Producer Price Differential with the California Federal Milk Marketing Order
A new concept for the California dairy industry is the Producer Price Differential (PPD).
In the Federal Milk Marketing Order system, each month dairy producers receive the value of the three components – butterfat, protein, and other solids. In addition to the component value, dairy producers receive the Producer Price Differential.
The PPD is calculated each month by the FMMO after all the reports of milk receipts and utilization have been received.
First, the FMMO calculates the value of all milk sold and used at all dairy plants that are part of the Federal order pool. The milk utilization is valued at the applicable Class prices announced for that month. The value of all the pooled milk in the FMMO is summed. That is called the “classified value.”
Next, the FMMO calculates the value of all milk received at pool plants during the month at the component values. The components are butterfat, protein, and other solids. The total value of all milk delivered from dairy farms to pool plants is called the “producer value.”
Finally, the producer value is subtracted from the classified value. The difference is divided by the total pounds of mill received at all pool plants during the month. This is the PPD.
The PPD is the method that FMMOs use to distribute the classified value of the milk to all dairy farmers. The PPD goes higher in months where there are more Class I sales. Class I is typically the highest Class price. With more Class I sales there is more money in the classified value total.
The announced PPD is for milk delivered to processing plants in Los Angeles. The location differential for Los Angeles is $2.10. There are five different location differentials for California counties. The PPD is adjusted to the location differential of the county where the receiving plant is located.
For example, the location differential in Tulare county is $1.60 per Cwt. The difference between the location differential in Los Angeles and the location differential in Tulare is $0.50 per Cwt. If the PPD is announced for a month at $0.65 per Cwt. in Los Angeles, $0.50 would be subtracted to get the PPD for milk delivered in Tulare county. The Tulare county PPD would be $0.15 per Cwt.
Dairy producers shipping milk to plans in counties with different location differentials will receive the same values per pound for their components. But they would receive different vales per Cwt. for the PPD because it is adjusted to the location differential where the plant is located.
If the producer value of milk for a month is more than the classified value the PPD will be negative. Negative PPDs are deducted from the component values that a dairy producer receives.