

contract must be made on or before the dates applicable to payments for milk that is not 

under forward contract under the respective Federal orders. This facilitates 

administration of the Program and eliminates the possibility of disparate treatment that 

could result from having different payment dates for contract and non-contract milk. 

Market administrators are not responsible for enforcing forward contracts.

 

5

 Variation in the method of pricing can cause difficulty in comparing forward contract prices to Federal 

order prices. In the proposed rule for the Program, USDA had proposed that the basis for pricing milk 

under the Program be the same as the basis for pricing regulated milk that is not under forward contract. In 

the four orders with butterfat and skim milk pricing, forward contracts would have been required to be 

written in those terms; in the seven orders with milk component pricing, forward contracts would have been 

required to be written in terms of those same components. This proposal was dropped because commenters 

saw it as an obstacle to effectively hedging contract prices.
1-4

Milk Price and Situation Forecasts During the Study Period 

This study covers Program forward contracts with deliveries from September 2000 

through March 2002. Only four producers delivered contract milk to two plants in 

August 2000, the first month of program operation. Therefore, this study considers 

September 2000 as the first full operational month of the program. March 2002 is the 

most recent month for which we have comprehensive Program data compiled and 

submitted from all Federal marketing orders. 

Since 1980, milk production has increased at an annual average rate of about 1.2 percent. 

However, in 2001, milk production declined by about 1.4 percent, causing farm-level 

milk prices to increase sharply. In 2001, the Federal order blend price averaged $14.90 

per hundredweight (cwt.), reaching a high of in $17.08 per cwt. in September 2001 

(Table 1-1). The Class III price, the price upon which many contracts were based, 

averaged $13.10 per cwt. in 2001 and reached a high of $15.90 per cwt. in September. 

The Class III price in 2001 averaged 35 percent higher than in 2000 (Table 1-2). 

United States Department of Agriculture’s (USDA) Class III price projections for the 

study period are compared with actual Federal order minimum Class III prices in Table 1-

3. Projected Federal order Class III prices for 2001 were consistently projected for less 

than the actual announced Federal order Class III prices with the exception of the 4th

delivery quarter. Projections for 2000 and 2002 tended to be higher than realized prices.

An examination of futures market prices reveals similar expectations. Table 1-4 displays 

a comparison of average Chicago Mercantile Exchange (CME) Class III futures prices for 

the study period with actual announced Federal order Class III prices. In 2001, futures 

prices were below realized prices with only a few exceptions. As with the USDA 

projections, Class III futures prices for 2000 and 2002 tended to be higher than actual 

announced Class III prices.

These forecasts and others did not anticipate the changing supply and demand conditions 

of 2001. As a result, contract prices for 2001 tended to be much lower than non-contract 

market prices for milk. We believe that if the study had covered a longer period of time, 

the results may have been substantially different. As stated in USDA’s Final Rule for the 

Dairy Forward Pricing Pilot Program:

“Over time, we would expect to see forward prices to producers below the blend 

price in some months and above the blend price in other months.... On balance, 

the pluses and minuses should cancel each other out since, one could argue, the 

desired objective of forward contracting is to remove the uncertainty and 

variability in prices...” 6

 

6

 65 FR 44413
1-5

Attributes of Contracts

There were numerous variations in how contracts were structured over the study period. 

Contract volumes varied greatly. The largest contract was a 12-month contract for about 

168 million pounds of milk, or about 14 million pounds per month. On the other end of 

the scale, contracts for 10,000 pounds of milk per month were not uncommon.

The delivery periods covered by contracts varied greatly. Contracts ranged from 1 month 

to 18 months in length. Some contracts provided for the same price each month while 

others provided for separate prices each month. For this analysis, the latter type contracts 

were considered separate contracts for each month. For example, if a producer signed a 

contract to deliver 100,000 pounds of milk in each of the months from January through 

June 2001 at a different specified price each month, this study views such an arrangement 

as 6 separate monthly contracts. 

The time from contract signing to the first delivery under the contract ranged from 1 to 20 

months. Table 1-5 displays a cross tabulation of the lengths of contracts and time from 

signing to date of first delivery. As discussed above, producers were limited to 12 

months for the duration of the first contract signed. However, it was not uncommon for 

producers to sign multiple contracts over a short period of time that covered more than 12 

months of future deliveries. A large number of producers signed 12-month contracts that 

were not scheduled for initial delivery until 2 to 4 months later. Many producers signed 

1-month contracts for delivery from 1 to 9 months after signing.

There were several ways in which handlers defined the product to be delivered under 

contracts. Most commonly, contracts specify pounds of milk to be delivered. Of these 

contracts, some further required the remainder of the producer’s production to be 

delivered at the handler’s non-contract price. Some contracts specified only the pounds 

of butterfat, protein, and other solids to be delivered, rather than pounds of milk. Other 

contracts specified milk pounds with minimum requirements for components. Many 

contracts specified a certain percentage of the producer’s marketings – up to 100 percent 

– to be delivered at the contract price. There were 7 cases of complementary contracts 

where a specified quantity was to be delivered for one contract price, and the balance of 

the producer’s deliveries would be accepted and paid at another contract price. 

Table 1-6 delineates the contract pricing methods according to the defined product to be 

delivered. The most common type of pricing method specified payment per 

hundredweight of milk. For these contracts, contract-milk prices were computed as they 

would be for non-contract milk. Then a contract adjustment was applied based on the 

difference between the contract price and the announced Class III price at 3.5 percent 

butterfat. In some contracts, the mechanics concerning this price adjustment were absent 

from the contract or were only referred to in vague terms. 

Many contracts were priced in terms of components, usually butterfat, protein, and other 

solids. Some contracts were priced in terms of butterfat and nonfat solids. Contracts in 
1-6

the Southeast were written in terms of butterfat and skim milk—the same terms used in 

the Southeast Federal milk order. There were some contracts that were stated in terms of 

a cheese yield value. A formula was used to convert the cheese yield value to a milk 

price.

Contracts that define delivery volumes in pounds perhaps carry some risk for the 

producer—risk that producers with contracts that define delivery volumes in terms of 

percentages of production do not incur—because of the potential for coming up short on 

deliveries. The data indicates that some producers—particularly those pooled in the 

Upper Midwest order—did not always deliver the contracted amount. There also were 

some producers who came up short on deliveries in the Central, Southeast, and Mideast 

orders. The data indicates that there were no producers who delivered less than the 

contracted amount in the Pacific Northwest or Western orders. Table 1-7 displays the 

short deliveries for the Upper Midwest. Table 1-8 displays the short deliveries for the 

Central, Southeast, and Mideast orders combined. Some contracts contained provisions 

for penalties for short deliveries.

Data Used for the Analysis

Two types of data were collected for the study. In order to evaluate the participation and 

the impacts of the Program on producers and handlers, Federal milk order market 

administrators collected data on contracted milk volumes and prices. In order to evaluate 

the industry’s perception of the Program, surveys were used to gather facts and opinions 

from participating and non-participating producers, cooperatives, and handlers. Further, 

information on the attributes of participants and non-participants were collected in the 

surveys. 

Payroll and Contract Data. Each Federal milk order market administrator’s office 

provided data concerning forward contracts from payroll records and copies of the 

contracts that they received. Data were collected for the 19-month period of September 

2000 through March 2002. Monthly data are from four categories: (1) Federal order 

data, including number of producers, number of plants, and volume of producer 

deliveries; (2) contract data, including prices, quantities, and dates; (3) participating 

producer data, including quantities actually delivered and prices received; and (4) 

participating handler data, including milk volumes received and number of eligible 

producers per handler.

For years some dairy cooperatives have offered their member-producers the opportunity 

to lock in milk prices for future deliveries. Since some dairy cooperatives compete with 

proprietary handlers for a milk supply, the expanded forward contracting opportunities 

for proprietary handlers may have had an effect on contracts offered by dairy 

cooperatives to their members. Specific information concerning such contracts is 

unavailable to us. We also do not have data on forward contracts of cooperatives or 

proprietary handlers that were in effect before the Program began. Consequently, we are 
1-7

unable to compare forward contracts in effect prior to the Program with contracts 

included in the Program.

The letter R that appears in some of the tables denotes restricted data. Section 8d of the 

Agricultural Marketing Agreement Act of 1937, as amended, prohibits the Secretary of 

Agriculture from releasing any information of a proprietary nature. Data provided to the 

Secretary by fewer than three parties is considered restricted because aggregation of such 

information may not prevent individual disclosure.

Survey Data. To obtain market participant perceptions and attributes, questionnaires 

were designed for dairy producers, cooperatives, and plants (See Appendix E). On or 

about April 10, 2002, each Federal order market administrator’s office sent 

questionnaires by U.S. mail to:

• Eligible producers -- all producers whose milk was pooled on a Federal order 

during June 2001 and who were not members of a cooperative association, with 

the exception of certain cooperative producers paid by proprietary handlers. 

Additionally, questionnaires were sent to producers who had been delivering to 

Kraft’s Melrose, Minnesota, plant prior to May 2001. 

• Eligible plants -- all proprietary plants and cooperative plants (excluding 

cooperative plants only receiving milk from members) that received Federal order 

pooled milk during June 2001. A questionnaire was sent to each plant, regardless 

of whether the plant was owned by a single-plant firm or one of several owned by 

a multi-plant firm.

• All cooperatives that delivered Federal order pooled milk to a proprietary plant 

during June 2001. Each cooperative was sent only one questionnaire even though 

several cooperatives have milk pooled in more than one Federal order.

In concert with e-government initiatives, questionnaires also were provided electronically 

on the Internet, and respondents were given a choice of responding by postage-paid 

return mail or on the Internet. Questionnaires were sent to 16,686 eligible producers, to 

144 cooperatives, and to 705 plants (including 96 cooperative plants). Response rates 

were 21.9 percent for producers, 35.2 percent for plants, and 60 percent for cooperatives. 

Of the 4,140 total responses, 132 were through the Internet. Of the 132 Internet 

responses, 65 were from producers.
1-8

Table 1-1: Federal Order Blend Prices ($/cwt) 

Month 2000 2001

Percent 

change over 

previous year 2002

Percent 

change over 

previous year

Jan. 11.67 12.86 10.2 13.18 2.5

Feb. 11.48 12.71 10.7 12.84 1.0

Mar. 11.59 13.64 17.7 12.32 -9.7

Apr. 11.63 14.32 23.1

May 11.94 15.55 30.2

June 12.19 16.36 34.2

July 12.71 16.60 30.6

Aug. 12.49 16.84 34.8

Sept. 12.74 17.08 34.1

Oct. 12.35 15.45 25.1

Nov. 12.11 14.19 17.2

Dec. 12.55 13.01 3.7

Averages 12.11 14.90 23.0 12.78 -2.2

Table 1-2: Federal Order Class III Prices ($/cwt)

Month 2000 2001

Percent 

change over 

previous year 2002

Change over 

previous year

Jan. 10.05 9.99 -0.6 11.87 18.8

Feb. 9.54 10.27 7.7 11.63 13.2

Mar. 9.54 11.42 19.7 10.65 -6.7

Apr. 9.41 12.06 28.2

May 9.37 13.83 47.6

June 9.46 15.02 58.8

July 10.66 15.46 45.0

Aug. 10.13 15.55 53.5

Sept. 10.76 15.90 47.8

Oct. 10.02 14.60 45.7

Nov. 8.57 11.31 32.0

Dec. 9.37 11.80 25.9

Averages 9.74 13.10 34.5 11.38 8.4
1-9

Table 1-3: Average USDA Class III Milk Price Projections 1/ Compared to Federal Order 

 Class III Prices

USDA Price Projections, Quarterly Averages($/cwt)

Delivery quarter

Projection 

quarter 2000

3rd

2000

4

th

2001

1st

2001

2nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

 rd 10.40 11.03 10.40 9.80 --- --- ---

4

th

--- 9.63 9.80 9.80 10.45 --- ---

2001

1

st

--- --- 10.03 10.00 10.63 11.70 ---

2

nd

--- --- --- 12.82 13.87 13.62 12.25

3

rd

--- --- --- --- 15.38 14.40 11.90

4

th

--- --- --- --- --- 13.25 11.48

2002

1

st

--- --- --- --- --- --- 11.43

Source: USDA; Livestock, Dairy and Poultry Situation and Outlook

1/ Quarterly projections are calculated by averaging monthly USDA projections.

Federal Order Class III Prices, Quarterly Averages ($/cwt)

Delivery quarter

2000

3rd

2000

4

th

2001

1st

2001

2

nd

2001

3

rd

2001

4

th

2002

1st

Class III Price 10.52 9.32 10.56 13.63 15.64 12.57 11.38

Source: USDA; Agricultural Marketing Service

Averages of monthly Federal Order Class III prices are used to calculate average quarterly 

 Class III prices.

USDA Projections Minus Actual Class III Prices ($/cwt) 

Delivery quarter

Projection 

quarter 2000

3rd

2000

4

th

2001

1st

2001

2nd

2001

3

rd

2001

4

th

2002

1st

2000

3

rd

-0.12 1.71 -0.16 -3.83 --- --- ---

4

th

--- 0.31 -0.76 -3.83 -5.19 --- ---

2001

1

st

--- --- -0.53 -3.63 -5.00 -0.87 ---

2

nd

--- --- --- -0.81 -1.77 1.05 0.87

3

rd

--- --- --- --- -0.25 1.83 0.52

4

th

--- --- --- --- --- 0.68 0.10

2002

1

st

--- --- --- --- --- --- 0.05
1-10

Table 1-4: CME Class III Futures Prices Compared to Federal Order Class III Prices

CME Class III Future Prices, Quarterly Averages ($/cwt)

Delivery quarter

Signing

quarter 2000

3rd

2000

4

th

2001

1st

2001

2

nd

2001

3rd

2001

4th

2002

1st

2000 

3

rd 10.82 10.98 10.61 10.65 11.25 --- ---

4

th

--- 9.42 9.84 10.13 11.04 11.25 ---

2001

1

st

--- 9.39 10.38 11.11 12.25 11.89 11.17

2

nd

--- --- --- 13.44 14.33 12.98 11.57

3

rd

--- --- --- --- 15.33 13.77 11.99

4

th

--- --- --- --- 15.89 12.05 11.70

2002

1

st

--- --- --- --- --- 11.81 11.48

Source for daily settlement prices: The Wisconsin Center for Dairy Research and Department of

 Agricultural and Applied Economics at the University of Wisconsin-Madison,

 http://www.aae.wisc.edu/future/front_futures.htm.

Class III futures prices are calculated as simple averages of all daily futures settlement prices 

 relevant to each signing-delivery quarter combination.

Federal Order Class III Prices, Quarterly Averages ($/cwt)

Delivery quarter

2000

3rd

2000

4th

2001

1

st

2001

2

nd

2001

3

rd

2001

4th

2002

1st

Class III Price 10.52 9.32 10.56 13.63 15.64 12.57 11.38

Averages of monthly Federal Order Class III prices are used to calculate average quarterly 

 Federal Order Class III prices.

CME Class III Futures Prices Minus Federal Order Class III Prices ($/cwt)

Delivery quarter

Signing 

quarter 2000 

3rd

2000

4

th

2001

1

st

2001

2nd

2001

3

rd

2001

4th

2002

1st

2000

3

rd 0.30 1.66 0.05 -2.98 -4.39 --- ---

4

th 0.10 -0.72 -3.50 -4.60 -1.32 ---

2001

1

st

--- 0.07 -0.18 -2.52 -3.39 -0.68 -0.21

2

nd

--- --- --- -0.19 -1.31 0.41 0.19

3

rd

--- --- --- --- -0.31 1.20 0.61

4

th

--- --- --- --- 0.25 -0.52 0.32

2002 

1

st

--- --- --- --- --- -0.76 0.10
1-11

Table 1-5: Contract Lengths and Time From Signing to First Delivery

Contract length in months Time from 

signing to first 

delivery in 

months 1 1/ 2 3 4 5 6 7 8 9 10 11 12 18 Totals

Less than 1 2/

--- --- --- --- 2 --- --- --- --- --- --- --- --- 2

1 184 4 2 179 4 69 --- 37 68 58 24 203 2 834

2 201 5 6 109 1 3 4 --- 84 3 4 99 --- 519

3 239 2 1 3 --- 50 3 --- 6 1 --- 692 --- 997

4 238 6 --- 2 2 5 --- --- 2 --- --- 113 --- 368

5 233 --- 1 2 4 3 2 --- --- 1 --- 12 1 259

6 219 2 2 --- 4 11 1 1 6 --- --- 6 --- 252

7 190 3 --- --- 1 2 --- --- --- --- --- --- --- 196

8 159 --- 1 1 1 1 --- --- --- --- --- 1 --- 164

9 100 1 --- --- --- 41 --- --- --- --- --- 2 --- 144

10 46 --- 1 1 --- 9 --- --- --- --- --- --- --- 57

11 33 3 --- --- --- --- --- --- --- --- --- --- --- 36

12 18 --- 1 1 --- --- --- --- --- --- --- --- --- 20

13 6 --- --- --- --- --- --- --- --- --- 1 1 --- 8

14 2 --- --- --- --- --- --- --- 2 --- --- 1 --- 5

15 2 --- --- --- --- 3 --- --- --- --- --- 1 --- 6

16 1 --- --- --- --- --- --- --- --- --- --- --- --- 1

17 1 --- --- --- --- --- --- --- --- --- --- --- --- 1

18 1 --- --- --- --- --- --- --- --- --- --- --- --- 1

20 1 --- --- --- --- --- --- --- --- --- --- --- --- 1

Totals 1,874 26 15 298 19 197 10 38 168 63 29 1131 3 3,871

1/ Some contracts specified delivery over mulitiple months but separate prices for each month. For this analysis, such 

arrangements were counted as multiple one-month contracts. For example, if a producer signed a contract to deliver 

100,000 pounds of milk in each of the months from January through June 2001, at a different specified price each 

month, this analysis views such an arrangement as 6 separate monthly contracts. 

2/ There were 2 contracts that scheduled deliveries in the same month as they were signed. The first deliveries under 

these contracts were not included in the Pilot Program.
1-12

Table 1-6: Contract Pricing Method by Defined Product to be Delivered

Product: Pounds of milk 

Contract pricing method

Number of 

contracts

Contract 

pounds in 

millions

Price per cwt 1/ 2,003 1,293

Butterfat, protein, other solids 829 843

Cheese yield 102 90

Butterfat, skim 12 7

Totals 2,946 2,233

1/ One contract in this category allows for contract pound changes based on 

certain conditions.

Product: Pounds of milk with minimum pounds of components required 

Contract pricing method Number of 

contracts

Contract 

pounds in 

millions

Price per cwt. 2 1.2

Butterfat, protein, other solids 125 95.4

Totals 127 96.6

Product: Percentage of milk production

Contract pricing method

Number of 

contracts

Average 

contract 

percentage

Price per cwt. 15 97

Butterfat, protein, other solids 2/ 619 94

Cheese yield 107 47

Butterfat, skim 11 70

Butterfat, nonfat solids 10 100

Total 762 ---

Weighted average percentage --- 87

2/ 78 contracts in this category allow for the contract percentage to be changed 

after a period of time.

Product: Other specified 3/

Number of 

contracts

Contract 

pounds in 

millions

Component pounds only 29 NA

Balance of production 7 NA

3/ All of these contracts use butterfat, protein, and other solids prices.
1-13

Table 1-7: Producer Deliveries of Less Than Amount Contracted, Upper Midwest Federal

 Order Market

Month

Total contract 

pounds, all 

pooled 

producers 

Scheduled 

contract pounds 

for producers 

delivering less 

than contract 

amount 

Delivery 

shortages on 

contract 

pounds

Percentage short 

for producers 

delivering less than 

contracted

Percentage 

short for all 

pooled 

producers 

1000 pounds Percent

2000

Sept. 25,210 1,089 151 13.9 0.6

Oct. 26,704 923 113 12.2 0.4

Nov. 26,751 1,357 143 10.5 0.5

Dec. 27,678 895 159 17.7 0.6

2001

Jan. 88,714 755 133 17.6 0.2

Feb. 85,238 2,210 205 9.3 0.2

Mar. 94,031 293 46 15.8 0.0

Apr. 124,290 16,203 2,435 15.0 2.0

May 64,583 15,004 2,063 13.7 3.2

June 63,140 14,873 2,317 15.6 3.7

July 69,787 11,362 1,492 13.1 2.1

Aug. 97,088 12,263 1,759 14.3 1.8

Sept. 123,934 17,198 2,235 13.0 1.8

Oct. 93,473 18,360 2,056 11.2 2.2

Nov. 120,789 20,088 3,061 15.2 2.5

Dec. 121,058 18,791 2,585 13.8 2.1

2002

Jan. 30,828 0 0 N/A N/A

Feb. 20,429 500 33 6.6 0.2

Mar. 39,531 150 7 4.7 0.0

Totals 1,343,256 152,314 20,992 13.8 1.6
1-14

Table 1-8: Producer Deliveries of Less Than Amount Contracted; Central, Mideast,

 and Southeast Federal Milk Order Markets Combined

Month

Total contract 

pounds, all 

pooled 

producers 

Scheduled 

contract pounds 

for producers 

delivering less 

than contract 

amount

Delivery 

shortages on 

contract 

pounds

Percentage short 

for producers 

delivering less than 

contracted

Percentage 

short for all 

pooled 

producers

1000 pounds Percent

2000

Sept. 19,564 75 17 22.8 0.1

Oct. 22,712 45 7 14.6 0.0

Nov. 24,030 1,865 482 25.9 1.9

Dec. 24,919 65 5 7.4 0.0

2001

Jan. 38,844 368 41 11.1 0.1

Feb. 41,166 448 64 14.3 0.2

Mar. 50,796 280 33 11.8 0.1

Apr. 54,730 285 89 31.2 0.2

May 74,626 1,055 206 19.5 0.3

June 81,818 860 69 8.0 0.1

July 94,988 1,842 230 12.5 0.2

Aug. 91,925 3,097 327 10.6 0.4

Sept. 62,683 743 223 29.9 0.4

Oct. 60,119 623 237 38.1 0.4

Nov. 53,586 1,001 252 25.2 0.5

Dec. 53,772 741 184 24.8 0.3

2002

Jan. 31,598 0 0 N/A N/A

Feb. 27,819 0 0 N/A N/A

Mar. 27,203 0 0 N/A N/A

Totals 37,898 13.393 2,464 18.4 0.3
2-1

Chapter 2

Milk Producers as Parties to Forward Contracts

Characteristics of Contracting Producers

An average of 653 producers per month participated in the Dairy Forward Pricing Pilot 

Program (Program) from September 2000 through March 2002.1 The number of 

producers whose milk was pooled in the Federal order markets averaged 66,555 per 

month, and producers eligible for the program averaged 16,616 per month over the same 

period. Eligible producers comprised about 25 percent of pooled producers. Contracting 

producers averaged about 4 percent of the eligible producers and about 1 percent of all 

Federal order producers (Table 2-1).

Contracting producers had farms located in 16 states (Table 2-2). Wisconsin and 

Minnesota producers comprised over three-quarters of participants, with Wisconsin 

having 45 percent and Minnesota having 32.6 percent. 

Producers with milk pooled in seven of the eleven Federal Milk Marketing Orders 

participated in the Program during the study period. These included the Central, Mideast, 

Northeast, Pacific Northwest, Southeast, Upper Midwest, and Western orders. We refer 

to these orders as the “Seven Orders.” The Upper Midwest had the largest numbers of 

both producers and handlers participating. Much of the data concerning each of the other 

six orders is restricted since the data are for less than three handlers or producers. For 

this reason, most of the data is aggregated for the six orders other than the Upper 

Midwest. We refer to these orders as the “Six Orders.”

Enumerated in Tables 2-1, 2-3, and 2-4 respectively, are the numbers of producers 

delivering pooled milk, producers eligible for the Program, and contracting producers for 

all Federal orders, the Upper Midwest, and the Six Orders. Forward contracts for the 

beginning of 2001 appeared to be attractive relative to price forecasts, and many of the 

contracts were for the calendar year. As a result, the participation rates increased 

markedly in 2001 compared to the last third of 2000. Participation peaked in April of 

2001 with 1,141 producers—78.6 percent of the 1,452 total participants for the study 

period—delivering milk under forward contract. 

The number of contracting producers declined by 361 in May of 2001. The drop in the 

number of producers primarily is due to the sale of a proprietary plant to cooperative 

associations. When the cooperatives purchased the plant and began paying producers, the 

contracts were no longer part of the Program. In May 2001, there was also a shift of 

contracts from the Upper Midwest to the Mideast order. While contracting producers 

 

1

 Only four producers delivered contract milk to two plants in August of 2000, the first month of program 

operation. Therefore, this study considers September 2000 as the first fully operational month of the 

program.
2-2

under the Upper Midwest order dropped from 898 in April to 375 in May, the number 

increased in the Six Orders from 243 to 405. 

Another sharp drop in the number of contracting producers under Federal orders occurred 

at the beginning of 2002—from over 700 in December 2001 to less than 175 in the first 

quarter of 2002. It is likely that many producers chose not to participate in 2002 as the 

result of losses on contract milk throughout much of 2001. At least one handler that 

offered contracts for 2001 was unable to contract for any milk in the first quarter of 2002. 

Also, it is possible that given less interest from producers, ambivalent handlers felt less 

competitive pressure to offer contracts and decided not to offer contracts for 2002. 

Contract Producer Milk

Pooled deliveries over the study period averaged 9,969 million pounds per month, and 

eligible producer deliveries averaged 2,449 million pounds per month (Tables 2-5). As 

noted above, a monthly average of 66,555 producers had milk pooled in Federal orders, 

and 16,616 were eligible to participate in the Program (Table 2-1). From these monthly 

averages for milk volumes and producers numbers, we compute monthly averages of 150 

thousand pounds per pooled producer and 147 thousand pounds per eligible producer. 

The monthly average per participating producer was 358 thousand pounds (Table 2-8). 

Thus, the average contracting producer delivery was more than twice the average 

producer delivery for all Federal orders. Moving into 2002, the difference was greater 

with the monthly average being 863 thousand pounds delivered per contracting producer.

Although 3.9 percent of the eligible producers per month on average participated in the 

Program during the study period (Table 2-1), contract milk from these producers 

averaged 5.3 percent of eligible producer milk (Table 2-5). However, contract milk 

deliveries represented about only 1.3 percent of the total pooled milk during the study 

period.

Producers’ contract signing and milk delivery activity is aggregated by quarter in Table 

2-6. The most active quarter for signing contracts was the fourth quarter of 2000. In the 

Upper Midwest, the greatest number of producers signing contracts in the fourth quarter 

of 2000 delivered contract milk in the first and second quarters of 2001. In the Six 

Orders, the greatest number of producers signing contracts in the fourth quarter of 2000 

delivered contract milk in the second and third quarters of 2001. 

Although the number of contracting producers fell sharply in 2002, the proportion of 

participants with large deliveries increased sharply. Contracting producers are 

categorized according to the size of total monthly deliveries in Table 2-7 and graphed in 

Figure 2-1. The smaller producers—those with total deliveries of less than 100,000 

pounds per month—made up the largest category on average at 43 percent. Producers 

delivering 100,000 to 400,000 pounds per month came in a close second, making up 

about 40 percent of the total number on average. The percentage of large producers in 

the program grew from around 3 percent at the start of the Program to around 23 percent 
2-3

at the end of the study period. Most of this change is due to a larger decrease in 

participation by smaller producers. 

The relative participation of small producers to large producers over the study period can 

be observed in the monthly averages of contract and total pounds delivered by 

contracting producers. Table 2-8 displays these averages for the Upper Midwest Federal 

milk market order, the Six Orders, and the Seven Orders. Participants in the Upper 

Midwest have generally been smaller on average than those in the Six Orders. In the 

Upper Midwest, the average of total deliveries per contracting producer started at about 

123 thousand pounds per month at the beginning of the study period and grew to about 

776 thousand pounds per month by the end of the study period. The Six Orders’ average 

monthly deliveries began in the range of 400 to 600 thousand pounds per month in 2000, 

dipped down into the range of 300 to 400 thousand for 2001, and shot up to over 1 

million pounds per month in 2002. The average monthly deliveries per contracting 

producer are displayed in Figure 2-2. 

Although there are some exceptions, deliveries on average for contracting producers 

typically ranged from 60 percent to 80 percent of total deliveries. However, the 

distribution of producers by contract delivery as percentage of total deliveries is widely 

disbursed as displayed in Table 2-9. More than half of the contract producers fell in the 

25 to 75 percent range. More than a fourth of the participating producers contracted for 

100 percent of total deliveries.
2-4

Table 2-1: Producers: Total, Program1/ Eligible, and Contracting Producers,

 by Month, All Federal Milk Marketing Orders

Contracting producers as 

percentage of

Year and

month

Number of 

producers 

delivering 

pooled milk

Number 

of 

Program 

eligible 

producers

Number of 

contracting 

producers

Producers 

delivering 

pooled milk

Program 

eligible 

producers

2000

Sept. 69,547 17,340 304 0.4 1.8 

Oct. 68,806 17,099 317 0.5 1.9 

Nov. 67,983 16,969 324 0.5 1.9 

Dec. 67,111 16,771 319 0.5 1.9 

2001

Jan. 67,709 16,838 994 1.5 5.9 

Feb. 66,678 16,886 1,005 1.5 6.0 

Mar. 66,942 16,836 1,032 1.5 6.1 

Apr. 66,522 17,170 1,141 1.7 6.6 

May 66,258 17,040 780 1.2 4.6 

June 65,969 16,074 819 1.2 5.1 

July 66,540 16,206 865 1.3 5.3 

Aug. 66,339 16,211 873 1.3 5.4 

Sept. 65,847 16,359 873 1.3 5.3 

Oct. 65,132 16,296 822 1.3 5.0 

Nov. 66,384 16,468 743 1.1 4.5 

Dec. 65,413 16,220 721 1.1 4.4 

2002

Jan. 65,572 16,336 169 0.3 1.0 

Feb. 64,759 16,225 137 0.2 0.8 

Mar. 65,031 16,366 171 0.3 1.0 

19-month 

average 66,555 16,616 653 1.0 3.9 

 1/ Program refers to Dairy Forward Pricing Pilot Program

 
2-5

Table 2-2: Program Participating Producers 1/ by State

State Number of producers Percent 

WI 655 45.1 

MN 473 32.6 

ID 95 6.5 

SD 61 4.2 

IL 48 3.3 

NY 37 2.5 

IA 32 2.2 

OH 21 1.4 

MO 11 0.8 

AR 6 0.4 

NE 4 0.3 

OK 3 0.2 

OR 2 0.1 

PA 2 0.1 

MI 1 0.1 

UT 1 0.1 

Total 1,452 100.0 

 1/ Program Participating Producers refers to the total number of 

 producers who delivered contract milk as part of the Dairy 

 Forward Pricing Pilot Program during the study period.
2-6

Table 2-3: Upper Midwest Federal Order Producers: Total, Program1/ Eligible, and 

 Contracting Producers, by Month

Contracting producers as 

percentage of

Year and 

month

Number of 

producers 

delivering 

pooled milk

Number 

of 

Program 

eligible 

producers

Number of 

contracting 

producers

Producers 

delivering 

pooled milk

Program 

eligible 

producers

2000

Sept. 17,362 6,314 238 1.4 3.8

Oct. 16,870 6,004 247 1.5 4.1

Nov. 16,223 5,904 254 1.6 4.3

Dec. 15,978 5,890 254 1.6 4.3

2001

Jan. 16,027 5,885 825 5.1 14.0

Feb. 15,483 5,874 822 5.3 14.0

Mar. 15,331 5,910 837 5.5 14.2

Apr. 14,635 5,877 898 6.1 15.3

May 13,753 5,259 375 2.7 7.1

June 12,748 4,359 361 2.8 8.3

July 12,831 4,258 369 2.9 8.7

Aug. 13,371 4,368 374 2.8 8.6

Sept. 15,363 5,175 519 3.4 10.0

Oct. 15,035 5,133 487 3.2 9.5

Nov. 15,418 5,183 431 2.8 8.3

Dec. 14,670 4,925 422 2.9 8.6

2002

Jan. 14,926 5,090 93 0.6 1.8

Feb. 14,494 5,018 72 0.5 1.4

Mar. 14,172 4,817 100 0.7 2.1

19-month 

average 14,984 5,329 420 2.8 7.9

 1/ Program refers to Dairy Forward Pricing Pilot Program.
2-7

Table 2-4: Six Orders 1/ Producers: Total, Program2/ Eligible, and Contracting 

 Producers, by Month

Contracting producers as 

percentage of

Year and 

month

Number of 

producers 

delivering 

pooled milk

Number 

of 

Program 

eligible 

producers

Number of 

contracting 

producers

Producers 

delivering 

pooled milk

Program 

eligible 

Producers

2000

Sept. 46,748 10,086 66 0.1 0.7

Oct. 46,478 10,122 70 0.2 0.7

Nov. 46,258 10,082 70 0.2 0.7

Dec. 45,423 9,910 65 0.1 0.7

2001

Jan. 46,066 9,988 169 0.4 1.7

Feb. 45,705 10,026 183 0.4 1.8

Mar. 46,023 9,978 195 0.4 2.0

Apr. 46,323 10,340 243 0.5 2.4

May 47,010 10,915 405 0.9 3.7

June 47,641 10,853 458 1.0 4.2

July 48,409 11,085 496 1.0 4.5

Aug. 47,543 10,982 499 1.0 4.5

Sept. 45,161 10,338 354 0.8 3.4

Oct. 44,868 10,324 335 0.7 3.2

Nov. 45,606 10,443 312 0.7 3.0

Dec. 45,351 10,438 299 0.7 2.9

2002

Jan. 45,052 10,420 76 0.2 0.7

Feb. 44,876 10,373 65 0.1 0.6

Mar. 45,198 10,619 71 0.2 0.7

19- Month 

Average 46,092 10,385 233 0.5 2.2

 1/ Six Orders refers to the Federal Milk Marketing orders other than the Upper 

 Midwest with participation in the Program. These include the Central, Mideast, 

 Northeast, Pacific Northwest, Southeast, and Western orders.

 2/ Program refers to Dairy Forward Pricing Pilot Program.
2-8

Table 2-5: Contract Pounds Delivered as a Percentage of Total Pooled Milk in All Federal 

 Order Markets and as a Percentage of Pooled Milk from Eligible Producers

Pooled Milk Contract Milk as a Percentage of

Year and 

month Total

Program1/

Eligible Contracted Total

Program 

Eligible

1000 Pounds Percent

2000

Sept. 9,170,023 2,301,802 46,592 0.51 2.02 

Oct. 9,518,128 2,390,307 51,288 0.54 2.15 

Nov. 9,146,453 2,301,586 53,144 0.58 2.31 

Dec. 9,445,742 2,385,246 54,456 0.58 2.28

2001

Jan. 9,984,196 2,435,805 127,384 1.28 5.23 

Feb. 9,002,305 2,237,077 126,135 1.40 5.64 

Mar. 10,147,728 2,494,623 144,748 1.43 5.80 

Apr. 9,933,591 2,484,366 176,841 1.78 7.12

May 10,512,566 2,521,950 142,175 1.35 5.64 

June 10,258,231 2,415,738 151,545 1.48 6.27 

July 10,251,589 2,436,232 169,016 1.65 6.94 

Aug. 10,025,733 2,468,079 195,753 1.95 7.93 

Sept. 9,742,172 2,402,271 205,016 2.10 8.53 

Oct. 9,841,319 2,379,186 170,892 1.74 7.18 

Nov. 10,013,597 2,497,104 195,199 1.95 7.82 

Dec. 10,573,390 2,588,609 199,840 1.89 7.72 

2002

Jan. 10,838,714 2,655,551 86,514 0.80 3.26 

Feb. 9,956,112 2,348,263 74,383 0.75 3.17 

Mar. 11,049,089 2,784,104 100,636 0.91 3.61 

19-Month 

Total 189,410,677 46,527,898 2,471,557 1.30 5.31 

19-Month 

Average 9,968,983 2,448,837 130,082 1.30 5.31 

 1/ Program refers to Dairy Forward Pricing Pilot Program
2-9

Table 2-6: Program1/ Producers by Contract Signing and Milk Delivery Quarter

Upper Midwest Federal Order

Delivery Quarter

Signing 

Quarter

2000 

3

rd

2000 

4

th

2001 

1

st

2001 

2

nd

2001 

3

rd

2001 

4

th

2002 

1

st

2000

3

rd 241 252 71 69 46 29 1

4

th

--- 3 666 666 289 279 1

2001

1

st

--- --- 39 107 129 125 14

2

nd

--- --- --- 25 82 72 11

3

rd

--- --- --- --- 13 20 11

4

th

--- --- --- --- --- 2 51

2002

1

st

--- --- --- --- --- --- 23

Six Orders 2/

Delivery Quarter

Signing 

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 67 74 92 90 91 81 ---

4

th

--- 1 78 209 210 79 ---

2001

1

st

--- --- 34 121 136 106 24

2

nd

--- --- --- 87 162 115 14

3

rd

--- --- --- --- 15 30 24

4

th

--- --- --- --- --- 2 24

2002

1

st

--- --- --- --- --- --- 18

Seven Orders 

2/

Delivery Quarter

Signing 

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 308 326 163 159 137 110 1

4

th

--- 4 744 875 499 358 1

2001

1

st

--- --- 73 228 265 231 38

2

nd

--- --- 112 244 187 25

3

rd

--- --- --- --- 28 50 35

4

th

--- --- --- --- --- 4 75

2002

1

st

--- --- --- --- --- --- 41

In each of these tables, it is inappropriate to add numbers of producers across for signing 

quarters. Producers who delivered over multiple quarters would be counted more than once. 

Likewise, it is inappropriate to add numbers of producers down for delivery quarters. 

Producers who signed multiple contracts over more than one quarter for delivery in the same 

quarter would be counted more than once.

1/ Program refers to Dairy Forward Pricing Pilot Program.

 2/ Seven Orders refers to the Federal Milk Marketing Orders with participation in the Program.

 These include the Central, Mideast, Northeast, Pacific Northwest, Southeast, Upper Midwest, 

 and Western orders. Six Orders refers to all of these orders except for the Upper Midwest. 
2-10

 

Table 2-7: Program1/ Contracting Producers Categorized by Total Pounds Delivered Per Month

Delivery pounds per month

Year and 

month 100,000 or less

100,000 to 

400,000

400,000 to 

1 million 1 million or more

Total number 

of producers 

per month

# of 

producers Percent 

# of 

producers Percent

# of 

producers Percent

# of 

producers Percent

2000

Sept. 171 56.3 109 35.9 15 4.9 9 3.0 304

Oct. 170 53.6 116 36.6 22 6.9 9 2.8 317

Nov. 183 56.5 111 34.3 18 5.6 12 3.7 324

Dec. 171 53.6 118 37.0 18 5.6 12 3.8 319

2001

Jan. 505 50.8 413 41.5 51 5.1 25 2.5 994

Feb. 554 55.1 372 37.0 52 5.2 27 2.7 1,005

Mar. 498 48.3 438 42.4 66 6.4 30 2.9 1,032

Apr. 558 48.9 470 41.2 75 6.6 38 3.3 1,141

May 318 40.8 348 44.6 72 9.2 42 5.4 780

June 356 43.5 340 41.5 80 9.8 43 5.3 819

July 359 41.5 373 43.1 84 9.7 49 5.7 865

Aug. 361 41.4 359 41.1 89 10.2 64 7.3 873

Sept. 379 43.4 347 39.7 85 9.7 62 7.1 873

Oct. 351 42.7 347 42.2 85 10.3 39 4.7 822

Nov. 306 41.2 295 39.7 82 11.0 60 8.1 743

Dec. 279 38.7 294 40.8 82 11.4 66 9.2 721

2002

Jan. 33 19.5 59 34.9 37 21.9 40 23.7 169

Feb. 34 24.8 54 39.4 23 16.8 26 19.0 137

Mar. 27 15.8 69 40.4 35 20.5 40 23.4 171

19-month 

average 295 43.0 265 39.7 56 9.8 36 7.5 653

1/ Program refers to Dairy Forward Pricing Pilot Program.
2-11

Table 2-8: Average Total Pounds and Contracted Pounds Per Program1/ Contracting Producer

Upper Midwest Six Orders2/ Seven Orders2/

Year and 

Month Total Contracted Total Contracted Total Contracted

1000 pounds Percent 1000 pounds Percent 1000 pounds Percent

2000

Sept. 123.4 105.3 85.3 445.3 326.3 73.3 193.3 153.3 79.3 

Oct. 128.0 107.7 84.1 488.3 352.8 72.2 207.6 161.8 77.9 

Nov. 125.5 104.8 83.5 505.5 379.1 75.0 207.6 164.0 79.0 

Dec. 132.5 108.3 81.8 580.9 414.4 71.3 223.8 170.7 76.3 

2001

Jan. 155.4 107.4 69.1 316.7 229.6 72.5 182.8 128.2 70.1 

Feb. 145.2 103.4 71.3 333.1 224.6 67.4 179.4 125.5 70.0 

Mar. 163.6 112.3 68.6 388.9 260.3 66.9 206.2 140.3 68.0 

Apr. 186.1 135.7 72.9 346.9 226.3 65.2 220.4 155.0 70.3 

May 255.6 166.7 65.2 309.4 196.7 63.6 283.5 182.3 64.3 

June 255.3 168.5 66.0 302.9 198.1 65.4 281.9 185.0 65.6 

July 265.6 185.1 69.7 293.6 203.1 69.2 281.7 195.4 69.4 

Aug. 390.9 254.9 65.2 291.9 201.3 68.9 334.4 224.2 67.1 

Sept. 329.2 234.5 71.2 338.4 235.4 69.6 332.9 234.8 70.5 

Oct. 253.9 187.7 73.9 336.9 237.2 70.4 287.8 207.9 72.2 

Nov. 400.9 273.2 68.1 351.4 248.3 70.7 380.1 262.7 69.1 

Dec. 423.1 280.7 66.4 399.8 272.1 68.1 413.4 277.2 67.0 

2002

Jan. 709.7 331.5 46.7 1113.4 732.7 65.8 891.2 511.9 57.4 

Feb. 463.0 283.3 61.2 1077.7 830.6 77.1 754.6 542.9 71.9

Mar. 775.8 395.2 50.9 1182.2 860.7 72.8 944.5 588.5 62.3 

19-month 

average 299.1 191.9 69.5 494.9 348.9 69.8 358.3 242.7 69.9 

 1/ Program refers to Dairy Forward Pricing Pilot Program.

 2/ Seven Orders refers to the Federal Milk Marketing Orders with participation in the Program. These include 

 the Central, Mideast, Northeast, Pacific Northwest, Southeast, Upper Midwest, and Western orders. Six 

 Orders refers to all of these orders except for the Upper Midwest. 
2-12

Table 2-9: Program1/ Contracting Producers per Month Categorized by Contract Pounds as Percentage of

 Total Delivery

Number of producers per percentage category

Year and 

month

Less than or 

equal to 25% 

Greater than 

25%, less than 

or equal to 

50% 

Greater than 

50%, less than 

or equal to 

75% 

Greater than 

75%, less than 

100% 100% 2/

Total number 

of producers

2000

Sept. 10 51 51 27 165 304

Oct. 10 56 57 30 164 317

Nov. 6 56 62 30 170 324

Dec. 8 62 58 22 169 319

2001

Jan. 40 276 220 70 388 994

Feb. 28 250 228 102 397 1,005

Mar. 41 288 238 83 382 1,032

Apr. 44 320 248 107 422 1,141

May 49 331 214 87 99 780

June 44 309 234 127 105 819

July 101 233 234 159 138 865

Aug. 100 211 256 160 146 873

Sept. 97 190 258 181 147 873

Oct. 97 194 233 147 151 822

Nov. 98 156 215 137 137 743

Dec. 99 165 212 119 126 721

2002

Jan. 35 70 48 9 7 169

Feb. 18 57 41 11 10 137

Mar. 34 70 45 14 8 171

Average 

number 50 176 166 85 175 653

Average 

percent 7.7 27.0 25.4 13.1 26.8 100.0

1/ Program refers to Dairy Forward Pricing Pilot Program.

2/ There were some contracts, priced per hundredweight, for which contract payment adjustments were made to 

producer payments based on the contract pounds that were more than 100 percent of pounds actually delivered. 

Contract payment adjustments were based on the difference between the contract price and the Class III price at 

3.5 percent butterfat. Such adjustments can add to, or subtract from, non-contract prices that would have otherwise 

been received.
2-13

Figure 2-1: Percentage of Participating Producers By Pounds of Total Deliveries Per 

 Month

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001Apr. 2001

May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

Figure 2-2. Average Total Pounds Per Participating Producer Delivered Per Month 

0

200

400

600

800

1,000

1,200

1,400

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001Feb. 2001Mar. 2001

Apr. 2001May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002Feb. 2002Mar. 2002

thousands of pounds

Upper Midwest Six Orders 1/

 1/ Six Orders refers to the Federal Milk Marketing orders other than the Upper Midwest with 

 participation in the Program. These include the Central, Mideast, Northeast, Pacific

 Northwest, Southeast, and Western orders.

> 1 million

>400,000 <=1 million

>100,000 <=400,000

<=100,000
2-14

Producer Questionnaire Response

The producer questionnaire was designed to provide some insight into the factors that 

affect producers’ decisions on whether or not to participate in the Program. Questions 

were asked to determine whether producers were accustomed to using risk management 

tools in their business, whom they relied upon for advice concerning the Program, why 

they did or did not participate, and whether they were satisfied with the results. 

Appendix E includes a copy of the questionnaire that was sent to 16,686 producers who 

were eligible to participate in the Program. Responses were tabulated and statistical tests 

were used to analyze differences in response rates and differences in effects of variables 

on participants and non-participants.2

Response Rates and Program Participation Rate

Of the 16,686 questionnaires that were sent to eligible producers, 3,646 responses were 

received for an overall response rate of 21.9 percent. Responses were received from 

producers in all orders (Table 2-10). The largest response rates are for those orders 

where only one or very few surveys were sent: 100 percent response for Arizona-Las 

Vegas, 100 percent for Florida, and 54.5 percent for the Southwest. The Southeast had 

the lowest response rate of 14.9 percent. The remaining orders had response rates 

ranging from 18 to 31 percent.

Of the 3,646 responses received, 313 (8.6 percent) indicated that they had participated in 

the Program (Table 2-11). In this discussion, we refer to data received from Federal Milk 

Order Market Administrators as population data while we refer to data obtained from the 

questionnaire as survey data. From the population data, we are able to estimate the 

response rates of participants vs. non-participants. The best estimate of the number of 

eligible producers equals the number of questionnaires sent—16,686. According to the 

population data, 1,452 (8.7 percent) producers participated in the program over the study 

period. From these numbers, we estimate the number of participants and non-participants 

that did not respond. Both Program participants and non-participants are well 

represented in the survey. The response rate for participants is about 21.6 percent while 

the response rate of non-participants is 21.9 percent (Table 2-12). The difference 

between response rates of participants and non-participants is statistically insignificant. 

The participation rate of respondents, 8.6 percent, is very close to the 8.7 percent 

participation rate of the population.

 

2

 For analyses that compare two groups, i.e. respondents v. non-respondents or participants v. nonparticipants, two-way frequency table tests were used. Results of these tests appear in footnotes of the 

tables. A high chi-square value with a corresponding low probability value indicates that there are 

significant differences between the two groups with respect to the variable being analyzed. A probability 

value of .01, for example, indicates that there is only a 1 percent probability that differences between the 

two groups with respect to the variable are due to chance alone. Non-responses, shown as “Unknown” in 

the tables are not figured in the chi-square calculations. For more discussion concerning two-way 

frequency table tests, see Applied Statistics and the SAS Programming Language by Ronald P. Cody and 

Jeffrey K. Smith, Prentice Hall, 4th edition, Upper Saddle, New Jersey, pp. 75-78.
2-15

Participation versus Non-Participation

Program participation rates of responding producers did not differ greatly by size of 

producers. Respondent participation rates are highest, about 10.5 percent for the two 

middle size groupings (marketings of 100,000 to 400,000 pounds per month and 400,000 

to 1,000,000 pounds per month), followed by a 9 percent participation rate for producers 

marketing greater than 1,000,000 pounds per month, and a 6 percent participation rate for 

producers marketing less than 100,000 pounds per month. There is some dissimilarity 

between the population and survey data with respect to size of participants. Of the 

participating respondents to the survey, the highest percentage, 45.7 percent, had monthly 

marketings of 100,000 to 400,000 pounds per month. The second largest group with 34.2 

percent had marketings of less than 100,000 pounds per month (Table 2-13). The 

population data indicate that, as a monthly average, the highest percentage of 

participating producers, 43 percent, had marketings of le ss than 100,000 pounds per 

month. The group with 100,000 to 400,000 pound marketings per month made up 39.7 

percent of the average number of participants (Table 2-7). With the survey, all producer 

size categories are well represented even though the distribution is not a perfect 

representation of the population.

Responding eligible producers are concentrated in the Upper Midwest (1,188), the 

Mideast (993), and the Northeast (760), followed by the Central (272) orders. (See Table 

2-14.) The Upper Midwest order had the most contracting respondents with 158 (50.5 

percent), followed by the Mideast order with 65 (20.8 percent) and the Central order with 

53 (16.9 percent). The rest of the orders had less than 10 percent each. Both the 

population data and the survey data indicate that the Upper Midwest had the greatest 

number of participating producers. However, the population data indicate that the 

monthly average of participants with milk pooled on the Upper Midwest order was about 

64.3 percent of total participants, considerably more than the 50.5 percent indicated by 

the survey (Tables 2-1 and 2-3). The survey indicates that the Central order had the 

highest percentage of participating respondents, 20 percent. Although not displayed in 

this report, this is consistent with the population data which shows that the Central order 

had the highest participation rate in most months.3 Both the survey and the population 

data indicate that the Upper Midwest had the second highest participation rate. The 

survey participation rates for the other orders are fairly consistent with the population 

participation rates. 

The States with highest respondent participation rates are South Dakota at 34.3 percent, 

followed by Minnesota at 25.2 percent, Idaho at 24 percent, Illinois at 19.7 percent, and 

Wisconsin at 13.1 percent (Table 2-15). New York, while having more participants than 

Idaho, South Dakota, or Illinois, had a participation rate of only 4.3 percent. Both the 

survey and population data indicate that the highest numbers of participating producers 

were located in Wisconsin and Minnesota. However, the percentage of participating 

respondents located in Minnesota, 13.1 percent, is significantly lower than the percentage 

reflected by the population data—32.6 percent. Both the survey and the population data 

 

3

 Data is not provided for each order since this could reveal proprietary information relevant to less than 

three handlers or producers. Data for the Central order is included with the Six Orders in this report.
2-16

indicate that participating producers are concentrated primarily in the central upper 

Midwestern States and that their milk is marketed through the three orders in the central 

United States. These three orders have a higher proportion of Class III utilization than 

for all Federal orders.

 

A major factor associated with respondents contracting under the Program is the use of 

other instruments such as forward contracts, futures contracts, or options to reduce price 

risk for fuel, feed, and milk (Table 2-16). Of the participating producers, about 42 

percent reported management of fuel or feed price risks, while only about 27 percent of 

non-participants reported such activities. Over half (53.4 percent) of participating 

respondents managed milk price risk through methods other than the Program, while only 

7.7 percent of non-participants did so. It is likely that many contracting producers 

evaluated the risk reduction benefit under the Program along with possibilities on the 

futures and options markets. Contracting producers may have used the Program in 

conjunction with futures and options contracts. 

Significant differences exist between participating and non-participating respondents with 

respect to number of potential buyers. Of the responding participants, 182 (58.1 percent) 

reported 2 or more potential buyers of their milk, while 56.4 percent of non-participants 

reported only 1 potential buyer (Table 2-17). This possibly coincides with a higher 

degree of competition in areas where forward contracts are more likely to be offered.

Finally, there are significant differences between participants and non-participants with 

respect to handler offerings. Of the participating respondents, 72.5 percent report that 

their handlers offered contracts to all producers, as compared to 21.5 percent for nonparticipating producers (Table 2-18).4

 

Reasons for and Results of Contracting

Contracting producers were asked why they contracted. Of the responding participating

producers, 55.3 percent had only one reason, but 39 percent of them had more than one 

reason (Table 2-19b). Nearly three-fourths of responding contracting producers (74.4 

percent) contracted to assure a more stable cash flow, and 7.0 percent contracted to 

satisfy lender requirement. Almost 45 percent of the contracting respondents contracted 

because the offered price was considered attractive (Table 2-19a). Twenty-eight (8.9 

percent) participating producers indicated that there were other reasons for participating 

in the program. Among the comments of these producers, 8 respondents stated that they 

participated in order to gain experience with the Program, and 5 respondents indicated 

that a handler representative influenced them to sign. 

 

4 One of the selections for response to this survey question is “Do not know.” Those who marked this 

selection could have possibly been in one of two groups. They either were not aware as to whether or not 

their handlers offered contracts, or they were not aware of the extent of the contract offerings. Of the 

responding participants, 16.6 percent selected “Do not know,” while 60.3 percent of the non-participants 

marked this selection. 
2-17

Most prominent among the contracting producers’ means of evaluating forward contract 

prices were the futures markets and the producers’ own forecasts—each with about 55 

percent (Table 2-20a). Among the other selections, 37.4 percent used other professional 

forecasts, including those of USDA, universities, and private forecasters, while 20.8 

percent of the respondents compared the forward contracts from competing handlers. 

Twenty-five respondents (8 percent) indicated that they used other means of evaluating 

contract prices. Among the comments of these producers, 8 respondents stated that a 

broker assisted them, and 6 respondents commented that they had relied on the handler. 

Nearly 60 percent used two or more sources of information to evaluate prices (Table 

2-20b).

Concern that producers could be pressured into signing contracts “to maintain a 

relationship with a buyer” led to a second question to directly address the issue (Table 

2-21). Only 2.6 percent of the contracting producers strongly agreed. This response is 

consistent with the reason given by 1.6 percent of the contracting producers who 

indicated that they signed contracts to maintain a relationship with their buyer (Table 

2-19a). An additional 4.6 percent of participants slightly agreed that a contract was 

necessary to maintain a buyer. However, nearly 75 percent of participants disagreed, 

either slightly (14.7 percent) or strongly (57.2 percent) that a contract was necessary to 

maintain a buyer for their milk. 

Nearly sixty percent of contracting respondents who realized lower prices than the market 

levels indicated that they likely will not contract in the future (33.5 percent) or that they 

will reduce future contract volumes (24 percent). (See Table 2-22a.) Consistent with 

these responses is the response from 57.8 percent of the contracting producers who 

thought the price loss was too large of a tradeoff for the price risk avoided (Table 22b). 

However, 26.2 percent of the contracting producers considered the price loss a reasonable 

cost to assure a stable price. This question was marked as not applicable by 10.9 percent 

of the producers who indicated that the contract price exceeded the comparable market 

price. 

 

Non-Participant Characteristics

Responding producers who did not participate in the Program, 3,313 producers, 

comprised 91.4 percent of the respondents. Such producers offered a number of reasons 

for not forward contracting. The primary reason given by 43.9 percent of the noncontracting producers was that their buyer did not offer contracts (Table 2-23a). 

Similarly, 43.3 percent indicated that they considered the offered contract price to be too 

low. 

About 1 percent of the non-contracting producers reported that their handler denied them 

a contract. Of those denied a contract, 35.5 percent (11 producers) said they were denied 

because their volumes of delivery were too small (Table 2-24a). For those who indicated 

other reasons for denial, comments revealed that a few respondents confused the Dairy 

Forward Pricing Pilot Program with the Dairy Options Pilot Program, stating that the 
2-18

program was not offered in their county.
2-19

Producer Survey Response Rates and Participation Rate

Table 2-10. Response rates by order

Federal Milk 

Marketing Order

Number 

Responding

Percent of Total 

Responding

Number Not 

Responding

Percentage Not 

Responding Response Rate

Appalachian 182 4.99 663 5.08 21.5

AZ-Las Vegas 1 0.03 0 0.00 100.0

Central 272 7.46 740 5.67 26.9

Florida 1 0.03 0 0.00 100.0

Mideast 993 27.24 3,240 24.85 23.5

Northeast 760 20.84 3,433 26.33 18.1

Pac. Northwest 23 0.63 52 0.40 30.7

Southeast 164 4.50 933 7.15 14.9

Southwest 6 0.16 5 0.04 54.5

Upper Midwest 1,188 32.58 3,826 29.34 23.7

Western 56 1.54 148 1.13 27.5

Totals 3646 100.00 13040 100.00 21.9

Chi-square 4187.2, DF 16, Prob<.0001

For chi-square test, AZ-Las Vegas, Florida, and Southwest are combined.

Table 2-11. Did you sign a contract as part of the Forward Contracting

 Pilot Program? 

Respondent Program Participation

Number of 

Responses Percentage

Yes (Participants) 313 8.6

No (Non-participants) 3,333 91.4

Total Number of Respondents 3,646 100.0

Table 2-12. Estimated response rates of participants vs. non-participants

Program participation

Number 

Responding

Percentage 

Responding

Number Not 

Responding

Percentage Not 

Responding Response Rate

Partic ipants 313 8.6 1,139 7.0 21.6

Non-participants 3,333 91.4 11,901 93.0 21.9

Totals 3,646 100.0 13,040 100.0 21.9

Chi-square 0.08, DF 1, Prob=0.7765
2-20

Tables Comparing Survey Responses of Participants and Non-Participants

Table 2-13. Pounds of milk produced and marketed per month during the past year: 

Pounds Marketed Participants

Percentage of 

Participants Non-Participants

Percentage of 

Non-Participants

Participation 

Rate

Less than 100,000 107 34.2 1,552 46.6 6.4

100,000 to 400,000 143 45.7 1,223 36.7 10.5

400,000 to 1,000,000 34 10.9 286 8.9 10.6

More than 1,000,000 21 6.7 212 6.4 9.0

Unknown 8 2.6 60 1.8 13.3

Totals 313 100.0 3,333 100.0 8.6

Chi-square 17.7, DF 3, Prob=0.0005

1/ Unknown indicates non-response to the s urvey question.

Table 2-14. My farm delivers to a plant/handler regulated under Federal Milk Order Name:

Federal Milk Marketing 

Order Participants

Percentage of 

Participants Non-Participants

Percentage of 

Non-Participants

Participation 

Rate

Upper Midwest 158 50.5 1,030 30.9 13.3

Mideast 65 20.8 928 27.8 6.5

Central 53 16.9 219 6.6 19.5

Northeast 21 6.7 739 22.2 2.8

Southeast 8 2.6 156 4.7 4.9

Western 4 1.3 52 1.6 7.1

Appalachian 1/ 3 1.0 179 5.4 1.6

Pacific Northwest 1 0.3 22 0.7 4.3

Southwest 0 0.0 6 0.2 0.0

Arizona-Las Vegas 0 0.0 1 0.0 0.0

Florida 0 0.0 1 0.0 0.0

Totals 313 100.0 3,333 100.0 8.6

Chi-square 126.6, DF 5, Prob <.0001

The six orders with the least numbers of responding participants were grouped for the chi-square test.

1/ For the Appalachian order, 3 respondents indicated that they participated in the Program even though 

there was no participation for that order. These producers may have been pooled on the Appalachian order 

at the time the survey was taken but on another order when they delivered milk under a Program contract.

Table 2-15. My farm is located in (State):

State Participants

Percentage of 

Participants Non-Participants

Percentage of 

Non-Participants

Participation

 Rate

WI 176 56.2 1,172 35.2 13.1

MN 41 13.1 122 3.7 25.2

ID 12 3.8 38 1.1 24.0

SD 12 3.8 23 0.7 34.3

IL 13 4.2 53 1.6 19.7

NY 16 5.1 357 10.7 4.3

Other 43 13.7 1,568 47.0 2.7

Totals 313 100.0 3,333 100.0 8.6

 Chi-square 227.0, DF 6, Prob<.0001
2-21

Table 2-16. Have you used forward contracts, futures contracts, or options to protect yourself against

 price changes in: (Select all that apply.)

Feed Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

Yes 131 41.9 920 27.6

No 182 58.1 2,413 72.4

Totals 313 100.0 3,333 100.0

Chi-square 2184.8, DF 2, Prob<.0001

Fuel Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

Yes 130 41.5 901 27.0

No 183 58.5 2,432 73.0

Totals 313 100.0 3,333 100.0

Chi-square 2198.4, DF 2, Prob<.0001

Cull Cows Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

Yes 2 0.6 38 1.1

No 311 99.4 3,295 98.9

Totals 313 100.0 3,333 100.0

Too few using cull cow price risk management to perform a useful chi-square test.

Milk (other than Forward

 Contracting Pilot Program) Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

Yes 167 53.4 255 7.7

No 146 46.6 3,078 92.3

Totals 313 100.0 3,333 100.0

Chi-square 2360.1, DF 2, Prob<.0001

Table 2-17. How many potential buyers for your milk did you have during the past year? 

Number of Potential Buyers Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

One 128 40.9 1,879 56.4

Two or three 114 36.4 997 29.9

Four or more 68 21.7 331 9.9

Unknown 1/ 3 1.0 126 3.8

Totals 313 100.0 3,333 100.0

Chi-square 51.3, DF 2, Prob<.0001

1/ Unknown indicates non-response to the survey question.
2-22

Table 2-18. The handler receiving your milk: 

Handler Contract Offerings Participants

Percentage of 

Participants Non-Participants

Percentage of NonParticipants

Offered forward contracts to 

 all producers 227 72.5 717 21.5

Offered forward contracts to

 some producers 10 3.2 79 2.4

Offered forward contracts to 

 no producers 1/ 23 7.3 487 14.6

Do not know 52 16.6 2010 60.3

Unknown 2/ 1 0.3 40 1.2

Totals 313 100.0 3,333 100.0

Chi-square 392.8, DF 3, Prob<.0001

1/ There was some obvious misinterpretation of either this question or the participation question. Some 

producers who indicated participation in the Program also indicated that their handler offered forward 

contracts to no producers.

2/ Unknown indicates non-response to the survey question.

Responses to Questions Concerning Only Participants in the Pilot Program

Table 2-19a. What were your reasons for signing a forward contract? (Select all that apply)

Reasons For Signing Forward Contracts

Number of responding 

participants Percentage

To assure a more stable cash flow 233 74.4

To satisfy lender requirement 22 7.0

Attractive contract price 140 44.7

To maintain relationship with my current buyer 5 1.6

Other reason 28 8.9

Did not answer 18 5.8

Percentages do not add to 100% because respondents could select more than one answer.

Table 2-19b. Number of Selections, Reasons for Signing Forward Contracts

Number of Selections, reasons for forwa rd 

contracting

Number of responding 

participants Percentage

None 18 5.8

One 173 55.3

Two 111 35.5

Three 11 3.5

Totals 313 100.0
2-23

Table 2-20a. What information did you rely upon to determine a suitable contract price?

 (Select all that apply.) 

Information sources used for contract price 

evaluation

Number of responding 

participants Percentage

Discussions with neighbors 62 19.8

USDA, university, and/or private forecasts 117 37.4

Futures market prices 175 55.9

Comparison to other forward contract offers 65 20.8

My own analysis of my cost of production and

 my own price forecast 173 55.3

Other information 25 8.0

Did not answer 14 4.5

Percentages do not add to 100% because respondents could select more than one answer.

Table 2-20b. Number of Selections, Information Sources Used for Contract Price Evaluation

Number of selections for information sources

 used to evaluate price

Number of responding 

participants Percentage

None 14 4.5

One 117 37.4

Two 86 27.5

Three 66 21.1

Four 21 6.7

Five 8 2.6

Six 1 0.3

Totals 313 100.0

Table 2-21. Although the Forward Contracting Pilot Program is voluntary, I felt it necessary to

 contract in order to maintain a relationship with my current buyer?

Agreement or disagreement: Participation 

necessary to maintain relationship with buyer

Number of responding 

participants Percentage

Strongly agree 8 2.6

Slightly agree 14 4.5

Don't know 56 17.9

Slightly disagree 46 14.7

Stongly disagree 179 57.2

Unknown 1/ 10 3.2

Totals 313 100.0

1/ Unknown indicates non-response to the survey question
2-24

Table 2-22a. If your contract price was less than the relevant comparison price (Class III

 price, blend price, etc.) during the contract period, how will this affect your

 future contracting decisions?

Effect of comparatively low contract price on future decisions

Number of 

responding 

participants Percentage

Probably will not forward contract again 105 33.5

Probably will reduce the amount of milk production I forward

 Contract 75 24.0

Will have no effect as I evaluate the next contract 95 30.4

Not applicable. My contract price was greater than the

 relevant comparison price during the contract period. 27 8.6

Unknown 1/ 11 3.5

Totals 313 100.0

1/ Unknown indicates non-response to the survey question.

Table 2-22b. If you contracted to reduce price volatility and the contract price was less than

 the relevant comparison price during the contract period, do you consider the

 difference to be a reasonable tradeoff for the price risk you avoided?

Price loss as tradeoff for risk avoided

Number of 

responding 

participants Percentage

Yes, it was reasonable. 82 26.2

No, it was too large. 181 57.8

Not applicable. My contract price was greater than the

 relevant comparison price during the contract period. 34 10.9

Unknown 1/ 16 5.1

Totals 313 100.0

1/ Unknown indicates non-response to the survey question.

Responses to Questions Concerning Only Non-Participants in the Pilot Program

Table 2-23a. If you did not sign a forward contract under the Forward Contracting Pilot

 Program, please mark all of the following statements that apply to you.

Reasons for Not Participating in the Pilot Program

Number of 

responding nonparticipants Percentage

My handler did not offer forward contracts and I did not want

 to change handlers. 1,462 43.9

I thought that the market price would be higher than the

 contract price offered. 1,444 43.3

I heard about the contract offer too late to contract. 88 2.6

I probably will sign a forward contract in the near future. 128 3.8

I wished to sign a forward contract, but the handler denied a

 contract to me. 31 0.9

Did not answer. 618 18.5

Percentages do not add to 100% because respondents could select more than one answer.
2-25

Table 2-23b. Number of Selections Chosen, Reasons for Not Participating in Program

Number of Selections, Reasons for Not Participating

Number of 

responding nonparticipants Percentage

None 618 18.5

One selection 2,314 69.4

Two selections 369 11.1

Three selections 28 0.8

Four selections 3 0.1

Five selections 1 0.0

Totals 3,333 100.0

Table 2-24a. If you were denied a contract even though your handler had contracts with other

 producers, what was the reason(s)?

Reasons for contract denial

Number of 

responding nonparticipants 

indicating contract 

was denied Percentage

Volume too small 11 35.5

I was too late to contract. Contracts were offered on a “first

 come, first serve” basis. 2 6.5

Quality problems 1 3.2

Other reason 9 29.0

Did not answer 9 29.0

Percentages to not add to 100% because respondents could choose more than one answer.

Table 2-24b. Number of Selections Chosen, Reasons for Contract Denial

Number of selections, reasons for contract denial

Number of 

responding nonparticipants 

indicating contract 

was denied Percentage

None 9 29.0

One 21 67.7

Two 1 3.2

Totals 31 100.0
3-1

Chapter 3

Milk Handlers as Parties to Forward Contracts

Handler and Plant Participation

A total of 22 handlers participated in the Dairy Forward Pricing Pilot Program (Program) 

at some time during the study period. These handlers had plants receiving contract milk 

regulated under 7 of the 11 Federal milk marketing orders (Seven Orders). There were 4 

Federal milk orders—Appalachian, Florida, Southwest and Arizona-Las Vegas—for 

which no contract milk was pooled during the study period of September 2000 through 

March 2002. Handler participation reached a peak in September and October 2001 when 

21 handlers were receiving forward contract milk. 

The Federal order market with the greatest number of handlers offering forward contracts 

was the Upper Midwest. Since January 2001, there have been more handlers receiving 

contract milk in the Upper Midwest than in all other orders combined (Table 3-1). 

During the peak period, there were 14 handlers in the Upper Midwest receiving contract 

milk compared with 10 handlers in the Central, Mideast, Northeast, Pacific Northwest, 

Southeast, and Western orders combined (Six Orders). For this comparison, a handler 

with plants in two or more markets in the Six Orders was counted only once. 

The number of handlers pooling contract milk under the Mideast order increased from 2 

to 3 during the period June through August 2001. This was the result of an Upper 

Midwest plant pooling on the Mideast order during this period to take advantage of the 

differences in blend prices. In September, when the Mideast pooling standards returned 

to a higher level, the handler again became pooled on the Upper Midwest order. 

In the Western order, two handlers received contract milk at times during the study 

period. Initially only one handler was pooling contract milk on that order; however, 

during the period from January through May 2001, no contract milk was pooled. Then 

from June 2001, through the end of the year, one handler continuously pooled contract 

milk on the Western order, but a second handler pooled contract milk only intermittently. 

During some months this handler pooled no contract milk and in other months pooled 

milk on both the Western and Upper Midwest orders. This handler, a non-pool plant, 

could pool milk only to the extent that the handler could associate milk with pool 

distributing plants regulated under the two Federal orders, and the handler chose not to do 

this in every month. For the first quarter of 2002, this handler pooled contract milk on 

the Western order each month. 

In the peak months, there were 35 plants regulated under 7 of the 11 Federal milk 

marketing orders receiving contract milk. See Table 3-2. When a handler owns more 

than one plant in an order, unit pooling allows the receipts to be combined, and individual 

producer deliveries to separate plants cannot be determined. Nearly all of these plants 

were Class III cheese plants, with the exceptions of 2 primarily Class II plants. 
3-2

The number of plants receiving contract milk under the Program represents a small 

proportion of the number of plants receiving pooled producer milk under Federal order 

regulation. On average during the study period, 25 plants received contract milk (Table 

3-2). On average, 980 plants received pooled producer milk under the Federal order 

system each month, of which 691 on average were proprietary plants. Excluding the 

Class I distributing plants from this group leaves an average of 434 plants that 

manufactured most pooled milk received into dairy products. Thus, over the study 

period, the plants receiving Program contract milk represent 2.5 percent of all plants, 3.6 

of proprietary plants, and 5.7 percent of proprietary manufacturing plants receiving 

pooled producer milk. Focusing on proprietary manufacturing plants, the percentage of 

plants receiving contract milk was at its lowest in October 2000 at 2.5 percent and at its 

highest in October 2001 at 7.8 percent. For the first quarter of 2002, this percentage was 

about 6 percent. 

The Upper Midwest market, which had the most handlers offering forward contracts, also 

was the market with the greatest number of Program participating plants—11 plants 

receiving contract milk on a monthly average basis (Table 3-3). With respect to Program 

participating plants as a proportion of the proprietary manufacturing plants, the Northeast 

market ranked first at 15.2 percent, but this represents only 1.2 of its average 7.9 

proprietary manufacturing plants.1 The Upper Midwest market tied for second with the 

Central market (8.0 percent) with respect to contracting plants as a proportion of the 

proprietary manufacturing plants. The Central market had the second highest average 

number of plants receiving contract milk—7.2 plants on a monthly basis. The remaining 

markets averaged 2.4 plants or less receiving contract milk on a monthly basis. 

Contract Milk Relative to Handler Receipts 

To measure the impact of the Program on participating handlers receiving contract milk, 

the following indicators were constructed: (1) the volume of milk from producers 

eligible to participate in the Program, (2) contract volumes received, and (3) and eligible 

producer milk plus bulk milk receipts. Our discussion is limited to pooled milk volumes 

received by handlers for Federal orders where the handlers’ plants received contract milk. 

This is only part of the milk volumes received by some participating handlers since they 

may have had plants that received milk pooled but none contracted in other Federal 

orders, that operated in State-regulated markets, or that operated in unregulated markets. 

Because some handlers jointly pool milk for multiple plants, we discuss milk volumes of 

handlers rather than plants, understanding that some handlers operate one or more plants 

receiving producer milk contracted under the Program. 

The total volumes of milk received by the relevant plants of participating handlers are 

calculated as the receipts of milk from eligible producers plus the receipts of bulk milk 

 

1

 Numbers referenced are not necessarily whole numbers because of changes for each order from month to 

month.
3-3

from other plants and cooperatives (Table 3-4).2 Milk deliveries from eligible producers 

accounted for 87.5 percent on average over the study period of total milk deliveries to 

participating handlers.

Average monthly milk deliveries received by these handlers totaled 644.8 million pounds 

while deliveries of contract milk averaged 130 million pounds, or 20.2 percent during the 

study period. During 2001, contract milk averaged 167 million pounds monthly, 

dropping off to 87 million pounds during the first quarter of 2002. The single highest 

month for contracted milk receipts was September 2001 (205 million pounds), accounting 

for 25.1 percent of all milk receipts by these handlers. Since eligible producer milk was 

on average 87.5 percent of the total milk receipts for these handlers, contract milk as a 

percentage of eligible producer milk would run slightly higher. See Table 3-4 for 

additional milk delivery data and comparisons by month. 

Handler Participation by Size 

To determine whether the Program was used more extensively by a particular size 

handler, participating handlers were arrayed according to total monthly receipts of milk. 

Three size categories were established: (1) less than 25 million pounds per month; (2) 25 

million to 50 million per month; and, (3) more than 50 million per month. (See Table 

3-5.) 

The Program was used monthly by at least 6 handlers throughout the study period. Some 

of the monthly variation between the categories is the result of handlers electing not to 

pool contracted milk every month and of changing pool volumes of handlers. In 2000, 

participation by handlers in each size category was evenly divided at a constant 2 plants 

per category each month. From January 2001 through February 2002, the category with 

the largest handlers, those with monthly receipts of at least 50 million pounds, varied 

between 4 to 6 handlers. Participation of the largest handlers reached a maximum of 7 in 

March 2002. The number of handlers in the medium-sized category reached a peak of 6 

handlers in June and July 2001, stayed constant at 5 through February 2002, and declined 

to 3 in March 2002. The number of handlers in the smallest size category increased as 

2001 progressed, reaching a maximum of 11 handlers in October 2001. The number of 

smaller handlers decreased toward the end of 2001 and varied between 6 and 7 handlers 

in the first quarter of 2002.

 

 

2

 Contracted pounds received are considered relative to pooled producer milk excluding that from 

cooperatives and all pooled producer milk plus bulk fluid milk product (FMP) receipts. Bulk FMP receipts 

include milk from cooperatives. The term “bulk FMP” is used to distinguish these milk receipts from 

receipts of packaged milk. Our calculations could be short of the actual total milk received by some 

handlers to the extent that plants receive packaged milk. Most milk contracted through the Program is milk 

received from eligible producers as defined in Chapter 1. These are mainly independent producers 

although some cooperative producers are also eligible because they are paid directly by a proprietary 

handler. 
3-4

Reducing Price Volatility - Contract Milk by Size of Participating Handler

To determine the usefulness of the program to participating handlers as a hedge against 

milk price volatility and to measure of the ability of handlers to offer acceptable contracts 

to producers, the total volume of contract milk was compared against the total milk 

receipts of the participating handlers. The greater the percentage of milk under contract, 

the more insulated handlers should be from milk price volatility. This measure was 

reviewed according to the handler size categories previously delineated and is presented 

in Figure 3-1.

For participating handlers with less than 25 million pounds of eligible milk deliveries 

(Figure 3-1,a), 22 percent of the milk delivered to the handlers was under contract in the 

peak month of January 2001. The proportion of milk under contract declined gradually 

from February 2001 through March 2002. By the end of the period, participating 

handlers in this category had less than 5 percent of their total milk supply under contract.

In January 2001, handlers with greater than 25 million pounds but less than 50 million 

pounds of eligible milk receipts (Figure 3-1,b) on average had 37 percent of their total 

milk receipts under contract. This percentage dropped to about 21 percent on average for 

the remainder of the year, and for the first quarter of 2002, the percentage was about 15 

percent.

The largest participating handlers had 25 percent of their milk under contract in the first 

half of 2001 (Figure 3-1,c). The proportion increased to an average of 29 percent in the 

second half of 2001. During the first quarter of 2002, the average percentage of contract 

milk dropped to 11 percent.
3-5

Table 3-1: Handlers Receiving Forward Contract Milk Under the Program1/, by Order, by Month 

Year and 

month

NortheastSoutheast CentralMideast

Pacific 

Northwest WesternUpper 

Midwest

Six Orders 

2/

Seven 

Orders 2/

2000

Sept. --- 1 3 1 --- 1 2 5 6

Oct. --- 1 3 1 --- 1 2 5 6

Nov. --- 1 3 1 --- 1 3 5 6

Dec. --- 1 3 1 --- 1 3 5 6

2001

Jan. --- 1 3 1 --- --- 8 4 10

Feb. --- 1 3 1 --- --- 10 4 12

Mar. --- 1 3 1 --- --- 10 4 12

Apr. 1 1 3 2 --- --- 11 6 14

May 2 1 4 2 --- --- 12 7 16

June 2 1 4 3 --- 2 11 10 19

July 2 1 4 3 --- 1 12 9 19

Aug. 2 1 4 3 --- 2 14 10 20

Sept. 2 1 4 2 1 2 14 10 21

Oct. 2 1 4 2 1 1 14 9 21

Nov. 2 1 4 2 1 2 13 10 20

Dec. 2 1 4 2 1 2 12 10 19

2002

Jan. 2 --- 4 2 1 1 11 9 17

Feb. 2 --- 4 2 1 1 10 9 17

Mar. 2 --- 4 2 1 1 10 9 16

1/ Program refers to the Dairy Forward Pricing Pilot Program.

2/ Seven Orders refers to the Federal Milk Marketing Orders with participation in the Program. These include the Central, 

 Mideast, Northeast, Pacific Northwest, Southeast, Upper Midwest, and Western orders. Six Orders refers to all of these 

 orders except for the Upper Midwest. The number of handlers for Six Orders and Seven Orders is not simply the sum of

 the handlers for individual orders because some Program participating handlers had pooled milk in more than one order.

. 
3-6

Table 3-2: Plants Receiving Producer Milk Pooled on Federal Orders: Total, Proprietary, and Program1/

 Participating, by Month

Plants receiving pooled producer milk Participating plants as percentages of

Year and 

month Total 

Proprietary 

2/

Proprietary 

manufacturing 3/ 

Program 

participating Total Proprietary 

Proprietary 

manufacturing

2000

Sept. 929 659 399 11 1.2 1.7 2.8

Oct. 940 662 403 10 1.1 1.5 2.5

Nov. 908 628 369 11 1.2 1.8 3.0

Dec. 912 629 370 11 1.2 1.7 3.0

2001

Jan. 946 661 404 17 1.8 2.6 4.2

Feb. 943 649 395 21 2.2 3.2 5.3

Mar. 953 667 401 23 2.4 3.4 5.7

Apr. 959 675 419 25 2.6 3.7 6.0

May 993 695 437 29 2.9 4.2 6.6

June 994 695 442 31 3.1 4.5 7.0

July 1020 721 469 31 3.0 4.3 6.6

Aug. 1032 732 474 35 3.4 4.8 7.4

Sept. 1002 716 458 35 3.5 4.9 7.6

Oct. 1002 712 451 35 3.5 4.9 7.8

Nov. 1020 729 469 35 3.4 4.8 7.5

Dec. 1047 754 495 33 3.2 4.4 6.7

2002

Jan. 1012 725 469 28 2.8 3.9 6.0

Feb. 1002 709 460 27 2.7 3.8 5.9

Mar. 1002 715 464 26 2.6 3.6 5.6

19-month 

Average 980 691 434 25 2.5 3.6 5.7

1/ Program refers to the Dairy Forward Pricing Pilot Program.

2/ Excludes cooperative plants.

3/ Excludes fluid distributing plants.
3-7

Table 3-3: Plants Receiving Producer Milk Pooled on Federal Orders: Total, Proprietary, and Program1/

 Participating, Monthly Average Number by Order

Plants receiving pooled producer milk Participating Plants as Percentages of

Order Total

Proprietary 

2/

Proprietary 

manufacturing 3/

Program 

Participating 4/ Total Proprietary

Proprietary 

manufacturing

Northeast 73.4 68.6 7.9 1.2 1.6 1.7 15.2

Appalachian 38.5 10.2 1.0 0.0 0.0 0.0 0.0

Florida 12.0 12.0 0.0 0.0 0.0 0.0 na

Southeast 104.9 101.1 69.4 1.7 1.6 1.7 2.4

Upper Midwest 266.6 157.1 137.7 11.0 4.1 7.0 8.0

Central 203.3 116.8 90.0 7.2 3.5 6.2 8.0

Mideast 142.7 115.1 70.6 2.4 1.7 2.1 3.4

Pac. Northwest 39.9 28.4 13.4 0.4 1.0 1.4 3.0

Southwest 51.0 41.7 17.5 0.0 0.0 0.0 0.0

AZ-Las Vegas 12.2 11.1 8.1 0.0 0.0 0.0 0.0

Western 35.3 29.2 18.5 1.1 3.1 3.8 5.9

Numbers displayed are not necessarily whole numbers because of changes for each order from month to month.

1/ Program refers to the Dairy Forward Pricing Pilot Program.

2/ Excludes cooperative plants.

3/ Excludes fluid distributing plants.

4/ Plants owned by handlers participating in the Program.
3-8

Table 3-4: Program1/ Milk Deliveries Received By Participating Handlers in the Seven Orders 2/, by

 Month

Forward contract pounds as a 

percentage of

Year and 

month

Eligible 

producer 

milk 3/

Eligible 

producer milk 

plus bulk milk 

receipts

Forward 

contract 

pounds 

received

Eligible 

producer 

milk 3/

Eligible 

producer milk 

plus bulk milk 

receipts

Number of 

handlers

1000 Pounds Percent

2000

Sept. 281,834 308,561 46,592 16.5 15.1 6

Oct. 293,958 324,792 51,288 17.4 15.8 6

Nov. 288,038 317,060 53,144 18.5 16.8 6

Dec. 304,553 326,441 54,456 17.9 16.7 6

2001

Jan. 494,768 521,346 127,384 25.7 24.4 10

Feb. 519,563 544,010 126,135 24.3 23.2 12

Mar. 573,549 600,794 144,748 25.2 24.1 12

Apr. 639,413 707,219 176,841 27.7 25.0 14

May 629,797 714,335 142,175 22.6 19.9 16

June 666,158 745,645 151,545 22.7 20.3 19

July 639,145 718,832 169,016 26.4 23.5 19

Aug. 699,970 784,610 195,753 28.0 24.9 20

Sept. 690,305 816,835 205,016 29.7 25.1 21

Oct. 639,868 766,219 170,892 26.7 22.3 21

Nov. 699,089 826,297 195,199 27.9 23.6 20

Dec. 723,103 851,817 199,840 27.6 23.5 19

2001

Jan. 688,422 802,175 86,514 12.6 10.8 17

Feb. 562,638 710,947 74,383 13.2 10.5 17

Mar. 683,768 862,408 100,636 14.7 11.7 16

19-month 

Average 564,102 644,755 130,082 23.1 20.2 14.6

1/ Program refers to the Dairy Forward Pricing Pilot Program.

2/ Reflects plant milk receipts of handlers pooling producer milk in the seven markets (Northeast, Southeast,

 Central, Mideast, Pacific Northwest, West, and Upper Midwest) where contracted milk is pooled under the

 Program.

3/ Excludes cooperative producers' milk, unless handler is responsible for producer payroll.
3-9

Table 3-5: Participating Handlers by Pooled Milk Receipt Category in the Seven Orders 1/

Less than 25 million pounds 25 million to 50 million 

pounds

Greater than 50 million 

pounds

Year and 

month

Number of 

handlers

Percent of 

total

Number of 

handlers

Percent of 

total

Number of 

handlers

Percent of 

total

Total

number of 

handlers

2000

Sept. 2 33.3 2 33.3 2 33.3 6

Oct. 2 33.3 2 33.3 2 33.3 6

Nov. 2 33.3 2 33.3 2 33.3 6

Dec. 2 33.3 2 33.3 2 33.3 6

2001

Jan. 3 30.0 2 20.0 5 50.0 10

Feb. 3 25.0 5 41.7 4 33.3 12

Mar. 4 33.3 3 25.0 5 41.7 12

Apr. 5 35.7 5 35.7 4 28.6 14

May 6 37.5 5 31.3 5 31.3 16

June 9 47.4 6 31.6 4 21.1 19

July 9 47.4 6 31.6 4 21.1 19

Aug. 10 50.0 5 25.0 5 25.0 20

Sept. 10 47.6 5 23.8 6 28.6 21

Oct. 11 52.4 5 23.8 5 23.8 21

Nov. 9 45.0 5 25.0 6 30.0 20

Dec. 8 42.1 5 26.3 6 31.6 19

2002

Jan. 6 35.3 5 29.4 6 35.3 17

Feb. 7 41.2 5 29.4 5 29.4 17

Mar. 6 37.5 3 18.8 7 43.8 16

1/ Reflects the plant numbers in the seven markets (Northeast, Southeast, Central, Mideast, Pacific Northwest, 

 West, and Upper Midwest) where handlers participated in the Program.
3-10

Figure 3-1: Contract Pounds as a Percent of Handlers’ Total Monthly Milk Receipts 1/

a. Participating Handlers With Less Than 25 Million Total Pounds Per Month

0.0%

10.0%

20.0%

30.0%

40.0%

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001Apr. 2001

May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

b. Participating Handlers with 25 Million to 50 Million Total Pounds Per Month

0.0%

10.0%

20.0%

30.0%

40.0%

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001Apr. 2001

May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

c. Participating Handlers With More Than 50 Million Total Pounds Per Month

0.0%

10.0%

20.0%

30.0%

40.0%

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001Apr. 2001

May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

1/ Total Monthly Milk Receipts are defined as eligible producer milk plus bulk fluid milk product (FMP) receipts received

 by plants of handlers that received contracted milk under the Program. The term “bulk FMP” is used to distinguish these

 receipts from receipts of packaged milk. 
3-11

Plant Questionnaire Response 

The plant questionnaire was designed to evaluate milk handlers’ perceptions of the 

Program. Questions were asked as to why they used the Program, how it affected their 

businesses, and whether they would continue to offer forward contracts to their producers 

in the future. A copy of the questionnaire that was sent to 705 proprietary and 

cooperative plants is found in Appendix E. 

The plant questionnaire generated usable responses from 248 plants, 21 which were 

Program participants and 227 which did not participate (Table 3-6). Of the 21 

participating plants, 20 are proprietary plants and one is a cooperative-owned plant. Both 

participating and non-participating plants are well represented by the survey. Of the 

plants that were sent questionnaires, about two-thirds of all participating plants responded 

while about one-third of all non-participating plants responded. 

Eighteen plants, or 85.7 percent, of the Program participants responding were 

predominantly Class III plants; and 2 plants, 9.5 percent, were predominantly Class I 

plants (Table 3-7). Class I participants can participate only to the extent that they also 

pool milk used in manufacturing classes. Of the non-participants responding, 139 plants 

(61.2 percent) were predominantly Class I plants and 40 plants (17.6 percent) were 

predominantly Class III plants. Only 3 predominantly Class IV plants responded, and 

these plants did not participate in the program. 

Participating and Non-Participating Plant Characteristics

Participating plants tend to be larger, with 42.9 percent of participants pooling 30 million 

pounds or more per month, and 61.9 percent pooling at least 20 million pounds per month 

(Table 3-8). Comparatively, 31.3 percent of the non-participating plants that responded 

pooled less that 10 million pounds per month and 57.7 percent pooled less than 20 

million pounds. 

While participating plants tend to be larger than non-participating plants, it is not clear 

that participating handlers tend to be larger than non-participating handlers. A greater 

proportion of participating plants, 57.1 percent, reported to be single-plant firms (Table 

3-9). This rate was somewhat higher than for non-participating plants, which reported 

being only 44.5 percent single plant firms. Of the participating plants belonging to multiplant firms, 28.6 percent belonged to firms with 2-5 plants and 1 plant, which had a mix 

of Class I and manufactured class utilization, belonged to a firm with 6 to 50 plants 

(Table 3-10). Forty-seven non-participating plants reported that they belonged to firms 

with 6-50 plants. (It should be noted that many of these participating and nonparticipating plants that reported to be part of multi-plant firms could belong to the same 

firm.) 

The Upper Midwest Federal milk marketing order regulated 12 (57.1 percent) of the 

reporting participating plants (Table 3-11). The Central order follows with three plants, 
3-12

with two or less in the remaining orders. Wisconsin had the highest percentage of 

participating plants, 47.6 percent, with no more than 2 participating plants in any of the 

other States, which were mostly in the Midwest (Table 3-12). 

Respondents’ Program Opinions on Market Effects

One of the early concerns expressed by the industry was the possibility of the Program 

making it more difficult to attract milk for Class I purposes (Table 3-13). Of the two 

participating Class I plants that responded to the survey, one indicated that the Program 

had no effect on ability to attract Class I milk while the other plant indicated that the 

Program made it harder. Of the non-participating Class I plants, 51.1 percent indicated 

no effect while 7.9 percent indicated that the Program made it harder. A significant 

number, 38.8 percent, indicated that the question was not applicable. This response may 

mean that no competitors in their procurement area were offering contracts under the 

Program. Our survey did not cover Class I milk buyers who purchase milk solely from 

dairy cooperatives. Since the Program did not affect cooperatives’ ability to forward 

contract with its members, any effect on their Class I milk customers would be indirect 

and small. 

As to the Program’s effect on a plant’s ability to procure a milk supply for 

manufacturing, the responses were mixed (Table 3-14). Of the responding participating 

plants, 38.1 percent indicated that the Program made milk procurement for manufacturing 

easier for them. Two participating plants actually responded that the Program made it 

harder for them to attract milk for manufacturing. Ninety-one non-participating plants 

(40.1 percent) reported that the program did not affect their ability to attract a supply of 

milk for manufacturing purposes. Half of the non-participating plants responded that the 

question on ability to procure milk was “not applicable” to them. Of the 113 nonparticipating plants that answered as “not applicable,” 69 are predominately Class I 

plants. Some of these may not view the question as applicable to them. Another 

explanation for many of “non-applicable” responses, whether the plants were Class I or 

manufacturing plants, may be that no competitors in their procurement area were offering 

contracts under the Program. 

Participating plants were more likely than non-participants to use price protection tools 

for fuel, energy, and dairy product markets, as well as other pricing tools to offset milk 

price volatility (Table 3-15a). Milk price protection other than the Program was used by 

61.9 percent of all participating plants. Such tools could include futures and options 

contracts for Class III and Class IV milk or cross hedging with some of the dairy product 

futures and options markets. Among non-participants, other milk price protection was 

reported by only 7.9 percent. The use of fuel and energy price protection tools was 

reported by 66.7 percent of all participating plants, but by only 29.1 percent of nonparticipating plants. Similarly, 66.7 percent of the participants reported using two or 

more other price protection tools compared to only 11 percent of the non-participants 

(Table 3-15b). Of the non-participants, 52 percent indicated using no price protection 

tool. Thus, the survey indicates that those who had used some type of price protection in 
3-13

the past, were more likely to offer forward contracts under the Program and were more 

likely to use forward contracts in combination with other price protection tools. 

Participating Plants – Contracting Activity

Participating plants mostly offered the same contract terms to all producers (90.5 percent; 

Table 3-16). Most participating plants accepted contracts in order of receipt (70.8 

percent; Table 3-17a) while 4.8 percent accepted contracts from large producers first and 

23.8 percent had other criteria for acceptance. Of those indicating other acceptance 

criteria, one respondent commented that contracts were limited to 100 percent of 

production, another stated that contracts had a 10,000 pound minimum, and another 

commented that contracts were accepted only in increments of 200,000 pounds. One 

plant indicated that contracts were offered, but no producers accepted contract offerings.

Plants used a variety of devices to cover contracts with producers (Table 3-18a). Futures 

and options contracts were used by 66.7 percent of the plants, 47.6 percent of the plants 

used long-term contracts to sell manufactured products, and 28.6 percent were to some 

extent self-protected. Thirteen plants (57.1 percent) used one device to cover the 

contracts, five plants (23.8 percent) used two, and three plants (14.3 percent) used three 

devices (Table 3-18b). 

Although the Program is authorized only through December 31, 2004, participating 

plants were asked if they would continue to offer contracts in the future if the Program 

were reauthorized. Fifteen plants, 71.4 percent, answered this question affirmatively 

(Table 3-19). Five plants (23.8 percent) would do so only if necessary to compete for 

milk. 

There was early concern expressed by the industry that the Program could result in the 

sale of more finished products under long-term contracts. This in turn could have an 

impact on the data available for the National Agricultural Statistical Service (NASS) 

dairy product price series. Long-term contract sales of finished products reportedly were 

increased by 7 plants, 33.4 percent of the participants (Table 3-20). One plant reported 

an increase of 50 percent or more, and 6 plants reported an increase of less than 25 

percent. See Chapter 5 for additional discussion of this topic. 

 

Non-Participating Plants—Considerations

A question was asked of non-participating plants to discover their reasons for not offering 

contracts under the Program. Of those responding, 120 plants, 52.9 percent, indicated 

that they did not offer contracts because most of their milk was used for Class I purposes 

(Table 3-21a). Two other reasons—“competition did not offer contracts” and “producers 

not interested”—were each reported by 22 plants. Sixteen plants reported that they offer 

contracts outside of the program subject to Federal order minimum prices. However, 

there is probably some misinterpretation of this selection. We found that 14 of these 16 
3-14

plants are cooperative plants. This selection was probably chosen because the plants 

offer contracts outside of the program to their members that are not subject to Federal 

order minimum prices. Thirty-nine respondents indicated that there were other reasons 

for not participating. From this group, 17 respondents commented that they do not 

receive producer milk or that they receive their milk from cooperatives, but they gave no 

reasons for not considering forward contracts with cooperatives.

A single reason for not contracting under the Program was given by 78 percent of the 

non-participants (Table 3-21b). Two or more reasons were given by about 10 percent of 

the non-participants.

As an indication of perhaps limited growth in the Program, 6 non-participating plants out 

of 227, only 2.6 percent, reported that they would likely offer contracts in the future.
3-15

Responses to Questions Concerning Participants and Non-participants

Table 3-6: Did you offer contracts under the Forward Contracting Pilot Program?

Respondents

Number of 

responses Percentage

Participants 21 8.5 

Non-participants 227 91.5 

Total Number of Respondents 248 100.0 

Table 3-7: Of the milk you pool under Federal orders, what annual percentage falls

 into each class? Predominant class. 

Predominant Class of Milk Participants

Percentage of 

Participants

NonParticipantsPercentage of 

Non-Participants

Class I 2 9.5 139 61.2 

Class I & II -- 0.0 1 0.4 

Class I & III -- 0.0 2 0.9 

Class II -- 0.0 13 5.7 

Class III 18 85.7 40 17.6 

Class IV -- 0.0 3 1.3 

Unknown 1 4.8 29 12.8 

Total 21 100.0 227 100.0 

Table 3-8: Total pounds milk pooled by plant per month during the past year. 

Pounds pooled per month Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

Less than 10 million 1 4.8 71 31.3 

10 to 20 million 6 28.6 60 26.4 

20 to 30 million 4 19.0 30 13.2 

More than 30 million 9 42.9 50 22.0 

Unknown 1 4.8 16 7.0 

Total 21 100.0 227 100.0 

Table 3-9: Plant is owned by single or multiple dairy plant firm.

Single or Multiple Plant Firm Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

Single 12 57.1 101 44.5 

Multiple 8 38.1 110 48.5 

Unknown 1 4.8 16 7.0 

Total 21 100.0 227 100.0 
3-16

Table 3-10: Number of dairy plants owned per firm.

Number of Plants Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

1 12 57.1 101 44.5 

2 to 5 6 28.6 27 11.9 

 6 to 50 1 4.8 47 20.7 

Greater than 50 0 0.0 29 12.8 

Unknown 2 9.5 23 10.1 

Total 21 100.0 227 100.0 

Table 3-11: Federal milk order the plant is generally regulated under. 

Order Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

Appalachian -- 0.0 12 5.3 

Arizona-Las Vegas -- 0.0 3 1.3 

Central 3 14.3 32 14.1 

Florida -- 0.0 8 3.5 

Mideast 2 9.5 30 13.2 

Northeast 1 4.8 29 12.8 

Pacific Northwest 1 4.8 18 7.9 

Southeast -- 0.0 12 5.3 

Southwest -- 0.0 19 8.4 

Upper Midwest 12 57.1 54 23.8 

Western 2 9.5 6 2.6 

Not regulated under a Federal order -- 0.0 4 1.8 

Total 21 100.0 227 100.0 

Table 3-12: State the plant is located in.

State Participants

Percentage of 

Participants

NonParticipantsPercentage of 

Non-Participants

IA 2 9.5 3 1.3 

ID 2 9.5 2 0.9 

IL 2 9.5 9 4.0 

NY 1 4.8 9 4.0 

OH 1 4.8 10 4.4 

OR 1 4.8 12 5.3 

SD 1 4.8 1 0.4 

UT 1 4.8 5 2.2 

WI 10 47.6 38 16.7 

All other states 0 0.0 138 60.8 

Total 21 100.0 227 100.0 
3-17

Table 3-13: How has the Forward Contracting Pilot Program affected your ability to

 attract a supply of milk for Class I uses? Class I Plants.

Effect on ability to attract 

Class I milk Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

Made it easier 0 0.0 0 0.0 

Unchanged 1 50.0 71 51.1 

Made it harder 1 50.0 11 7.9 

Not applicable 0 0.0 54 38.8 

Unknown 0 0.0 3 2.2 

Total 2 100.0 139 100.0 

Table 3-14: How has the Forward Contracting Pilot Program affected your ability to

 attract a supply of milk for manufacturing (Class II, Class III, Class

 IV) uses?

Effect on ability to attract 

milk for manufacturing uses Participants

Percentage of 

Participants

NonParticipants

Percentage of 

NonParticipants

Made it easier 8 38.1 1 0.4 

Unchanged 8 38.1 91 40.1 

Made it harder 2 9.5 11 4.8 

Not applicable 2 9.5 113 49.8 

Unknown 1 4.8 11 4.8 

Total 21 100.0 227 100.0 

Table 3-15a: Have you used forward contracts, futures, or options to protect against

 price changes? Selected categories.

Category Participants

Percentage 

of 

Participants

NonParticipants

Percentage 

of NonParticipants

Fuel or energy 14 66.7 66 29.1 

Labor 0 0.0 3 1.3 

Dairy product markets 8 38.1 25 11.0 

Milk other than through pilot 

program 13 61.9 18 7.9 

Other, please specify 0 0.0 32 14.1 

Did not make a selection 4 19.0 117 51.5 

Table 3-15b: Have you used forward contracts, futures, or options to protect against

 price changes. Number of categories selected. 

Number of categories selected Participants

Percentage 

of 

Participants

NonParticipants

Percentage 

of NonParticipants

None 3 14.3 118 52.0 

One 4 19.0 84 37.0 

Two 11 52.4 15 6.6 

Three 3 14.3 10 4.4 

Total 21 100.0 227 100.0 
3-18

Response to Questions Concerning Only Participants

Table 3-16: Did you offer the same contract terms to all producers?

Contract Terms

Number of 

Participants Percentage

Same for all producers 19 90.5 

Not the same for all producers 2 9.5 

Total 21 100.0 

Table 3-17a: Criteria you used for accepting contracts offered. Selected criteria.

Criteria 

Number of 

Participants Percentage

Accepted first from large producers 1 4.8 

Accepted all contracts in order of receipt without regard to volume 17 70.8 

Accepted for other reason 5 23.8 

Did not make a selection 1 4.8 

Percentages do not add to 100 because respondents could choose more than one answer.

One respondent indicated that contracts were offered but that no producers accepted the offer.

Table 3-17b: Criteria you used for accepting contracts offered under the

 Forward Contracting Pilot Program ? Number of selected

 criteria.

Number of selected criteria

Number of 

Participants Percentage

None 1 4.8 

One 18 85.7 

Two 2 9.5 

Total 21 100.0 

Table 3-18a: How did you cover accepted contracts under the Forward

 Contracting Pilot Program? Selected Criteria.

Criteria

Number of 

Participants Percentage

Long-term contract to sell manufactured

 Products 10 47.6 

Used futures and options 14 66.7 

Self-protected 6 28.6 

Did not make a selection 2 9.5 

Table 3-18b: How did you cover accepted contracts under the Forward

 Contracting Pilot Program? Number of selected criteria.

Number of selected criteria

Number of 

Participants Percentage

None 1 4.8 

One 12 57.1 

Two 5 23.8 

Three 3 14.3 

Total 21 100.0 
3-19

Table 3-19: Would you continue to offer forward contracts if the program

 were continued beyond December 2004?

Program participant response

Number of 

Participants Percentage

Yes 15 71.4 

Only if necessary to meet competition 5 23.8

Don't know 1 4.8 

Total 21 100.0 

Table 3-20: Did you sell more of your finished product under long-term

 contracts with buyers because you were able to forward

 contract a milk supply? 

Effect on sales of finished products 

Number of 

Participants Percentage

None 14 66.7 

Less than 25 percent more 6 28.6 

From 25 to 50 percent more 0 0.0

50 percent or more 1 4.8 

Total 21 100.0 

Responses to Questions Concerning Only Non-Participants

Table 3-21a: If you did not offer forward contracts under the Forward Contracting Pilot

 Program to your producers, please mark all the following that apply. 

 Selected reasons.

Reason for not participating

Number of NonParticipantsPercentage of nonParticipants

Competition did not offer forward contracts. 22 9.7

Producers were not interested in forward contracting. 22 9.7

Most milk is used for Class I purposes and is ineligible. 120 52.9

Plant offers forward contracts outside of program subject

 to Federal Order minimum prices. 1/ 16 7.0

Other reason. 39 17.2

Plant likely will offer in near future. 6 2.6

Did not make a selection. 28 12.3

Percentages do not add to 100 because respondents could choose more than one answer.

1/ Includes fourteen cooperative responses, who likely interpreted the category to include the 

 milk they pool on Federal orders, for which minimum prices are drawn from the pool, but 

 for which cooperative members’ revenues may be re -blended and forward contracted outside

 of the Pilot Program.
3-20

Table 3-21b: If you did not offer forward contracts under the Forward Contracting Pilot

 Program to your producers, please mark all the following that

 apply. Number of selected reasons.

Number of Selections Number of Non-Participants Percent

None 29 12.8 

One 177 78.0 

Two 15 6.6 

Three 6 2.6 

Total 227 100.0 
3-21

Cooperative Questionnaire Response

The cooperative survey was initially designed to study characteristics and opinions of 

cooperatives participating in the Program as milk sellers. Since only one cooperative 

participated in the Program as a milk seller during the study period, the survey is not 

useful for this purpose. However, the survey does allow us to compare cooperatives 

offering members forward contracts to cooperatives not offering forward contracts. We 

are also able to gain some information concerning the effect of the Program on 

cooperatives offering forward contracts to members.

Of 84 respondents to the cooperative survey, 19 respondents (22.6 percent) indicated that 

they offered forward contracts to their members (Table 3-22). Only one (5.3 percent) of 

the contract-offering cooperatives reported total milk pounds handled of more than 250 

million per month (Table 3-23). This contrasts with 13.8 percent of the non-contractoffering group handling 250 million pounds of milk per month. While the largest 

percentage of contract-offering cooperatives handles 10 to 50 million pounds per month 

(47.4 percent), the largest percentage of non-contracting-offering cooperatives handles 

less than 10 million pounds per month (30.8 percent), with the 10 to 50 million pound 

category coming in a very close second (29.2 percent).

For both contract-offering and non-contract-offering cooperatives, Class III milk tends to 

be the dominant class of milk, with about 42 percent from both groups in this category 

(Table 3-24). Class I is ranked second for both groups, with 21.1 percent for contractoffering cooperatives and 33.8 percent for non-contract-offering cooperatives. It is 

interesting that 2 contract-offering cooperatives indicated Class IV as a predominant class 

of milk while there were no non-contract-offering cooperatives in this category.

There is a notable contrast between the two groups with respect to Federal marketing 

orders (Table 3-25). Contract-offering cooperatives pooled most of their milk in the 

Upper Midwest Federal Milk Marketing Order (57.7 percent) while the non-contracting 

cooperatives pooled most of their milk in the Northeast Federal Milk Marketing Order 

(64.7 percent). Second place for the contract-offering cooperatives is the Northeast (15.8 

percent), while second place for the non-contract-offering cooperatives is the Upper 

Midwest (8.0 percent). 

The survey indicates that contract-offering cooperatives are more likely than noncontract-offering cooperatives to use tools such as forward contracts, futures contracts, or 

options to reduce price volatility. This is the case for feed, fuel or energy, dairy product 

markets, and milk (Table 3-26a). Of the cooperatives offering forward contracts to 

members, 42.1 percent reported use of at least one type of tool to reduce price risk (Table 

3-26b). For the cooperatives not offering forward contracts, only 10.8 percent reported 

use of at least one type of price reduction tool. It is interesting that only 3 of the 19 

contract-offering cooperatives indicated that they used price protection methods for milk. 

This seems contradictory to their responses indicating that they had offered forward 

contracts to members. One possible explanation is that some contract-offering 

respondents may not think of their forward contracts primarily as price risk reduction 
3-22

instruments for the cooperative. Perhaps some cooperatives perceive forward contracts 

as tools to acquire, keep, and satisfy members rather than as tools to reduce price 

volatility for the cooperative.

Cooperatives that had offered contracts to their members were questioned concerning the 

effect of the Program on their contract offerings. The majority, 13 respondents (68.4 

percent), indicated that the program had little or no effect (Table 3-27). Two reported 

that the Program made offering contracts necessary in order to meet competition, 1 

indicated that the Program made offering contracts easier, and 4 did not make a selection.
3-23

Cooperative Questionnaire Responses

Table 3-22: Has the cooperative offered forward contracts to members?

Contracts offered to cooperative members

Number of 

responses Percentage

Yes 19 22.6

No 65 77.4

Totals 84 100.0

Table 3-23: Total pounds of milk handled per month during the past year:

Offered Member 

Contracts

Did not offer member 

contracts

Pounds handled per month Number Percentage Number Percentage

Less than 10 million 6 31.6 20 30.8

10 to 50 million 9 47.4 19 29.2

50 to 250 million 3 15.8 15 23.1

More than 250 million 1 5.3 9 13.8

Unknown 1/ 0 0.0 2 3.1

Totals 19 100.0 65 100.0

1/ Unknown indicates non-response to the survey question.

Table 3-24: Of the milk you pool under Federal orders, what percentage falls into each class? 

Predominant class of milk determined from response to this question.

Offered Member 

Contracts

Did not offer member 

contracts

Predominant class of milk Number Percentage Number Percentage

Class I 4 21.1 22 33.8

Class II 1 5.3 4 6.2

Class II & III 1/ 1 5.3 0 0.0

Class III 8 42.1 27 41.5

Class IV 2 10.5 0 0.0

Unknown 2/ 3 15.8 12 18.5

Totals 19 100.0 65 100.0

1/ One respondent indicated equal predominance of Class II and Class III.

2/ Unknown indicates non-response to the survey question.
3-24

Table 3-25: Of the milk you pool under Federal orders, what annual percentage is pooled in 

each order? Please enter percentages addi ng to 100%.

Average Percentage Pooled Per Order

Order

Offered Member 

Contract

Did not offer member 

contracts

Northeast 15.8 64.7

Mideast 0.8 5.3

Appalachian 0.0 2.5

Northwest 9.3 4.9

Florida 0.0 1.5

Southwest 2.7 3.4

Southeast 2.7 2.2

AZ-Las Vegas 0.0 3.3

Upper Midwest 57.7 8.0

Western 1.4 1.7

Central 9.6 2.5

Totals 100.0 100.0

Table 3-26a: Has the cooperative used forward contracts, futures market contracts, or options 

to protect itself against price changes in: (Select all that apply.)

Offered Member 

Contracts

Did not offer member 

contracts

Other Risk Management Used Number Percentage Number Percentage

Feed 4 21.1 0 0.0

Fuel or energy 5 26.3 6 9.2

Dairy product markets 2 10.5 3 4.6

Milk other than through pilot program 3 15.8 2 3.1

Did not make a selection 11 57.9 58 89.2

Percentages do not add to 100 because respondents could choose more than one answer.

Table 3-26b: Number of Selections: Has the cooperative used forward contracts, futures 

market contracts, or options to protect itself against price changes?

Offered Member 

Contracts

Did not offer member 

contracts

Number of Selections Number Percentage Number Percentage

None 11 57.9 58 89.2

One 3 15.8 4 6.2

Two 4 21.1 2 3.1

Three 1 5.3 1 1.5

Totals 19 100.0 65 100.0
3-25

Table 3-27: If the cooperative has offered forward contracts to its members, has the Forward 

Contracting Pilot Program: (Select all that apply)

Effect On Offerings to Coop Members

Number of 

Responses Percentage

Made it easier 1 5.3

Made it necessary in order to meet competition 2 10.5

Had little or no effect 13 68.4

Did not make a selection 4 21.1

Percentages do not add to 100 because respondents could choose more than one answer.
4-1

Chapter 4

Prices for Forward Contract Milk Marketed Under the Program

The economic function performed by Dairy Forward Pricing Pilot Program (Program) is 

the reduction in the uncertainty of prices paid and received for milk through forward 

contracting. In this study, prices received by producers for forward contracted milk are 

compared to the prices that would have been received for the milk had it not been 

contracted. The analysis includes a comparison of average prices by signing quarter to 

delivery quarter, and a comparison of forward contract average prices to Federal milk 

order average minimum prices (at producers’ tests) and futures market average prices for 

milk. 

The great majority of handlers participating in the Program are cheese makers, and their 

contract prices are usually related to Federal order Class III prices. In most contracts, 

prices are either expressed in terms of the Class III milk components used in Federal 

orders or just as a price for Class III milk. Contracts frequently provide that the handler 

will pay a producer price differential (PPD) and customary premiums in addition to the 

contract price for Class III milk and/or components1. The PPD paid by the handler may 

be different from the Federal order PPD, and customary payments are often described as 

the normal quality premiums paid, but are not detailed in the contract. 

Price comparisons in this chapter are the differences between the average pay prices for 

producers’ milk under contract (the contract price) and for such milk if not under contract 

(the non-contract price.) The prices are compared for the same plant locations, are for 

milk of the same component tests, and are based on the gross pay prices for milk before 

deductions for hauling, promotion, and normal marketing charges. We assume that 

premiums and PPDs paid by handlers are the same for contract and non-contract milk. 

The average contract and non-contract prices discussed and reported in the tables are 

average prices received, weighted by pounds of contract milk. For a detailed discussion 

of how prices were computed, see Appendix D. 

 

1

 The producer price differential (PPD) is part of the minimum blend price in Federal orders with 

component pricing plans. The PPD reflects the producer’s portion of the Class I and Class II differentials; 

the Class IV price relative to the Class III price; location adjustments; differences in the pool values of 

protein, butterfat, and other solids compared to their Class III values; and other factors. The producer’s 

minimum Federal order milk price is the value of comp onents at minimum prices—or the Class III price at 

producers milk test—plus the PPD. In the orders with skim milk and butterfat pricing plans, a Uniform 

price is calculated as a weighted average or pool value of skim milk and butterfat priced at minimum class 

prices. A value analogous to the PPD can be calculated as the difference between the Uniform price and 

the Class III price. For more pricing detail see Code of Federal Regulations, Title 7, Parts 1000 to 1199; 

and Dairy Programs’ Price Description at http://www.ams.usda.gov/dyfmos/mib/fedordprc_dscrp.htm. 

Handlers may pay PPDs that are identical to the Federal order PPDs, or may pay different PPDs calculated 

with their own formulas. The Federal order assures that producers receive at least the Federal order 

minimum blend price, and is otherwise indifferent to the payment systems used by handlers and producers. 

However, prices for milk contracted under the Program may fall below the Federal order minimum blend 

price. 
4-2

We make comparisons between average contract prices and Federal milk order average 

minimum blend prices (at producers’ tests) and find that there are instances of contract 

prices falling below the Federal order minimum. We also compare differences between 

average contract prices and average Class III futures prices on the Chicago Mercantile 

Exchange (CME). The use of the futures market is an alternative to the Program for 

many dairy farmers. Finally, to address concerns of some industry participants, we look 

at any impact that the Program may have had on CME cash markets for dairy products.

Forward Contracts and Price Variability

Over time, our expectation is that prices received by producers for contract milk will 

average about the same as prices for milk not under contract. It is clear that forward 

contracting is of value to some producers and handlers because it affords them a 

reduction in price variation or price risk. Economic theory holds that risk-averse 

producers will produce the same amount of commodity at a lower, stable price as they 

would at a higher variable price. There also are benefits to handlers from stable prices. 

However at this time, we cannot determine if either party to a contract for milk tries to 

negotiate a premium or discount related to risk aversion. Instead, we believe that each 

party uses the best information available at the time the contract was entered into with the 

expectation that contract prices will be reasonably close to current price projections. 

An overall measure of the Program’s effect on producer milk prices is captured by the 

differences between average contract and non-contract prices, and the differences in 

variability of these prices. From September 2000 through March 2002, contracts were 

signed under the Program for milk that was pooled on 7 of the 11 Federal milk marketing 

orders. Orders pooling contract milk were the Upper Midwest, Pacific Northwest, 

Western, Central, Mideast, Southeast, and Northeast (Seven Orders). For the Seven 

Orders, the 19-month average contract price was $14.02, $0.49 less than the non-contract 

price (Table 4-1). (Monthly price tables are provided in Appendix F.) The standard 

deviation, which is a measure of spread in prices around the average, is $1.80 per 

hundredweight for the non-contract price and $0.51 for the contract milk. The price 

range for non-contract milk over the period is $5.71 per hundredweight, but for milk 

under contract is only $1.63. Thus, the program reduced the volatility in prices from 

$5.71 to $1.63 per hundredweight, but the average price was $0.49 per hundredweight or 

about 3.4 percent lower. 

The effect of contracts stabilizing milk prices is presented graphically in Figure 4-1. 

From September 2000 through February 2001, monthly average contract prices exceeded 

the non-contract prices. Non-contract prices increased dramatically from April to 

September 2001 and exceed contract prices before again falling below contract prices in 

November 2001. The gap between contract and non-contract prices continued to widen 

in the first-quarter of 2002. It is likely that contract prices remained above non-contract 

prices during the second and third quarters of 2002, as milk prices continued to be 

pressured downward by increased milk supplies. Figure 4-2 shows the differences 
4-3

between contract prices and non-contract prices and between contract prices and Federal 

order minimum prices for the 19-month period. 

To add additional perspective, contract prices were compared against prices paid in 

recent years for Grade A milk. This Grade A milk price is comparable to the prices for 

contract and non-contract milk in that the prices are at producer tests and are f.o.b. plant 

prices, and include quality, quantity, and other premiums. Average annual fluid grade 

milk prices, at test, averaged $14.17 per hundredweight for the period 1997 through 

2001, ranging between $12.44 in 2000, and $15.50 in 1998. Over the 19-month study 

period, the price for contract milk averaged $14.02. We expect that as the Program 

continues, average contract prices may continue to be near recent historical averages. 

The price for milk contracted in the third quarter of 2000 averaged $14.01 per 

hundredweight, which was quite close to the 1997-2000 average fluid grade price of 

$13.94.

Fluid grade milk price: U.S. annual average, at test

1997 1998 1999 2000 2001 Average

$13.40 $15.50 $14.42 $12.44 $15.09 $14.17

Source: USDA, National Agricultural Statistics Service

Upper Midwest and Six Orders 

The Upper Midwest order had the greatest Program participation in terms of both 

producers and handlers. Participation in the other six Federal orders with contract milk 

(Six Orders) was such that to avoid disclosure of proprietary information these markets 

are combined in the following analysis. Also, because of restricted data, the months of 

September and October 2000 are excluded from the following analysis. Thus, the 

following relates to the 17-month period November 2000 through March 2002 rather than 

the 19-month period used in prior chapters of this report. 

To compare the Upper Midwest and the Six Orders with the Seven Orders, 17-month 

statistics are also provided for the Seven Orders in Table 4-1. For the Seven Orders, 

reducing the study period by two months has the effect of increasing the average noncontract milk price from $14.51 (19 months) to $14.68 per hundredweight. The 19-

month average contract milk price is reduced by $0.02 per hundredweight to $14.00 per 

hundredweight. The average difference between the contract and non-contract prices for 

the 17-month period is $0.67 per hundredweight compared to $0.49 for the 19-month 

period, with the average non-contract price being higher in both periods. The standard 

deviations increase modestly by going to the 17-month period, but the extreme price 

points and the price ranges are unchanged.

Average contract prices compared to non-contract prices averaged $0.66 per 

hundredweight less in the Upper Midwest and $0.65 less in the Six Orders.2 The Upper 

 

2

It would be expected that since the Seven Order average contract and non-contract prices lie between 

those prices of the Six Orders and the Upper Midwest, the Seven Order average price difference would lie 
4-4

Midwest and Six Orders diverge when it comes to variance reduction. The Upper 

Midwest had less price variability for the non-contract milk than the Six Orders, a 

standard deviation of $1.67 as opposed $1.98, respectively. In comparison, the price 

variability for contact milk was less in the Six Orders with a standard deviation of $0.42 

per hundredweight than in the Upper Midwest with a standard deviation of $0.82.

Prices in the Upper Midwest for non-contract milk ranged from a high of $17.27 to a low 

of $11.77 per hundredweight, a difference of $5.50. For contract milk, prices ranged 

from $15.20 to $12.58 per hundredweight, a difference of only $2.63. The maximum 

non-contract price exceeded the maximum contract price by $2.07 per hundredweight. 

The minimum contract price exceeded the minimum non-contract price by $0.81 per 

hundredweight.

In the Six Orders, average prices for non-contract milk ranged from a high of $18.46 to a 

low of $12.31 per hundredweight, a difference of $6.15. For contract milk, prices ranged 

from $15.31 to $13.77 per hundredweight, a difference of only $1.54. The maximum 

non-contract price exceeded the maximum contract price by $3.16 per hundredweight. 

The minimum contract price exceeded the minimum non-contract price by $1.46 per 

hundredweight.

Forward Contract Prices by Signing and Delivery Quarter

There appear to be two notable factors that affected the difference between contract and 

non-contract prices. Contract prices were more likely than not to be consistent with 

delivery-date market conditions when the time span between the signing and delivery 

dates was shorter. Forecast prices influence contract prices, and forecasts are influenced 

by market conditions at the time of forecast.

Contract Milk Under Seven Orders

Quarterly average contract milk prices by signing and delivery quarter are found in Table 

4-2a and illustrated in Figure 4-3. Contracts were signed in one quarter for milk to be 

delivered in succeeding quarters, possibly more than one year later. Contracts signed in 

third quarter 2000 had prices averaging closest to the $14.02 per hundredweight, the 19-

month average contract price. Contracts signed in first quarter 2001 reflected the outlook 

 

between the Six Orders and Upper Midwest average price differences. However, the Upper Midwest 

contracted volume decline in 2002 was significantly greater than that in the Six Orders, shifting the 

weighting to the Six Orders in calculating the Seven Orders average prices. In addition, in most of 2001 

contract prices were less than non-contract prices, but contract prices exceeded non-contract prices in firstquarter 2002. This combination of shifts caused the improbable ordering of differences in the average

contract and non-contract prices. However, the ordering of price differences is logical for every individual 

month, for the Nov. 2000 through 2001 averages, and for the first-quarter 2002 averages. 
4-5

for lower prices in 2001. As market prices began to climb in 2001, contract prices at 

signing also rose. Prices provided by contracts signed in second quarter 2001 ranged 

from $14.15 to $14.96 per hundredweight, and prices in contracts signed in third quarter 

2001 reached $16.00 per hundredweight. By fourth quarter 2001, signing prices had 

fallen back down to reflect the expected drop in 2002 market prices. Contracts signed in 

first quarter 2002 for delivery in that quarter averaged $13.66 per hundredweight. 

For comparison purposes, average non-contract prices applicable for the signing and 

delivery quarters are shown in Table 4-2b. Prices differ by delivery quarter for contracts 

entered into in the same quarter because of the differing number of plants, orders and 

volumes of non-contract milk that was associated with contracting plants. Average 

Federal order minimum prices for the same quarters are presented in Table 4-2c. 

Calculating market and Federal order minimum prices in this manner allows us to 

examine differences in comparable prices.

The average differences between contract and non-contract prices according to signing 

and delivery quarter are shown in Table 4-2d and Figure 4-4. Clearly shown are the 

effects of market expectations in the signing quarter on differences between contract and 

non-contract prices. As signing quarters progressed from 2000 through the first quarter 

of 2001, contract prices for future delivery periods underestimated ultimate market prices 

to a greater degree. By the second quarter of 2001, a momentum had been established 

toward higher market prices. Although contract prices were less than non-contract prices 

in the second and third delivery quarters of 2001 for all signing quarters, differences for 

contracts signed in the second and third quarters were less than differences for contracts 

signed in previous quarters. As non-contract prices fell in the fourth quarter of 2001, 

differences between contract and non-contract prices moved in a positive direction. 

Prices for contracts signed in the second half of 2001 for delivery in fourth quarter 2001 

were higher than non-contract prices. For the first delivery quarter of 2002, contract 

prices were higher than non-contract prices for all signing quarters.

The amounts by which non-contract milk prices exceeded contract milk prices were 

largest in the third quarter of 2001. The greatest gap, $4.33 per hundredweight, was for 

milk contracted in the fourth quarter of 2000 for delivery in the third quarter of 2001. 

Contract milk prices in excess of non-contract prices were greatest, $1.97 per 

hundredweight, for milk contracted in the third quarter of 2000 for delivery in the fourth 

quarter of 2000. 

Contract milk prices were less than the Federal milk order minimum prices in the second 

and third quarters of 2001. Contract prices for all other signing and delivery quarters, 

with the exception of contracts signed in the first quarter of 2001 for delivery in the 

fourth quarter of 2001, received more than the comparable Federal order minimum price.
4-6

Upper Midwest and Six Orders

Tables 4-3a through 4-3e provide quarterly average prices and comparisons for milk 

pooled under the Upper Midwest Order. Tables 4-4a through 4-4e provide the same 

information for the Six Orders. Differences in contract and non-contract prices follow 

similar patterns in the two sets of tables. For example, the Upper Midwest average price 

for milk contracted in the first quarter of 2001, for delivery in the fourth quarter of 2001, 

was $0.97 per hundredweight less than the comparable average non-contract price. The 

same price comparison for the Six Orders is a negative $1.03 per hundredweight. The 

general patterns for the Upper Midwest and Six Orders are consistent for all signing and 

delivery quarters. However, the magnitudes of the price differences vary between the 

two groups. For the Six Orders, the greatest amount by which the average non-contract 

price exceeded the contract price, $4.75 per hundredweight, occurred for milk contracted 

in the fourth quarter of 2000 for delivery in the third quarter of 2001. The greatest 

amount by which average contract milk prices exceeded the non-contract average was 

$1.66 per hundredweight and occurred for milk contracted in the third quarter of 2001 for 

delivery in the first quarter of 2002. 

Gross Values of Contract Deliveries

As noted earlier, the number of producers participating and the volumes of milk marketed 

under the Program have varied. Contract volumes were the greatest when non-contract 

prices exceeded contract prices by the greatest amount. Thus the impact on farm cash 

receipts from milk marketing by contract producers was greater than that implied by just 

the difference in average prices over the study period. See Figure 4-5. 

In the Seven Orders, from September 2000 through March 2002, contract producers 

marketed a total of 3.6 billion pounds of milk, of which 2.5 billion pounds (69 percent) 

were contract milk. Gross cash receipts for all milk marketed by contract producers were 

$514 million before deductions for hauling, promotion, and marketing. See Table 4-5. 

Contract milk grossed $343 million. Had the contract milk been marketed without 

contract, the gross cash receipts for that milk would have been an estimated $371 million, 

$28.2 million higher. Thus, gross cash receipts for all milk marketed by contract 

producers as a group were reduced by an estimated 5.2 percent during the study period.

Information relative to similar gross cash receipts for the Upper Midwest Federal milk 

order and the Six Orders combined are in Appendix G. 

Forward Contract Prices and Futures Prices

As an alternative or a supplement to participation in the Program, producers could have 

sold milk futures contracts on the Chicago Mercantile Exchange (CME).3 Of course, 

 

3

 Milk and dairy product trading on the CME includes Class III and Class IV milk futures, butter futures, 

options on futures contracts, and spot markets for butter, cheese, and nonfat dry milk.
4-7

smaller producers may not have this alternative since monthly futures contracts are for 

200,000 pounds each. For some contracts, the handler acts as a middleman between the 

producer and the futures market. Some handlers sell futures in order to offset their risk 

contract positions. For these reasons, it is useful to compare results from the contracting 

with the results from the futures market. Since most contract milk has been for Class III 

purposes, the likely alternative to compare against was the CME Class III futures prices. 

As an alternative from the producer’s prospective, we estimated how producers would 

have faired if, instead of forward contracting, they had purchased futures contracts. We 

assumed that the futures contracts were purchased in the same months that forward 

contracts were signed and that delivery period and amounts were the same as under 

forward contracts. Our comparison considers neither brokerage fees nor any margin calls 

that might have occurred during the futures’ contract period. 

A forward contracting producer chooses to give up the non-contract price and to accept 

instead the contract price for a portion of his milk. As an alternative, a producer could 

have sold futures contracts on the CME for future delivery of the same portion of his 

milk, accepted the non-contract milk price at the time of delivery, and added his gains or 

losses from the futures market to the price received for his milk, to arrive at his net milk 

price. Average Class III futures prices-- by forward contract signing and delivery quarter 

and weighted by monthly pounds forward contracted under the Program-- are shown in 

Table 4-6a. The corresponding average Federal order Class III prices in Table 4-6b 

similarly reflect the monthly pounds contracted over the quarter. The quarterly average 

prices in the delivery quarters are different to the extent that the monthly delivery 

proportions vary by signing quarter. The differences between average Class III futures 

and Federal order Class III prices are calculated in Table 4-6c. It is this difference that 

would be added to the producers’ non-contracted milk price had they used the Class III 

futures markets to protect their milk price.

A comparison of the use of CME futures contracts to Program contracts is shown in 

Table 4-7. Table 4-7a shows the quarterly prices received for contract milk under the 

Program. Table 4-7b shows the quarterly non-contract prices to which has been added 

any gains or losses from the futures market and calculated in Table 4-6. Table 4-7c 

shows the amount by which average quarterly prices under Program contracts would have 

exceeded net prices received by producers who used the futures market to stabilize milk 

prices. 

Producers were better off, on average, with contract prices than with futures in 17 of the 

25 signing-delivery combinations. Producers would have been better off signing forward 

contracts in the first three delivery quarters and the last delivery quarter of the study 

period. In the second through fourth quarters of 2001, how a producer faired depended 

on when the forward contract was signed and when the futures contract was sold. 
4-8

Addendum - Price Information After Study Period

As the data collected for the 19-month study period was being analyzed and this report 

was being written, it became obvious that additional information provided by contracts 

for delivery in 2002 could be reshaping the picture. Given the precipitous decline in 

2002 milk prices from 2001 levels, it appears that producers who signed contracts in 

2002 may have protected themselves by contracting at prices that will likely be attractive 

in 2002. 

Although no actual data on deliveries made or prices received were available beyond 

March 2002, limited contract information was available with price levels for deliveries to 

be made in April though August 2002. Table 4-8 shows the number of producers for 

which we had contract information each month. From this information, we were able to 

define two groups for which the contracts provided both price and volume information. 

For one group, prices were specified as Class III milk prices and for the other, milk 

component prices. About 80 of the available contracts did not specify pounds of milk or 

components and therefore could not be used in this estimation. 

Contract prices were converted, if necessary, into prices for Class III milk containing 3.5 

percent butterfat. We were then able to compare these base contract prices (without 

premiums or PPDs) with announced Federal order minimum Class III prices. For 

contracts quoted on a Class III milk price basis, the average quoted price exceeded the 

announced Federal order Class III price by $2.30 per hundredweight during this 5-month 

period. Those contracts written on a milk component price basis exceeded the announced 

Federal order Class III price by an average of $2.41 per hundredweight. 

Thus, the additional limited available information indicates that milk delivered under 

contracts in 2002 received a higher average price than non-contracted milk. This 

illustrates the potential value of market participants following a consistent marketing 

strategy. Had the producers who dropped out of the program after 2001 stayed in, the 

negative differences on contract and non-contract prices may have been balanced out and 

their revenues stabilized.

Dairy Forward Pricing Pilot Program Impact on Chicago Mercantile Exchange 

Cash Dairy Product Markets

There were concerns expressed by several in the industry that the Dairy Forward Pricing 

Pilot Program (Program) could result in less volumes of dairy products traded on the 

Chicago Mercantile Exchange (CME) cash markets. The State of California uses CME 

cash market prices to price milk under their marketing order program, and it is generally 

believed that a large share of the cheese and butter sold wholesale in the United States is 

priced based on the CME cash market prices. Federal milk orders use weekly wholesale 

prices of butter and cheese collected by the National Agricultural Statistics Service 
4-9

(NASS) to establish minimum class prices. NASS wholesale product prices and the 

CME cash market prices are highly correlated.

Historically, dairy product cash markets occasionally have been referred to as “thin” 

markets. Trades on the CME occur primarily when buyers and/or sellers believe that the 

current market price level does not adequately reflect the supply and demand conditions 

for the product. Experience has shown that any firm attempting to buy or sell a dairy 

product at a price level which differs from the general industry consensus price must be 

prepared to buy or sell large quantities of the product in order to raise or lower the market 

price. The Commodity Futures Trading Commission has stated in a letter to USDA as 

recently as December 2001, that “although there are relatively small numbers of actual 

transactions, the spot butter and cheese call sessions are closely monitored by a number 

of commercial traders in various segments of the dairy industry who stand ready to 

participate if conditions warrant it.” 

Specifically the questions we looked at were, “If by contracting a milk supply, will 

manufacturers of butter and cheese have a better handler on their input costs, will they 

sell more of their finished product under long-term contracts with their customers rather 

than on the spot market? If there are more long-term contracts for butter and cheese, will 

there be less activity on the CME cash markets for these products?”

Question number 15 on our plant questionnaire asked if handlers sold more of their 

products under long-term contracts because they were able to lock-in a price of milk, the 

major input cost. Of the 21 responding, 16 indicated that they sold no additional product 

under long-term contracts, 5 cheese plants indicated that sales under long-term contracts 

had increased less than 25 percent, and 1 cheese plant indicated that such sales had 

increased by 50 percent or more. Although these responses suggest additional interest in 

committing products to long-term sales contracts, data are not available to estimate 

volume increases or the volumes of cheese and butter currently sold under long-term 

contracts by all contracting and non-contracting manufacturers. Even if those cheese 

plants who indicated that they had increased the volume of product sold under long-term 

contracts had instead sold all of the cheese that they produced from contracted milk under 

long-term contracts, the additional contracted volume would amount to less than one 

percent of monthly American cheese production. 

Next, we reviewed the average monthly volume of total activity (includes sales, bids, and 

offers) and sales activity on the CME cheese and butter cash markets from January 1998 

to August 2000 (before the program implementation), and from September 2000 to 

March 2002 (since implementation). To reduce the short-term variation in activity on the 

CME, the data were converted into three-month moving averages. (See Figures 4-6 and 

4-7.)

The average monthly volume of total activity on the combined CME block and barrel 

cheese markets after Program implementation was almost 60 cars, or 27 percent, less than 

activity prior to the Program. A similar comparison of monthly sales activity of blocks 

and barrels showed a decrease of almost 35 cars, or 33 percent. The average monthly 
4-10

volume of total activity on the CME butter market has been down more than 35 cars (18 

percent) following implementation of the Program while the monthly average of total 

sales decreased by 7 cars, or 10 percent. 

Market factors other than forward contracting of milk are more likely responsible for the 

reduced CME activity. It appears that there is less activity on the CME when the price 

remains stable. For example, a sustained strong growth in milk supply kept cheese prices 

near the price support level in early 2000, which likely limited transactions on the CME. 

More transactions took place in August, September, and October as prices moved to 

levels that the market felt more adequately reflected supply and demand conditions. In 

contrast, during the first nine months of 2001, cheese prices on the CME increased 

steadily due to a decrease in milk production. During the period the market did not resist 

the price increase, and thus it took fewer transactions to raise the price and keep it there. 

Although the questionnaires provided some indication that some contracting handlers had 

increased the volume of butter and cheese they sold under long-term contacts, it is 

unclear whether the decrease in activity on the CME cash markets has been a result of the 

Program. 
4-11

Table 4-1: Contract Milk and Price Information1/, Two Study Periods 2/—Seven Orders3/, Upper Midwest,

 and Six Orders 3/

Prices at test Price differences

Contract milk 

delivered and 

pooled

Contract 

price

Noncontract 

price 

Federal 

order 

minimum

Contract 

minus noncontract 

Contract 

minus F. O. 

minimum 

Study period summary 

statistics for Federal order 

groups 1000s lbs. $/cwt. $/cwt.

Seven Orders – 19 months

 (Sept. 2000 – March 2002)

Monthly average 130,082 14.018 14.512 13.320 -0.494 0.698

Standard deviation 55,743 0.507 1.803 1.830 -1.296 -1.323

Minimum 46,592 13.226 12.039 10.829 1.187 2.397

Maximum 205,016 14.855 17.753 16.683 -2.898 -1.827

Range 158,424 1.629 5.714 5.854 -4.085 -4.225

Seven Orders – 17-months

 (Nov. 2000 – March 2002) 

Monthly average 139,628 14.003 14.677 13.521 -0.674 0.482

Standard deviation 50,747 0.534 1.839 1.833 -1.305 -1.299

Minimum 53,144 13.226 12.039 10.829 1.187 2.397

Maximum 205,016 14.855 17.753 16.683 -2.898 -1.827

Range 151,873 1.629 5.714 5.854 -4.085 -4.225

Upper Midwest Order 

 17-months

 (Nov. 2000 – March 2002) 

Monthly average 74,742 13.621 14.279 13.242 -0.658 0.379

Standard deviation 35,889 0.819 1.669 1.898 -0.850 -1.079

Minimum 20,396 12.575 11.771 10.425 0.805 2.150

Maximum 121,855 15.204 17.269 16.499 -2.066 -1.296

Range 101,459 2.628 5.499 6.074 -2.870 -3.446

Six Orders – 17-months

 (Nov. 2000 – March 2002) 

Monthly average 64,886 14.457 15.108 13.830 -0.652 0.627

Standard deviation 23,832 0.419 1.976 1.743 -1.557 -1.324

Minimum 26,536 13.769 12.308 11.234 1.461 2.535

Maximum 100,721 15.305 18.460 16.951 -3.155 -1.647

Range 74,186 1.536 6.152 5.717 -4.616 -4.181

Source: Appendix Table F-1, F-2 and F-3.

/1 For a detailed description of how average prices are computed, see Appendix D.

/2 For the Upper Midwest and the Six Orders, price statistics are provided for 17 months rather than 19 months. 

 Data for September and October of 2000 are restricted due to Program participation by less than 3 handlers. 

 Data provided by fewer than three parties is considered restricted because aggregation of such information

 may not prevent individual disclosure. For comparison purposes, statistics for the 17-month period are

 provided for the Seven Orders.

/3 Seven Orders refers to the seven Federal orders with participation in the Program during the study period—

 the Central, Mideast, Northeast, Pacific No rthwest, Southeast, Upper Midwest, and Western orders. 

 Six Orders refers to all of these orders except for the Upper Midwest.
4-12

Table 4-2: Contract Milk Price Comparisons1/, Seven Orders2/ by Signing and Delivery Quarter

 Combination

Table 4-2a: Prices received for contract milk ($/cwt, at test)

Delivery quarter

Signing 

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 13.911 14.599 14.115 13.788 13.579 14.087 R

4

th

--- R 13.791 13.580 13.368 13.950 R

2001 

1

st

--- --- 14.146 12.780 12.710 12.968 14.025

2

nd

--- --- --- 14.963 14.753 14.762 14.151

3

rd

--- --- --- --- 15.648 16.008 15.852

4

th

--- --- --- --- --- 15.377 14.008

2002 

1

st

--- --- --- --- --- --- 13.657

Table 4-2b: Prices had there been no forward contracts ($/cwt, at test)

Delivery quarter

Signing 

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 12.992 12.628 13.470 15.852 17.335 15.189 R

 4th--- R 13.304 16.001 17.694 15.109 R

2001 

1

st

--- --- 14.411 15.154 16.700 13.950 13.658

 2nd--- --- --- 16.931 17.644 14.959 13.484

 3rd--- --- --- --- 17.839 15.554 14.277

 4th--- --- --- --- --- 14.019 12.978

2002 

1

st

--- --- --- --- --- --- 11.926

Table 4-2c: Federal milk order minimum prices ($/cwt, at test)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 11.777 11.238 12.381 14.639 16.031 13.944 R

 4th--- R 11.925 14.344 16.178 13.901 R

2001 

1

st

--- --- 12.587 14.390 16.025 13.507 12.472

 2nd--- --- --- 15.630 16.435 14.231 12.965

 3rd--- --- --- --- 16.609 13.750 12.418

 4th--- --- --- --- --- 13.176 12.142

2002 

1

st

--- --- --- --- --- --- 11.471
4-13

Table 4-2 Continued: Contract Milk Price Comparisons 1/, Seven Orders2/ 

 by Signing and Delivery Quarter Combination

Table 4-2d: Contract price minus non-contract price ($/cwt)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 0.919 1.971 0.645 -2.064 -3.756 -1.102 R

 4th--- R 0.487 -2.421 -4.326 -1.159 R

2001 

1

st

--- --- -0.265 -2.374 -3.990 -0.982 0.367

 2nd--- --- --- -1.968 -2.891 -0.197 0.667

 3rd--- --- --- --- -2.191 0.454 1.575

 4th--- --- --- --- --- 1.357 1.030

2002

1

st

--- --- --- --- --- --- 1.731

Table 4-2e: Contract price minus Federal order minimum price ($/cwt)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 2.133 3.362 1.734 -0.852 -2.452 0.143 R

 4th--- R 1.866 -0.764 -2.811 0.049 R

2001 

1

st

--- --- 1.559 -1.610 -3.314 -0.539 1.553

 2nd--- --- --- -0.668 -1.682 0.531 1.187

 3rd--- --- --- --- -0.961 2.258 3.434

 4th--- --- --- --- --- 2.200 1.867

2002 

1

st

--- --- --- --- --- --- 2.186

R=Restricted data. Data provided by fewer than three parties is considered restricted because

 aggregation of such information may not prevent individual disclosure.

/1 For a detailed description of how average prices are computed, see Appendix D.

/2 Seven Orders refers to the seven Federal orders with participation in the Program during the study

 period—the Central, Mideast, Northeast, Pacific Northwest, Southeast, Upper Midwest, and Western

 orders. 
4-14

Table 4-3: Contract Milk Price Comparisons1/, Upper Midwest Federal Order 

 by Signing and Delivery Quarter Combination

Table 4-3a: Prices received for contract milk ($/cwt, at test)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 14.117 R 13.492 12.930 12.930 R R

 4th--- R R 13.605 13.463 R R

2001 

1

st

--- --- R 12.045 12.039 12.510 R

 2nd--- --- --- 15.467 14.742 14.260 14.400

 3rd--- --- --- --- 14.843 15.199 16.457

 4th--- --- --- --- --- R 13.815

2002 

1

st

--- --- --- --- --- --- R

Table 4-3b: Prices had there been no forward contracts ($/cwt, at test)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 13.164 R 13.174 15.430 17.006 R R

 4th--- R R 15.381 17.458 R R

2001 

1

st

--- --- R 14.413 16.125 13.478 R

 2nd--- --- --- 16.752 17.262 14.458 13.146

 3rd--- --- --- --- 16.394 14.843 15.172

 4th--- --- --- --- --- R 12.816

2002 

1

st

--- --- --- --- --- --- R

Table 4-3c: Federal milk order mini mum prices ($/cwt, at test)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 11.636 R 11.766 13.924 15.481 R R

 4th--- R R 13.864 16.196 R R

2001 

1

st

--- --- R 14.166 15.915 13.340 R

 2nd--- --- --- 15.298 16.099 13.596 12.131

 3rd--- --- --- --- 16.263 13.489 12.257

 4th--- --- --- --- --- R 12.034

2002 

1

st

--- --- --- --- --- --- R
4-15

Table 4-3 Continued: Contract Milk Price Comparisons 1/, Upper Midwest Federal Order 

 by Signing and Delivery Quarter Combination

Table 4-3d: Contract price minus non-contract ($/cwt)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 0.953 R 0.318 -2.499 -4.076 R R

 4th--- R R -1.775 -3.995 R R

2001 

1

st

--- --- R -2.367 -4.086 -0.968 R

 2nd--- --- --- -1.285 -2.519 -0.198 1.254

 3rd--- --- --- --- -1.552 0.356 1.285

 4th--- --- --- --- --- R 0.999

2002 

1

st

--- --- --- --- --- R

Table 4-3e: Contract price minus Federal order minimum price ($/cwt)

Delivery quarter

Signing 

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 2.480 R 1.726 -0.994 -2.552 R R

 4th--- R R -0.258 -2.732 R R

2001 

1

st

--- --- R -2.121 -3.876 -0.830 R

 2nd--- --- --- 0.168 -1.357 0.664 2.268

 3rd--- --- --- --- -1.420 1.710 4.200

 4th--- --- --- --- --- R 1.782

2002 

1

st

--- --- --- --- --- --- R

R=Restricted data. Data provided by fewer than three parties is considered restricted because

 aggregation of such information may not prevent individual disclosure.

/1 For a detailed description of how average prices are computed, see Appendix D.
4-16

Table 4-4: Contract Milk Price Comparisons1/, Six Orders2/ by Signing and Delivery Quarter

 Combination 

Table 4-4a: Prices received for contract milk ($/cwt, at test)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 13.691 R 14.326 13.997 13.740 R ---

 4th--- R R 13.538 13.246 R ---

2001 

1

st

--- --- R 14.366 14.461 14.632 R

 2nd--- --- --- 14.868 14.756 14.912 14.133

 3rd--- --- --- --- 16.201 16.425 15.670

 4th--- --- --- --- --- R 14.403

2002 

1

st

--- --- --- --- --- --- R

Table 4-4b: Prices had there been no forward contracts ($/cwt, at test)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 12.808 R 13.570 15.955 17.417 R ---

 4th--- R R 17.003 17.993 R ---

2001 

1

st

--- --- R 16.755 18.199 15.665 R

 2nd--- --- --- 16.965 17.773 15.109 13.509

 3rd--- --- --- --- 18.831 15.921 14.008

 4th--- --- --- --- --- R 13.310

2002 

1

st

--- --- --- --- --- --- R

Table 4-4c: Federal milk order minimum prices ($/cwt, at test)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 11.928 R 12.589 14.814 16.168 R ---

 4th--- R R 15.119 16.156 R ---

2001 

1

st

--- --- R 14.874 16.312 14.113 R

 2nd--- --- --- 15.693 16.548 14.421 13.025

 3rd--- --- --- --- 16.847 13.885 12.467

 4th--- --- --- --- --- R 12.363

2002 

1

st

--- --- --- --- --- --- R
4-17

Table 4-4 Continued: Contract Milk Price Comparisons 1/, Six Orders2/ by Signing and Delivery

 Quarter Combination

Table 4-4d: Contract price minus non-contract ($/cwt)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 0.883 R 0.756 -1.958 -3.676 R ---

 4th--- R R -3.465 -4.746 R ---

2001 

1

st

--- --- R -2.388 -3.738 -1.033 R

 2nd--- --- --- -2.096 -3.016 -0.197 0.625

 3rd--- --- --- --- -2.631 0.504 1.663

 4th--- --- --- --- --- R 1.093

2002 

1

st

--- --- --- --- --- --- R

Table 4-4e: Contract price minus Federal order minimum price ($/cwt)

Delivery quarter

Signing

quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 1.764 R 1.737 -0.817 -2.427 R ---

 4th--- R R -1.581 -2.910 R ---

2001 

1

st

--- --- R -0.507 -1.851 0.519 R

 2nd--- --- --- -0.825 -1.792 0.491 1.108

 3rd--- --- --- --- -0.646 2.540 3.204

 4th--- --- --- --- --- R 2.040

2002 

1

st

--- --- --- --- --- --- R

R=Restricted data. Data provided by fewer than three parties is considered restricted because

 aggregation of such information may not prevent individual disclosure.

/1 For a detailed description of how average prices were computed, see Appendix D.

/2 Six Orders refers to the six Federal orders with participation in the Program other than the Upper

 Midwest—the Central, Mideast, Northeast, Pacific Northwest, Southeast, and Western orders. 
4-18

Table 4-5: Gross Cash Receipts for Contract Milk in Seven Orders 1/ With Comparisons

Milk volumes

Gross cash receipts before deductions for hauling, 

promotion, and marketing charges2/

Differences in gross cash 

receipts

Year 

and 

Month

Total pooled 

milk of 

Program3/

producers

Contract

Milk

Total pooled 

milk of 

Program 

producers

Contract 

milk

Contract 

milk had 

there been 

no contract

Contract 

milk at 

Federal 

order 

minimum 

prices 

Contract 

minus no 

contract 

Contract 

minus 

Federal 

order 

minimum 

1000s lbs. $1000 

2000

Sept. 58,764.7 46,592.3 8,112.1 6,536.3 6,097.8 5,507.7 438.5 1,028.6

Oct. 65,796.1 51,287.6 9,179.0 7,320.5 6,732.5 5,855.0 588.0 1,465.4

Nov. 67,250.8 53,143.8 9,547.5 7,857.7 6,398.1 5,755.0 1,459.6 2,102.7

Dec. 71,402.2 54,456.4 10,169.0 7,989.4 6,929.5 6,263.7 1,059.9 1,725.7

2001

Jan. 181,713.3 127,384.0 24,785.0 17,845.2 16,381.3 14,847.9 1,463.9 2,997.3

Feb. 180,275.9 126,135.4 24,581.6 17,433.1 16,463.4 14,793.9 969.7 2,639.2

Mar. 212,767.2 144,748.2 29,760.8 20,059.6 20,488.0 18,460.6 -428.4 1,599.0

Apr. 251,424.6 176,840.5 35,149.2 23,994.7 25,719.6 23,566.4 -1,724.8 428.4

May 221,123.1 142,175.4 32,061.8 19,046.5 22,823.6 21,046.5 -3,777.1 -2,000.1

June 230,861.1 151,544.5 34,014.6 20,315.8 25,628.2 23,646.9 -5,312.5 -3,331.1

July 243,640.2 169,016.0 35,434.1 22,617.7 28,909.2 26,681.8 -6,291.5 -4,064.2

Aug. 291,887.9 195,752.7 42,283.0 25,890.8 33,303.0 31,244.5 -7,412.2 -5,353.7

Sept. 290,659.5 205,016.2 43,505.3 28,331.7 36,397.2 34,202.8 -8,065.5 -5,871.1

Oct. 236,533.4 170,891.6 34,946.1 24,004.0 28,447.3 26,489.4 -4,443.3 -2,485.4

Nov. 282,415.6 195,199.0 40,053.1 27,929.3 27,445.3 26,036.3 483.9 1,892.9

Dec. 298,089.6 199,839.9 41,103.3 27,526.7 27,532.3 25,643.0 -5.6 1,883.8

2002

Jan. 150,619.4 86,514.1 21,565.8 12,688.1 12,184.3 11,207.6 503.8 1,480.5

Feb. 103,385.6 74,383.1 15,071.7 11,050.0 10,331.9 9,420.0 718.1 1,630.0

Mar. 161,509.9 100,636.4 22,264.2 14,541.7 12,925.0 12,002.3 1,616.7 2,539.4

Totals 3,600,120.1 2,471,557.3 513,587.0 342,978.7 371,137.4 342,671.3 -28,158.7 307.4

/1 Seven Orders refers to the seven Federal orders with participation in the Program during the study period—

 the Central, Mideast, Northeast, Pacific Northwest, Southeast, Upper Midwest, and Western orders.

/2 For a description of how gross values are computed, see Appendix D. 

/3 Program refers to the Dairy Forward Pricing Pilot Program.
4-19

Table 4-6: Comparison of Chicago Mercantile Exchange (CME) Class III Futures Prices to Federal 

 Order Class III Prices

Table 4-6a: CME average Class III futures prices, weighted by Program1/ pounds 2/

Delivery quarter

Signing 

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 10.992 10.897 10.564 10.631 11.253 --- ---

 4th--- 9.490 9.864 10.118 11.006 11.250 ---

2001 

1

st

--- --- 10.285 11.133 12.241 11.851 11.147

 2nd--- --- --- 13.395 14.158 12.948 11.611

 3rd--- --- --- --- 15.168 13.782 12.018

 4th--- --- --- --- --- 11.562 11.700

2002 

1

st

--- --- --- --- --- --- 11.439

Table 4-6b: Federal Order average Class III prices at 3.5 percent butterfat, weighted by Program 

 Pounds

Delivery quarter

Signing

quarter

2000

3rd

2000

4th

2001

1

st

2001

2

nd

2001

3rd

2001

4th

2002

1st

2000

3

rd 10.753 9.320 10.575 13.575 15.572 --- ---

 4th--- 9.028 10.571 13.281 15.638 12.697 ---

2001 

1

st

--- --- 11.165 13.659 15.653 12.331 11.552

 2nd--- --- --- 14.639 15.674 12.505 11.342

 3rd--- --- --- --- 15.848 12.484 11.384

 4th--- --- --- --- --- 11.585 11.305

2002 

1

st

--- --- --- --- --- --- 10.690
4-20

Table 4-6 Continued: Comparison of Chicago Mercantile Exchange (CME) Class III Futures Prices

 to Federal Order Class III Prices

Table 4-6c: CME Class III futures prices minus Federal order Class III prices

Delivery quarter

Signing 

quarter

2000

3rd

2000

4

th

2001

1

st

2001

2

nd

2001

3rd

2001

4th

2002

1st

2000

3

rd 0.239 1.577 -0.010 -2.944 -4.319 --- ---

 4th--- 0.462 -0.707 -3.163 -4.632 -1.447 ---

2001 

1

st

--- --- -0.881 -2.526 -3.412 -0.480 -0.406

 2nd--- --- --- -1.243 -1.516 0.443 0.269

 3rd--- --- --- --- -0.680 1.298 0.634

 4th--- --- --- --- --- -0.023 0.394

2002 

1

st

--- --- --- --- --- --- 0.749

Source for daily futures settlement prices: The Wisconsin Center for Dairy Research and Department of

 Agricultural and Applied Economics at the University of Wisconsin-Madison,

 http://www.aae.wisc.edu/future/front_futures.htm.

/1 Program refers to Dairy Forward Pricing Pilot Program.

/2 To calculate average CME Class III futures prices for each quarterly signing-delivery combination, we

 first calculate simple averages for each monthly signing-delivery combination using all corresponding

 daily settlement prices. Quarterly signing-delivery combination averages are calculated by weighting

 corresponding monthly combinations by Program contract pounds applicable to each monthly

 combination.

 

/3 To calculate Federal Order average Class III prices at 3.5 percent butterfat, quarterly signing-delivery

 combination averages are calculated by weighting announced Class III prices by Program contract

 pounds applicable to each monthly combination. 
4-21

Table 4-7: Comparison of Program1/ Prices and Non-Contract Prices Protected by Chicago

 Mercantile Exchange (CME) Class III Futures

Table 4-7a - Price received for contract milk, ($/cwt, at test)2/

Delivery quarter

Signing

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 13.911 14.599 14.115 13.788 13.579 -- --

 4th--- R 13.791 13.580 13.368 13.950 --

2001 

1

st

--- --- 14.146 12.780 12.710 12.968 14.025

 2nd--- --- --- 14.963 14.753 14.762 14.151

 3rd--- --- --- --- 15.648 16.008 15.852

 4th--- --- --- --- --- 15.377 14.008

2002 

1

st

--- --- --- --- --- --- 13.657

Table 4-7b: Net price received: Price at test without contract plus futures gain or loss, 

 ($/cwt, at test)3/

Delivery quarter

Signing

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 13.231 14.205 13.460 12.908 13.016 -- --

 4th--- R 12.597 12.838 13.062 13.663 --

2001 

1

st

--- --- 13.531 12.629 13.288 13.471 13.252

 2nd--- --- --- 15.688 16.128 15.402 13.753

 3rd--- --- --- --- 17.159 16.852 14.911

 4th--- --- --- --- --- 13.996 13.372

2002 

1

st

--- --- --- --- --- --- 12.675
4-22

Table 4-7 Continued: Comparison of Program1/ Prices and Non-Contract Prices Protected by

 Chicago Mercantile Exchange (CME) Class III Futures

Table 4-7c: Contract price minus non-contract price adjusted by futures gain or loss, 

 ($/cwt, at test )

Delivery quarter

Signing

Quarter

2000

3

rd

2000

4

th

2001

1

st

2001

2

nd

2001

3

rd

2001

4

th

2002

1

st

2000

3

rd 0.680 0.394 0.655 0.880 0.563 --- ---

 4th--- -R 1.194 0.742 0.305 0.287 ---

2001 

1

st

--- --- 0.615 0.152 -0.577 -0.503 0.773

 2nd--- --- --- -0.725 -1.375 -0.640 0.399

 3rd--- --- --- --- -1.511 -0.844 0.941

 4th--- --- --- --- --- 1.380 0.636

2002 

1

st

--- --- --- --- --- --- 0.982

R=Restricted data. Data provided by fewer than three parties is considered restricted because

 aggregation of such information may not prevent individual disclosure.

/1 Program refers to Dairy Forward Pricing Pilot Program.

/2 Prices in Table 4-7a are the same as prices in Table 4-2a.

/3 Table 4-7b is calculated by adding Table 4-2b and Table 4-6c.

Table 4-8 - Contract Prices Without Premiums or PPDs for April through August 2002 Delivery

 Contracts priced per cwt. based on Class III 

milk price at 3.5% butterfat Contracts based on component prices 2/

2002, 

Month Contracts1/

Average 

contract 

price

Class III 

price at 

3.5% BF

Contract 

price minus 

Class III 

price Contracts1/

Average 

contract 

price at 

3.5% BF

Class III 

price at 

3.5% BF

Contract 

price minus 

Class III 

price

($/cwt) ($/cwt)

April 102 12.36 10.85 1.51 23 12.44 10.85 1.59

May 93 12.35 10.82 1.53 24 12.40 10.82 1.58

June 94 12.40 10.09 2.31 24 12.45 10.09 2.36

July 84 12.54 9.33 3.21 25 12.89 9.33 3.56

Aug. 78 12.47 9.54 2.93 25 12.48 9.54 2.94

Averages 90 12.42 10.13 2.30 24 12.53 10.13 2.41

1/ Contracts signed as of March 2002 for delivery through August 2002.

2/ Component pricing contracts converted to 3.5% BF, 3.1% protein, and 5.9% other solids.
4-23

Figure 4-1: Avg. Prices at Test: Contract Price, Non-contract Price, and 

Federal Order Minimum

$10

$12

$14

$16

$18

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001

Apr. 2001May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

$/cwt.

Contract Price Non-contract Price Federal Order Minimum

Figure 4-2: Comparison of Avg. Contract Prices to Non-contract Prices 

and Federal Order Min.

-$4

-$2

$0

$2

$4

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001

Apr. 2001May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

$/cwt.

Contract Price Minus Non-contract Price Contract Price Minus Federal Order Minimum
4-24

Figure 4-3: Average Prices Received For Contract Milk Per Signing and 

Delivery Quarter

$12

$14

$16

$18

2000 3rd 2000 4th 2001 1st 2001 2nd 2001 3rd 2001 4th 2002 1st

$/cwt.

2000 3rd 2000 4th 2001 1st 2001 2nd 2001 3rd 2001 4th 2002 1st

Signing Quarter

Delivery Quarter

Figure 4-4: Contract Price Minus Non-contract Price Per Signing Quarter 

and Delivery Quarter

-$6

-$4

-$2

$0

$2

2000 3rd 2000 4th 2001 1st 2001 2nd 2001 3rd 2001 4th 2002 1st

$/cwt.

2000 3rd 2000 4th 2001 1st 2001 2nd 2001 3rd 2001 4th 2002 1st

Signing Quarter

Delivery Quarter
4-25

Figure 4-5: Contract Volume and Contract Price Minus Non-Contract 

Price 

0

50

100

150

200

250

Sept. 2000

Oct. 2000

Nov. 2000Dec. 2000

Jan. 2001

Feb. 2001Mar. 2001Apr. 2001

May 2001

June 2001

July 2001

Aug. 2001

Sept. 2001

Oct. 2001

Nov. 2001Dec. 2001

Jan. 2002

Feb. 2002Mar. 2002

millions of pounds

-$6

-$4

-$2

$0

$2

$4

$/cwt.

Contract pounds Contract price minus non-contract price
4-26

Figure 4-6: CME Cheese Activity, Three Month Moving Average, January 1998-March 2002

0

100

200

300

400

500

600

700

800

Jan-98Mar-98May-98Jul-98

Sep-98Nov-98

Jan-99Mar-99May-99Jul-99

Sep-99Nov-99

Jan-00Mar-00May-00Jul-00

Sep-00Nov-00

Jan-01Mar-01May-01Jul-01

Sep-01Nov-01

Jan-02Mar-02

Volume

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

$/pound

Total Cheese Sales Total Cheese Activity

Average Monthly Block Price Average Monthly Barrel Price

Figure 4-7: CME Butter Activity, Three Month Moving Average, January 1998-March 2002

0

50

100

150

200

250

300

350

400

450

500

Jan-98Mar-98May-98Jul-98Sep-98Nov-98Jan-99Mar-99May-99Jul-99Sep-99Nov-99Jan-00Mar-00May-00Jul-00Sep-00Nov-00Jan-01Mar-01May-01Jul-01Sep-01Nov-01Jan-02Mar-02

Volume

0.00

0.30

0.60

0.90

1.20

1.50

1.80

2.10

2.40

2.70

$/Pound

Total Butter Sales Total Butter Activity Average Monthly Butter Price
5-1

Chapter 5

Summary and Observations

This study examines the Dairy Forward Pricing Pilot Program (Program) over the period 

of time from September 2000 through March 2002, a period of nineteen months. 

As measured in terms of reduction in price volatility, the Program has been effective. 

The average monthly price received for contract milk was $14.02, ranging from a low of 

$13.23 to a high of $14.86. The average monthly price of the same milk, had it not been 

under contract, was $14.51, ranging from a low of $12.04 to a high of $17.75. Over the 

study period, the volume of milk marketed under contract was greatest in months when 

contract prices were below non-contract prices.

Contract prices are influenced by forecasts of market conditions at the time contracts are 

signed. In this respect, the behavior pattern is similar to that of the CME Class III futures 

market. Returns to Program participating producers have generally been as good as, if 

not better than, returns to producers from hedging on the futures market. Data for the 

study period, and limited information concerning prices past the study period, indicate 

that prices received for contract milk may be about the same as long-run average noncontract prices for U.S. Grade A milk.

Contracts under the Program have taken many forms. Contracts vary widely in contract 

quantity, duration, length from signing to first delivery, quantifying method, and pricing 

method. In some cases, contracts are very detailed--designed to cover nearly any 

contingency. In other cases, contract terms are vague and leave room for interpretation. 

This sometimes leads to ambiguity concerning whether or not Federal Order minimum 

price requirements have been met for the portion of participant milk not under contract. 

At least one legal action has been brought because of misunderstanding of contract 

provisions. Arbitration hearings have dealt with a dispute between nineteen producers in 

Wisconsin who claim that the contracts they signed with Kraft Foods, Inc. had an escape 

clause.1 It appears important that both parties of a Program contract have professional 

assistance in understanding all provisions. 

Participation in the Program has been small when considered in terms of numbers of 

producers, numbers of handlers, or milk quantities. A total of 1,452 producers and 22 

handlers participated in the program over the study period. On a monthly average basis, 

3.9 percent of eligible producers participated in the program, and 5.7 percent of 

proprietary manufacturing plants participated. Contract milk averaged 5.3 percent of 

pooled milk received from eligible producers per month. Participation by producers 

peaked in April 2001 with 1,141 producers participating, but dropped off sharply in 2002, 

reaching a low point of 137 producers in February 2002. Participation by handlers 

peaked in September and October 2001 with 21 handlers participating. Participation 

 

1

 Article by Mike Ivey, “Dairy Farmers Challenge Kraft Over Pricing Contract,” The Capital Times, 

Madison WI, September 12, 2002. 
5-2

declined to 16 handlers by March 2002. For participating handlers, the average 

percentage of eligible producer milk under contract in markets with participation in 2001 

ranged between 23 and 30 percent. The percentage dropped to less than 15 percent in 

2002. 

During the study period, there was a decrease in the percentage of small producers 

participating in the Program. More than half of the participants marketed less than 

100,000 pounds per month at the start of the study period. The percentage in this smallproducer category had declined to less than 20 percent by the end of the study period. By 

contrast, the percentage of large producers--those marketing more than 1 million pounds 

per month--made up around 3 percent of the total at the beginning of the study period, 

and increased to around 20 percent by 2002. 

Although there has been forward contract activity in seven of the eleven Federal Milk 

Marketing Orders, activity has been concentrated overwhelmingly among cheese 

manufacturers in the north central area of the country. Most of the participating 

producers and handlers pooled milk on the Upper Midwest, Central, and Mideast orders. 

On average about 46 percent of the contract milk has been pooled on the Upper Midwest 

order. Of the total number of producers, 45 percent have farms located in Wisconsin 

while 33 percent have farms located in Minnesota. Although the Central order had fewer 

participating producers than the Upper Midwest, the Central order had the highest 

participation rate among eligible producers in most months. With the exception of the 

four beginning months of the Program, more than half of the participating handlers have 

had milk pooled on the Upper Midwest order.

Our Producer Survey results indicate that participating producers were generally more 

accustomed to using price protection tools than were non-participants. Nearly threefourths of participants indicated that they contracted in order to assure a more stable cash 

flow. Participants were more likely to have more than one potential buyer than nonparticipants, and they were much more aware of handler contract offerings than nonparticipants. Most participants relied on futures markets or their own forecasts to 

evaluate contract prices. Most participants whose contract prices were below their noncontract prices indicated that they would discontinue forward contracting or reduce 

contract volumes. The result is consistent with the reduction in participation for 2002. 

The Plant Survey indicates that many participating plants use the Program contracts in 

combination with other price protection programs for milk, dairy products, and other 

inputs. Plants reported using a variety of strategies to cover contracts with producers. 

Most plants reported that they offered the same contract terms to all producers. Over a 

third of participants indicated that forward contracting had resulted in more long-term 

contracting of dairy products. There were mixed responses concerning the Program’s 

effect on the ability to attract milk for manufacturing purposes. Thirty-eight percent of 

participants indicated that procurement of manufacturing milk had been made easier, 

while the majority of non-participating plants indicated that the Program had no effect on 

their ability to obtain milk. Although some Class I plants indicated that the Program had 
5-3

affected their ability to attract a Class I milk supply, most indicated that the Program had 

no such effect.