Milk Shrinkage in the New California Federal Milk Marketing Order
With the transition coming November 1st, California fluid milk plants need to learn how milk shrinkage is valued in Federal Milk Marketing Orders (FMMO). Shrinkage is the unexplained loss of milk. It happens in all fluid milk plants. It can occur in receiving, processing, packaging, cold room, and in distribution.
The Federal Milk Marketing Orders have specific rules about how shrinkage is calculated and priced. These are different from how the current California state milk rules handle milk shrinkage.
Milk shrinkage is the unexplained difference between the amount of milk received at a dairy plant and the amount of milk sold and used during that month. The milk receipts include the beginning inventory. Ending inventory is included in milk sold and used. Milk shrinkage doesn’t include known milk losses.
The equation for calculating shrinkage is:
(MILK RECEIPTS + BEGIN INVENTORY) – (MILK SOLD AND USED + ENDING INVENTORY) = SHRINKAGE
Shrinkage is calculated first on the total pounds of milk received versus milk used and sold. Then, the shrinkage is calculated on the skim component of the milk and the butterfat component. The division of the shrinkage into the skim and butterfat components is needed for calculating its value.
COST OF SHRINKAGE
Every product made at a dairy plant regulated by a FMMO is assigned to one of four price classes. For example, fluid milk is assigned to Class I.
The starting point for determining the value of shrinkage is the quantity of producer milk receipts for the month. Producer receipts is milk that comes to the plant directly from the farm. For every dairy plant the Market Administrator calculates an amount that is 2% of producer receipts. The calculation is made for the skim portion and the butterfat portion.
If the amount of butterfat shrinkage or skim shrinkage is less than 2% of producer receipts, then it is priced at whatever the lowest Class price is for that month. Many months this is Class IV, but not always.
If either the skim or butterfat component shrinkage is above 2% of producer receipts that component is priced at the highest Class price at that plant. For fluid milk plants the highest Class price is almost always Class I.
If milk is dumped, and the quantity is measurable and the components are testable, then this event is reported to the FMMO as a milk loss. Milk loss is different from than shrinkage because the cause of milk loss is known. Milk loss can be from packaged products or bulk in tanks.
Milk reported as loss is always priced by the FMMO at the lowest Class price for the month.
Shrinkage and milk loss are two similar concepts. Both represent milk that was purchased that is never sold. Successful dairy plants work continuously to minimize milk loss and shrinkage.