Dairy processing

Vet Clin Food Anim 19 (2003) 295–317

Dairy processing Kenneth W. Bailey, PhD The Pennsylvania State University, 210-A Armsby Building, University Park, PA 16802, USA

The demand for milk and dairy products in the United States has grown significantly over time. Although fluid consumption has remained steady over time, demand for manufactured dairy products, particularly cheese, has grown steadily. In fact, much of the growth in demand for dairy products has grown parallel with growth in the fast food industry. Cheese (Italian and American cheddar styles of cheese) has been the engine of growth in demand. The growth in milk production in the United States over the past 20 years would not have been possible without strong growth in cheese consumption.

How milk is used The two major uses for milk in the United States are for fluid purposes and for manufacturing or processing purposes. A more exact answer is difficult to give because milk is made up of many components and can be used to make hundreds of products. Milk consists of water, milk fat, and other solids [1]. Cow’s milk in the United States, on average, contains 87.4% water and 12.6% milk solids. Those milk solids consist of milk fat (3.7%) and other, nonfat solids (8.9%). The latter is mainly composed of protein, lactose, and minerals. All of these milk components are used to manufacture various dairy products. When fluid milk is processed, it is first separated into cream and skim milk. It is then recombined into various proportions to bottle fluid milk (skim, low fat, whole milk). Because more and more milk is processed into lower fat milk products, excess milk fat is often available after milk is bottled. Thus, one cannot say that it takes 100 gal of raw milk at 3.7% milk fat to package 50 gal of whole milk and 50 gal of low-fat and skim milk. Some butterfat will be left over in this process. E-mail address: [email protected] 0749-0720/03/$ - see front matter Ó 2003 Elsevier Inc. All rights reserved. doi:10.1016/S0749-0720(03)00026-4

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The US Department of Agriculture (USDA) National Agricultural Statistics Service (NASS) employs a milk equivalent conversion process to compute how milk is used in the United States. It is a rough measure of how milk fat is allocated throughout the dairy industry. The data for 2001 (Table 1) indicate that roughly 33.2% of all milk is used for fluid milk purposes (bottled milk and cream products) and 60.4% is used for manufactured dairy products (the balance is either waste or is unaccounted for). Of all the milk used for manufacturing, the majority is used to process cheese. In 2001, 36.8% of all milk was used in the production of American cheese and other cheese (mainly mozzarella). Thus, more milk is used to make cheese than is bottled for fluid consumption. Between 1975 and 2001, the milk supply in the United States grew 43%, or 1.6%/y (Table 2). Over this same time period, milk used for fluid purposes grew only 7%, or an average of 0.3%/y. Thus, dairy producers consistently produced more milk than the fluid market would support. The remaining balance of milk was processed into storable dairy products. American cheese and other cheese production grew 113% and 298% between 1975 and 2001, respectively. Thus, cheese production grew at a faster rate than milk production. Nonfat dry milk and butter production grew at a rate more closely related to that of milk. Most of the growth in the milk supply was funneled into cheese production, an area of market growth. The growth in cheese consumption in the United States relative to flat demand for fluid milk has strong implications for the United States processing industry. The growing demand for cheese by food service companies and food processors has been a strong market for a growing supply of milk. Cheese has been an integral part of the growth in the United States fast food industry. Table 1 Milk supply and utilization on a milk fat basis, 2001 Utilization Manufactured products Creamery butter Cheese American Other Total cheese Ice cream and frozen desserts Other (canned milk products) Total manufactured products

(Million lb)

%

22,150

13.3

35,128 25,960 61,088 14,744 2,329 100,311

21.2 15.6 36.8 8.9 1.4 60.4

55,097

33.2

Used on the farm

1,264

0.8

Residual

9,352

5.6

166,024

100.0

Fluid milk products

Total utilization/supply

Data from US Department of Agriculture, National Agricultural Statistics Service. Dairy products 2001 summary. Da Z-1(02)a. Washington, DC: USDA; April 2002.

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K.W. Bailey / Vet Clin Food Anim 19 (2003) 295–317 Table 2 Trends in dairy product production, 1975–2001 Cheese production

Year

Milk production

Fluid milk consumption

American

Other

Total

Nonfat dry milk

Butter

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

115,398 120,180 122,654 121,461 123,350 128,406 132,770 135,505 139,588 135,351 143,012 143,124 142,709 145,152 144,239 148,319 148,535 151,647 150,636 153,602 155,292 154,259 156,091 157,348 162,771 167,658 165,336

51,500 51,500 51,400 51,200 51,400 50,900 50,200 49,300 49,700 50,600 52,000 52,600 55,387 55,016 55,169 55,431 55,955 55,644 55,329 55,643 55,217 55,797 55,386 55,176 55,675 55,496 55,102

1655 2049 2043 2074 2190 2375 2642 2752 2928 2648 2855 2798 2717 2757 2674 2894 2769 2937 2957 2974 3131 3281 3286 3315 3568 3642 3519

1157 1271 1316 1446 1527 1609 1635 1789 1891 2025 2226 2411 2628 2815 2941 3167 3286 3552 3571 3760 3785 3937 4045 4178 4362 4621 4605

2811 3320 3359 3520 3717 3983 4277 4542 4819 4674 5081 5209 5344 5572 5615 6061 6055 6488 6528 6735 6917 7217 7330 7492 7929 8262 8124

1001 926 1107 920 909 1161 1314 1401 1500 1161 1390 1284 1057 980 875 879 878 872 954 1231 1233 1062 1218 1135 1360 1452 1414

984 979 1086 994 985 1145 1228 1257 1299 1103 1248 1202 1104 1208 1295 1302 1336 1365 1315 1296 1264 1174 1151 1168 1277 1256 1237

Percent change 2001–1997 Average percent change per year

43

7

113

298

189

41

26

1.6

0.3

4.2

11.0

7.0

1.5

1.0

Values are in million pounds. Data from US Department at Agriculture, Economic Research Service, Livestock, Dairy & Poultry Outlook. Washington, DC.

In 2002, however, growth in cheese consumption stalled. More specifically, American cheese consumption grew only 0.9 and consumption of other cheese types grew only 3.7% [2]. In addition, the United States milk supply grew 2.6%, whereas fluid milk consumption grew 0.7%. The class III price fell 20.5% in 2002 from the year before to $10.42 per hundred weight (cwt) largely because there was not sufficient growth in cheese sales. Structure of milk marketing The market structure of milk marketing from farm to retail customer has been undergoing significant change in recent years. This change is

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characterized by consolidation of farmer cooperatives, proprietary processors, and retail grocery store chains. In addition, more dairy products are flowing from processor directly to retail grocery stores, with less product marketed through ‘‘middlemen.’’ Milk is collected off the farm by way of cooperatives or directly by proprietary processors. Over 80% of all milk is marketed through cooperatives [3]. According to the USDA Rural Business Cooperative Service, the percentage of milk marketed in the United States that was handled by cooperatives rose from 48% in the mid-1930s to 83% in 1997 [4]. The proportion of milk sold by way of cooperatives rather than through ‘‘independents’’ or noncooperative marketing channels has remained fairly stable over the past decade. Cooperatives have remained a significant part of the dairy industry because of the services they provide to their farm member owners and to their customers. Cooperatives often provide on-farm inspection services, arrange to have the milk picked up and delivered to processing plants, and manufacture and process many dairy products. Cooperatives also testify on behalf of their members at federal order hearings and provide members with market analysis and price information. Some proprietary dairy processors, however, also pick up their own milk supplies directly from independent milk producers. Some of these firms actually do both; that is, procuring some of their own milk while purchasing the remainder from dairy cooperatives. Farm milk is delivered to a processing plant where it is tested before it is loaded into a milk silo. This testing ensures that the milk meets quality standards set by the US Government under the Pasteurized Milk Ordinance. Milk is then processed into fluid milk products or manufactured into storable dairy products such as cheese, butter, nonfat dry milk, and so forth. In many cases, the dairy processor directly markets its products to a food retailer such as a supermarket or grocery store. In that case, there is no middleman. In other cases, processed dairy products are sold through a middleman to food service outlets such as institutions (prisons, schools, military) and restaurants. The ‘‘supply chain’’ follows milk from the farm all the way to retail consumers (Fig. 1). Prices are used to help direct resources at the farm level and to efficiently allocate milk to alternative dairy products that reach the consumer. Farmers expand milk production when they receive price signals to do so (high milk prices), and decrease production when prices fall. Likewise, processors allocate milk to its highest and best use. Some milk is allocated to fluid purposes because it is a highly perishable product with a short shelf life. Milk is then allocated to alternative manufactured products depending on the relative profitability among alternative uses. Thus, if demand for cheese is strong, more milk will be allocated to cheese production. Regulations are employed throughout the supply chain to enforce quality standards and to help determine farm-gate and wholesale milk prices. These

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Fig. 1. Supply and demand chain for the United States dairy industry.

regulations include farm inspections, plant inspections, and federal and state milk marketing orders that enforce minimum milk prices. It is clear from Fig. 1 that the product flows from the milk producer to the end consumer along the supply chain. Market information, however, flows from the consumer back through processors and retailers to the milk producer along the ‘‘demand chain.’’ Consumer demand for innovative and higher quality dairy products is signaled directly to the retailer. Many large supermarkets use ‘‘shopper cards’’ to track individual consumption patterns. They use this information to stock inventory for their stores. In this way, they signal to processors what types of foods they wish to purchase, and at what prices. Concerned citizens also transmit information through the demand chain back to dairy producers. These citizens are not so much concerned about the type of foods they purchase but how these products were produced at the farm and processed. For example, some consumers want to know whether their milk came from cows that were grazed in open fields or they may request milk that is produced and processed under organic standards. The technology now exists to track livestock from calves to slaughter and to track meat and milk from the processor/packer all the way to retail outlets. The question is whether consumers are willing to pay for this additional

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expense to have the ability to know how their dairy products are produced and processed.

Trends in consumption There are two ways to analyze trends in consumption of dairy products. The first is to look at total consumption by product over a period of time. For example, total beverage milk consumption is analyzed in Table 3 over the period 1975 to 2001. An alternative way to analyze consumption patterns over time is to compute consumption on a per capita basis (total consumption divided by the domestic population). The latter method essentially neutralizes the impact of changes in population over time on consumption data. Fluid milk consumption in the United States has remained relatively constant over the past few decades. Table 3 reveals that during the period 1975 to 2001, total beverage consumption in the United States rose only 1.4%. A closer examination of the data reveals that whole milk consumption declined significantly over this time period. Plain and flavored whole milk has seen significant reductions in consumption. Lower fat dairy products, however, including skim milk, have seen much more dramatic increases in consumption. Skim milk, for example, grew 232% during the period 1975 to 2001 and lower fat milk consumption grew 106%. This growth in lower fat fluid milk products, however, only offset the gradual decline in whole milk consumption. There are many reasons postulated as to why fluid milk consumption has not grown over time. One observation is that milk is no longer consumed at breakfast time. In fact, cereal consumption has weakened dramatically in recent years. Children do not take the time to sit down and have a nutritious meal before going to school. Another reason for the decline is that beverage milk has not competed well in the beverage category. Consumption of soda, fruit juices, and bottled water has taken ‘‘stomach share’’ away from the fluid milk industry. Part of this could be the archaic packaging still used in fluid milk products (ie, the milk carton). A final reason could be that consumers today are less likely to choose food products based solely on their nutritional qualities. Consumers are much more interested in indulging in their wants and needs; thus, it is not sufficient for milk to just be nutritionally superior to other beverage products. Although overall consumption for fluid milk products has been level over time, it has actually declined after growth in the United States population is accounted for. Per capita consumption of fluid milk and dairy products is presented in Table 4. Table 4 indicates that consumption of fluid milk and cream products has declined from 261 lb per person in 1975 to 210 lb by 2000, a decline of 19.5%. Cheese consumption, however, has increased over time. American cheese consumption had increased from 8.4 lb in 1975 to

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K.W. Bailey / Vet Clin Food Anim 19 (2003) 295–317 Table 3 Fluid milk sales by producta, 1975–2001

Year

Whole milk

Lower fat milk

Skim milk

Flavored whole milk

Other flavored milk

Butter milk

Total beverage milk

Whole milkb (%)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

36,188 35,241 34,036 33,235 32,480 31,253 30,397 29,350 28,871 28,204 27,760 26,446 25,644 24,691 22,823 21,333 20,769 20,196 19,460 19,223 18,662 18,698 18,413 18,147 18,467 18,448 18,007

11,468 12,431 13,426 14,250 15,043 15,918 16,662 17,038 17,638 18,525 19,812 21,156 21,390 22,214 23,744 24,509 25,039 25,225 24,825 24,735 24,202 24,011 23,709 23,446 23,571 23,649 23,630

2480 2524 2617 2543 2604 2636 2583 2449 2474 2726 3009 3236 3406 3979 5006 5702 6000 6357 6844 7414 8359 8871 9139 9203 8985 8435 8225

1366 1475 1446 1359 1236 1075 843 710 749 907 882 851 830 816 770 691 672 689 690 702 704 662 676 788 877 892 973

719 864 1062 1097 1129 1197 1288 1283 1374 1409 1430 1516 1608 1630 1611 1657 1719 1745 1776 1842 1914 2075 2154 2256 2339 2444 2553

1011 1021 1007 983 939 927 926 950 1006 1020 1046 1017 1040 1006 910 879 855 808 780 760 739 711 691 676 668 622 592

53,232 53,556 53,594 53,467 53,431 53,006 52,699 51,780 52,112 52,791 53,939 54,222 53,918 54,336 54,864 54,771 55,054 55,020 54,375 54,676 54,580 55,028 54,782 54,516 54,907 54,490 53,980

70.5 68.6 66.2 64.7 63.1 61.0 59.3 58.1 56.8 55.1 53.1 50.3 49.1 46.9 43.0 40.2 38.9 38.0 37.1 36.4 35.5 35.2 34.8 34.7 35.2 35.5 35.2

Percent change 1975–2001


50.2

106.1

231.7


28.8

255.1


41.4

1.4

a

Values are in million pounds. Includes plain and flavored whole milk as a percentage of total beverage milk. Data from US Department of Agriculture, Economic Research Service. Livestock, dairy and poultry outlook. LDP-M-96, p. 36. Washington, DC: USDA; June 25, 2002. b

12.7 lb in 2000, an increase of 51.2%. Other cheese consumption, which consists mainly of mozzarella cheese, has increase even more, rising 182% over the same time period to 17.2 lb by 2000. Much of the increase in cheese consumption occurred during a time period of expanding demand from consumers for fast food, including pizza. The pizza craze has resulted in most of the growth in mozzarella cheese demand. This demand is followed by American cheese, which is used on everything including hamburgers, tacos, and other fast foods. American cheese is shredded, sliced, and cut and wrapped for final sale to food service or retail.

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Table 4 Per capita consumption of dairy productsa, 1975–2000

Year

Fluid milk and cream

Butter

American

Other

Cottage

Ice creamb

All products: milk-equivalent milk fat basis

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

261 260 258 254 251 246 242 236 236 238 241 240 239 235 236 233 232 229 224 224 221 220 217 214 214 210

4.7 4.3 4.3 4.4 4.5 4.5 4.2 4.4 4.9 4.9 4.9 4.6 4.7 4.5 4.4 4.4 4.3 4.3 4.6 4.8 4.5 4.3 4.1 4.4 4.7 4.6

8.4 9.0 9.3 9.6 9.6 9.6 10.2 11.3 11.6 11.9 12.2 12.1 12.4 11.5 11.0 11.1 11.0 11.3 11.3 11.4 11.7 11.8 11.8 11.9 12.6 12.7

6.1 6.7 6.8 7.4 7.6 7.9 8.0 8.6 8.9 9.6 10.4 11.0 11.7 12.2 12.8 13.5 13.9 14.6 14.7 15.1 15.2 15.5 15.7 15.9 16.4 17.2

3.9 3.7 3.2 3.1 3.0 2.8 2.9 2.7 2.7 2.4 2.2 2.2 2.2 2.1 2.0 2.2 2.1 2.1 1.9 1.8 1.5 1.5 1.7 1.4 1.5 1.3

18.5 17.9 17.5 17.4 17.1 17.5 17.4 17.6 18.1 18.2 18.1 18.4 18.4 17.3 16.1 15.8 16.2 16.2 16.0 16.0 15.5 15.6 16.1 16.3 16.7 16.7

539 540 540 544 548 543 541 555 573 582 594 592 601 583 564 568 564 563 570 580 577 566 568 570 585 593

Cheese

a

Values are in pounds. Does not include ice milk, sherbet, and other frozen dairy products. Data from US Department of Agriculture, Economic Research Service. Livestock, dairy and poultry outlook. LDP-M-91, p. 30. Washington, DC: USDA; January 16, 2002. b

It is also used in the manufacture of processed cheese, which is used commonly on hamburgers. No other dairy product matches the historical growth rate of cheese consumption. Butter consumption has fluctuated over time between 4.1 to 4.7 lb per capita. Butter consumption declined significantly in the 1950s and 1960s due to health claims that margarine was more healthful. In recent years, however, concerns over trans fatty acids in margarine negated those health claims. At the same time, Americans’ interest in gourmet cooking and fine taste increased demand for butter. That said, butter consumption has been fairly stable. The same is true for ice cream. Concerns over the high fat content of ice cream may have contributed to the decline in per capita ice cream consumption from 18.5 lb in 1975 to 16.7 lb in 2000. The high-fat premium ice cream category, however, has seen significant increases in recent

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years, in effect slowing down the rate of decline in the overall ice cream category. It may be that ice cream consumption has been substituted by other dessert items and that this reduction has nothing to do with health concerns. In summary, it is not clear whether American perception of dairy products as high-fat products has anything to do with actual consumption. Cheese is a high-fat product, yet consumption has increased over time. At the same time, whole milk, a high-fat dairy product, has seen consumption decline over time. It is very likely that Americans are simply interested more in taste, convenience, and satisfaction when considering consumption choices than in health or nutrition concerns. Milk pricing in the United States Milk price formation in the United States is very complex. At first glance, the uninformed reader may decide this complexity is due to the involvement of the US Government in price formation. In reality, governmental pricing policy has evolved over time to meet the needs of the dairy industry. Milk pricing is complex because (1) milk contains many components that have their own market value, (2) milk is highly perishable, and (3) processors purchase components and manufacture numerous dairy products. Milk pricing today is determined by the interaction of governmental policies and market forces. Prices for dairy commodities (cheese, butter, nonfat dry milk, dry whey) are derived from bids and offers in several markets in the United States. For example, block and barrel American cheese prices are determined daily at the Chicago Mercantile Exchange. Those prices determine cheese prices around the country. Likewise, grade AA butter trades three times a week at the Chicago Mercantile Exchange. The prices for these dairy commodities are reported daily, weekly, and monthly by the USDA Agricultural Marketing Service (www.ams.usda.gov). The US Government is involved in milk prices in four ways. First, it sets production, processing, and transportation standards. Second, the USDA operates the Dairy Price Support Program (DPSP) that essentially puts a floor under the wholesale value of cheese (blocks and barrels), butter, and nonfat dry milk. Third, the USDA manages federal milk marketing orders. These orders set minimum prices for alternative uses for milk in set geographic regions. Currently there are 11 federal orders. There are four classes of milk, depending on how milk is used in the order. The prices for these classes are determined through a hearing process and are a function of the dairy commodity prices. Fourth, the US Government is a signatory to the Uruguay Round of the World Trade Organization. As such, it has agreed to tariff rate quotas that essentially quantify market access of other countries. Thus, both market forces and governmental policies determine farm-gate milk prices. Market supply and demand determine the wholesale values for cheese, butter, nonfat dry milk, and whey. If supply is short and demand is strong, market prices will rise. The opposite is also true. The DPSP only

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becomes involved when market prices are weak. The DPSP thus provides a floor for these commodity prices. If cheese, for example, is ‘‘long’’ (ie, a large amount of cheese relative to demand), then cheese processors will offer cheese for sale to the USDA under the DPSP and receive the cheese support price. This process effectively prevents cheese prices at the Chicago Mercantile Exchange from falling significantly below support price levels. The farm-gate price of milk is thus a combination of the four federal order prices for producers that market milk in a federal milk marketing order. Fluid milk processors in the Northeast Federal Order 1 (a geographic area from the Maine border to Washington, DC) are required to pay at least the class I price of milk. That price, in turn, is determined by a formula that is a function of dairy commodity prices. Ice cream and yogurt processors must pay at least the class II price for milk. Cheese processors must pay the class III price, and butter and nonfat dry milk processors must pay the class IV price. The Market Administrator, an agent of the USDA, announces the federal order class prices each month, enforces minimum pricing by auditing the books of these processors each month, and ‘‘pools’’ all four federal order prices each month based on milk use in the entire federal order and determines one producer pay price. Thus, dairy producers in the order receive a pooled or blend price based on four milk prices and actual milk use in the order. Recent changes in dairy policy Governmental involvement in milk pricing has evolved over time. The number of federal milk marketing orders has been reduced from over 60 orders to 11 orders in 2000 as transportation systems improved and processors and dairy cooperatives consolidated. Also, milk pricing is now based on milk components. The commodity prices for butter, nonfat dry milk, cheese, and whey determine component prices for butterfat, protein, and other solids based on agreed-on formulas. The formulas are used because there are no markets where pure protein or butterfat is traded. Instead, their value is inferred from these formulas that are based on wholesale commodity markets. The components are then used to determine the four class prices used in federal milk marketing orders. This transition to component-based pricing was a major evolution in governmental involvement in milk pricing and was based on industry demand to price milk according to market demand. In other words, the market buys and sells dairy components. This method makes sense because milk is 87% water, the component levels in milk change from farm to farm and from season to season, the market value of components are not the same from month to month, and processors only want to pay for what they use to make dairy products. For half a century, milk in the United States was priced according to the Forker-Hardin plan that paid producers according to volume and the fat content in milk [5]. This pricing system rewards producers for the fat content in milk and does not encourage production of protein and other solids that

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are valued by the marketplace. Coggins and Hammond [6] and Perrin [7] note that alternative pricing plans (called multiple component pricing plans) have the potential to transmit consumer preferences for dairy components directly to producers. Such a pricing system will pay farmers for the pounds of protein, butterfat, and other solids they provide to the marketplace at specific levels of quality. The Federal Agriculture Improvement and Reform Act of 1996 required that federal milk marketing orders be consolidated to between 10 and 14 orders [8]. It also instructed the Secretary of Agriculture to consider alternative methods for pricing fluid milk and employing multiple component pricing plans in valuing milk. The Secretary responded to the task of federal order reform. These reforms were later adopted on January 1, 2000. The principal changes were (1) consolidation of the number of federal orders from 31 to 11, (2) replacement of the former basic formula price (value for manufacturing milk) with a multiple component pricing system based on yields and ‘‘make allowances,’’ and (3) adoption of a new formula for determining class I fluid milk prices based on the higher of class III or IV skim milk prices [9]. Under order reform, 7 of 11 federal orders use multiple component pricing plans (Fig. 2). The other orders were mainly fluid milk orders. They continued to pay farmers on the basis of fat and nonfat solids in milk. The major change that began with order reform was to move away from a system that paid all farmers a similar price to a more competitive system that rewarded producers for the components and quality of their milk. The former Forker-Hardin plan focused on sharing the higher revenues from fluid milk sales with the lower revenues from balancing needs (manufacturing). The new system recognizes that milk is not uniform from farm to farm and thus provides an economic incentive for farmers to produce what the market wants. This system pays farmers a price for the pounds of butterfat, protein, and other solids they deliver. In four of the seven federal orders that have a multiple component pricing plan, there are also quality incentives to encourage dairy farmers to lower their somatic cell counts. The inevitable result of this decision, however, is that some farms will receive a much higher milk price than others. The Farm Security and Rural Investment Act of 2002 was signed into law on May 13, 2002. It is a 6-year farm bill that will extend the life of the DPSP, and contains a new counter-cyclical payment program that targets support payments to smaller dairy producers [10]. Under the previous farm bill, the DPSP was set to expire May 31, 2002. The new 2002 Farm Bill extends this deadline to December 31, 2007. The program continues to extend the support price at $9.90/cwt for milk testing 3.67% butterfat. That support price is then translated into Commodity Credit Corporation (CCC) purchase prices for butter, nonfat dry milk, and cheese. The Secretary of Agriculture also continues to have authority to adjust the relative support price of butter and nonfat dry milk—the so-called ‘‘butter-powder tilt.’’ On November 15, 2002, the USDA announced a new

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Fig. 2. Consolidated milk marketing regions under federal order reform.

butter-powder tilt: ‘‘To bring better balance to the market for butter and nonfat dry milk, CCC will increase the price it pays for butter 19.52 cents to $1.05 per pound, and decrease its purchase price of nonfat dry milk 10 cents to $0.80 per pound’’ [11]. The 2002 Farm Bill also created a new counter-cyclical payment program for dairy farmers: the Milk Income Loss Contract (MILC) program. This program pays dairy producers a subsidy each month on the first 2.4 million pounds of milk they market each fiscal year. This is the amount of milk from a farm with 133 cows producing 18,000 lb of milk per cow. The monthly payment rate is equal to 45% of the positive difference between $16.94/cwt and the announced federal order class I price from Boston, Massachusetts. This new subsidy program was a political compromise in the 2002 Farm Bill debate that focused on whether to extend and expand the Northeast Interstate Dairy Compact. The MILC program basically places a floor on 45% of a producer’s milk revenue up to 2.4 million pounds of milk. This program is set to expire on September 30, 2005. The creation of a new dairy subsidy raises a number of interesting questions. First, will this program result in an expansion in the United States milk supply? Second, is it equitable to provide a financial subsidy to one group of farmers and a much lower subsidy to others? Third, will the US Government be able to afford to continue this subsidy program after it expires? United States dairy policy has been haltingly moving toward a marketbased program. With the exception of the MILC program and the DPSP, the milk price is based on supply and demand factors. This experiment in reducing the support price of milk overtime and allowing the market to take over has resulted in retail milk prices that have risen at a rate lower than the

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overall rate of inflation. Thus, one should expect an even greater emphasis on a market orientation for dairy policy, which means farm numbers will continue to consolidate, the support price will eventually be lowered to allow the market to set the price of dairy commodities, and subsidy programs like the MILC program will disappear. These disciplines will be enforced by the upcoming Doha Round of the World Trade Organization and a looming United States budget deficit.

Risk management for milk prices Volatility in dairy commodity prices for cheese and butter and for farmgate milk prices has presented new challenges to the United States dairy industry. How does an ice cream processor or a food service company that purchases large quantities of butter budget their dairy ingredient costs 6 months in the future? Also, how does a dairy farmer budget feed purchases and labor costs when milk prices can fall well below production costs for months at a time? Dairy futures markets have evolved over time to meet these needs. At present, the Chicago Mercantile Exchange offers dairy futures contracts for butter and nonfat dry milk, as well as class III and IV milk. By far the most popular futures contract is the class III contract. The trading unit is 200,000 lb of milk and is offered monthly for 18 consecutive months in the future. It trades daily at the Chicago Mercantile Exchange from 9:40 AM central standard time until as late as 1:10 PM. At present, there are 2500 to 4000 contracts per month outstanding. Each contract represents a buyer and a seller of the contract (ie, a farmer and a processor). These contracts represent roughly 3.5% to 5.6% of the United States milk supply.1 There are presently two ways that dairy producers can protect or ‘‘forward price’’ their milk. First, they can hire a broker and ‘‘hedge’’ milk using a Chicago Mercantile Exchange class III or IV contract. Hedging requires them to hire a broker and set up a margin account. The other way dairy producers forward price milk is by way of their dairy cooperative. The farmer agrees to a price for a certain quantity of milk delivered in the future. The cooperative charges some minimum fee to do this (often 10–15 cents per cwt under the Chicago Mercantile Exchange prices). In exchange, the cooperative hires the broker and manages the margin accounts. Although interest has grown in recent years, many dairy farmers do not participate in forward pricing their milk. There has been low participation in the USDA Dairy Option Pilot Program as well. Many farmers complain that locking in milk prices may result in receiving a price that is below the

1 Assuming each contract is equal to 200,000 lb of milk and a United States milk supply of 170 billion pounds.

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cash market. Of course the opposite is also true: farmers could lock in a price that turns out to be well above the cash market. The Consolidated Appropriations Act of 2000 provided the USDA with the authority to implement the Dairy Forward Pricing Pilot Program through December 31, 2004. The program allows proprietary processors (noncooperatives) regulated under federal orders to contract for future deliveries of milk from dairy farmers or their cooperatives at prices exempt from minimum pricing under federal orders. Before this law, a proprietary cheese company could not contract with a farmer to deliver milk at some fixed price because the federal order requires the firm to pay farmers at least the announced class III price for milk. If they contracted for milk, for example, at $11/cwt with the farmer and the announced price turned out to be $13/cwt, the proprietary processor would be required under federal order rules to pay the farmer the higher market price. The USDA studied the impact of the Dairy Forward Pricing Pilot Program during the 19-month period from September 2000 to March 2002 [12]. It concluded that although the program reduced volatility for dairy farmers, farmers realized a lower market price. The average contract price during the period of study was $14.02/cwt compared with a market price (noncontracted price) of $14.51/cwt. If one assumes that the United States dairy industry is not going to move toward greater protectionism and more market control, then learning to use forward contracting programs and hedging will be a very useful tool for dairy farmers, dairy processors, and dairy ingredient buyers. Many businesses in the United States face volatile prices for their products or for their inputs. Many use the futures market to deal with this risk. Dairy farmers will have to learn to use these tools along with budgeting and planning to stabilize their earnings and equity growth over time.

Formula pricing One of the major changes in federal order reform was the use of formula pricing. Before order reform, federal order milk prices were based, in large part, on a major survey of unregulated manufacturing milk plants in Minnesota and Wisconsin. This dwindling milk supply was ‘‘grade B’’ milk and, as such, was unregulated, which compares to federal order ‘‘Grade A’’ milk which is regulated. Grade B in Minnesota and Wisconsin represented a market-based value for milk used for manufacturing. This use of a survey was called into question in recent years because the supply of grade B milk dwindled relative to the grade A milk supply. According to Cropp and Jesse [13], the grade B milk supply in Minnesota and Wisconsin fell from 68% of the total milk supply in these two states in 1961 to 11% in 1993. This decrease in the grade B milk supply required a different approach to pricing milk in the United States.

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The USDA opted to replace the Minnesota and Wisconsin formula price, known as the M-W, with a formula that derives component values for butterfat, protein, and other solids from market values for finished dairy products. This approach is similar to the formulas used by California’s state milk marketing order. For example, component value for butterfat is derived each month by market administrators using the following formula: Butterfat price ¼ ðNASS AA butter survey price
0:115Þ=0:82 where the NASS AA butter survey price, conducted weekly by the NASS, represents a national survey. NASS also surveys plant prices for natural unaged cheddar cheese in 40-lb blocks and 500-lb barrels, grade AA butter, USDA extra grade edible nonhygroscopic dry whey, and USDA extra grade and grade A nonfortified nonfat dry milk. These survey prices are published weekly by the USDA. The survey prices are then transformed into component values by way of economic formulas that make use of a manufacturing (make) allowance and a yield factor. In the previous equation, $0.115 is the cost of manufacturing a pound of butter, and 0.82 is the yield formula. Basically, the yield formula recognizes that packaged grade AA butter contains about 82% butterfat. There are similar formulas that use survey prices for finished dairy products (cheese, butter, nonfat dry milk, and dry whey) to compute component values for butterfat, protein, and other solids. These formulas for component values basically determine what a processor pays dairy farmers for butterfat, protein, and other solids in relation to wholesale finished product prices. By using a make allowance and a yield factor, they basically lock in a gross margin for the processor. Thus, the levels for these yield factors and make allowances have become a subject of contention at federal order hearings held periodically to evaluate these pricing formulas. As an example, the USDA announced dairy product price averages for February 2003 based on four NASS weekly surveys. The prices were as follows: butter, $1.0476/lb; nonfat dry milk, $0.8111/lb; cheese, $1.1299/lb; and dry whey, $0.1632/lb. The cheese survey price is an average of both block and barrel cheese. The wholesale commodity prices were then combined with economic formulas to compute the following component values: butterfat, $1.1373/lb; protein, $1.8538/lb; and other solids, $0.0240/lb. These monthly component values were then used compute class II, III, and IV federal order prices.2 More specifically, the component prices

2 The class I price of milk used for fluid purposes is computed using advanced pricing factors that are based on a 2-week NASS survey.

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determine skim and butterfat prices that are combined using the following formula to produce uniform prices at standard component levels: Class price at 3:5% butterfat ¼ class skim milk price  0:965 þ butterfat price  3:5 The class skim milk price is reported on a dollars per hundred-pound basis, whereas the butterfat price is reported on a dollars per pound basis. Using the previously supplied data and economic formulas, the classified prices for February 2003 were reported as follows at 3.5% butterfat: class II, $10.66/cwt; class III, $9.66/cwt; and class IV, $9.81/cwt. Again, each of these class prices is based on a separate skim and butterfat price. The class III and IV prices share a common butterfat price. For more detail and a review of federal order reform formula pricing, see Bailey and Tozer [14]. For a current update on federal order component and classified pricing formulas, see Jesse et al [15].

Farm-to-retail price spreads As explained earlier, there are three markets for milk and dairy products: the farm market for raw milk, the wholesale market for finished dairy products, and the retail market. Each market is linked and related, but each determines its own prices. For example, the farm price of milk as described earlier is a function of market forces and governmental involvement. The minimum price that a processor pays for milk is determined by the federal order (or a state order) and the wholesale value of the finished dairy product (ie, cheese) as determined by the wholesale market. Thus, the processor earns a profit on the difference between the wholesale value of the finished dairy product and the ingredient cost of the milk components, less processing and other costs. Retailers then purchase the cheese or other dairy products from the processors at the wholesale prices and are free to market up their products to whatever retail price they determine is sufficient, given market conditions. Clearly, there is a linkage in the market prices from the farm to the processor and to the retailer. If the milk supply is curtailed and market demand for butter, for instance, increases, then the wholesale value of dairy commodities will increase. For example, in 2001, the milk supply fell 1.4% and grade AA butter prices rose from $1.18/lb in 2000 to an average of $1.66/ lb in 2001. Given the federal order formulas that reflect dairy commodity prices, processors will pay more for milk components used to manufacture these products. Thus, the federal order formulas allow processors to remain profitable when commodity markets are fluctuating. The higher wholesale cost of dairy commodities is then passed on to the retail or foodservice purchaser who has no choice but to pay this higher cost. The retail grocery

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store, for example, will then ‘‘mark up’’ the packaged dairy commodity from the wholesale price. The retail markup should reflect the costs of the retail store such as labor, store costs (ie, rent or building and maintenance costs), and so forth, plus store profits. The retail store, however, cannot set a retail price that consumers are unwilling to pay. Sometimes, in the case of ice cream, for instance, the wholesale processor and the retailer may not be able to fully pass on their higher costs for the dairy products to the next market level and maintain profitability. For the case of the retailer, they may not be able to increase their sale prices enough to reflect the higher cost of the finished dairy products. If the component price of butterfat is very high due to strong butter prices, an ice cream processor will have to raise their sales price to the retailer. Butterfat is a major dairy ingredient in ice cream production. If that cost rises, processors must either pass that cost on or face lower profits. At the same time, retailers must apply their markup to remain profitable; however, retailers may not be able to fully pass on their higher cost to the consumer. The consumer may decide to forego an ice cream purchase and look to other dessert items if the retail price is too high. So, in this case, the retailer will look to the processor to reduce their cost of the packaged dairy product. Thus, margins (the difference between the sale price and the cost of the ingredients) could get squeezed. Many dairy producers are concerned that the farm share of the retail price of dairy products has gone down over time on a percentage basis. The farm price of milk has not increased over time as much as the retail price. Thus, they argue, someone is making up the difference. There have been many studies on the so-called ‘‘farm-to-retail price spread’’ for dairy products. This spread, defined as the difference between the retail price of milk and the farm cost of milk, has been analyzed by the economics literature in relation to the farm cost of milk (class I federal order prices plus premiums). Kinnucan and Forker [16] developed an econometric model to estimate the net relationship between changes in the farm-level price of milk and changes in the retail prices of four major dairy products. This study was based on an earlier markup pricing model by Heien [17]. Kinnucan and Forker’s [16] model notes that retail dairy product prices adjust more rapidly and more fully to increases in the farm price of milk than to decreases. The USDA Economic Research Service tracks the farm value of retail prices and the farm-to-retail price spread for many food products, including dairy. The Economic Research Service computed an index for the retail cost and the farm value of a market basket of dairy products. These two indexes can be used to compute the farm value share of the retail price [18]. The farm value of a basket of dairy products has declined from 47% to 52% during the period 1967 to 1980 and to 30% to 39% during the period 1990 to 2001. Many dairy farmers point to this trend as a failure in the marketing system. They argue that their costs have gone up just as much as the retailers’ and the processors’; therefore, their price or share of the retail price should have increased over time.

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The main flaw in the preceding argument is that the retail market for milk and dairy products is separate from the farm market for raw milk. Some dairy producers have expanded milk productivity per cow and herd size. In the process, they have lowered their average cost of production. These producers are less vulnerable to the impact of inflation on their business because they have been willing to accept a lower margin on a much larger volume of business. At the same time, many have made very little changes in their dairy operations. Inefficient producers, in many cases, have a much higher cost of production than their more efficient neighbors. As a result, when supply has historically exceeded demand and market prices have declined, there has been a large pool of high-cost and inefficient producers that the market could draw on. In effect, these producers were forced to exit the marketplace. Thus, although there is a lag in the adjustment process, the milk supply has realigned with demand overtime. It is this ongoing process of expansion and exit of dairy producers in the United States dairy industry that has resulted in consolidation in farm numbers. At the same time, it has prevented the farm price of milk from trending higher over time. Although class III milk prices (a barometer of manufacturing milk) has been increasingly volatile ever since milk support prices were lowered in the mid-1980s, they have averaged around $12/cwt (Fig. 3). It should be clear that changes in the farm market for raw milk do not directly determine retail milk prices. For fluid milk, retail milk prices are much less volatile than farm-gate milk prices. For some dairy products such as cheese and ice cream, there may be very little relationship between retail and farm-gate prices. Although there are some state laws (such as in Pennsylvania) that set minimum markups for fluid milk from farm-to-retail prices (New York State has a maximum markup law for fluid milk), there is generally very little regulation in the retail price of most dairy products.

Fig. 3. Volatility in class III prices, 1985 to 2002.

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Retailers are free to set whatever price they wish. Thus, in some cases, there may not exist a clear relationship between farm-gate and retail prices for milk and dairy products. For example, between January 2001 and January 2002, the federal order price of protein fell 7.6%, whereas the retail price of natural cheddar cheese fell only 3.0% [12]. The price of butterfat fell 20.1% during this time period, whereas the retail price of butter (a large user of butterfat) fell only 13.9%. More surprisingly, the retail price of ice cream, which is normally 10% to 18% butterfat [1], increased 9.5%. There has been much written in the popular press regarding the declining farm share of retail dairy product prices; however, there have not been many studies undertaken in recent years to study this issue. The United States dairy industry relies on the private sector to purchase milk at regulated prices and to transform it into marketable dairy products. Processors have an economic incentive to be creative in developing many new and exciting dairy products. Retailers are also largely unregulated in terms of setting retail milk and dairy product prices. The United States dairy industry relies in the creative energies of retail businesses to market and sell innovative dairy products. The bottom line is if processors and retailers do their job (process and sell dairy products), then farmers benefit through stronger demand for their product. Because the overall price of milk is determined by market supply and demand forces, stronger demand will translate into higher farm-gate milk prices.

International trade Increasingly, United States trade and global markets for milk and dairy products are having an impact on farm-gate milk prices in the United States. A graphic example of this impact occurred in 2001 when an outbreak of foot and mouth disease in the United Kingdom resulted in the significant slaughter of dairy cows. This loss of dairy cows contributed to rising global prices for nonfat dry milk and butter. Combined with a production shortfall in the United States, these occurrences drove milk prices to record-high levels. It is difficult to clearly state whether trade in dairy products is good or bad for the United States or whether we will benefit from increased trade in the global market for milk and dairy products. Our domestic prices for dairy commodities are often well above world prices and we have the market that the rest of the world would like to tap into. However, as economies in less developed nations improve, these nations will increasingly turn to countries like the United States to supply quality dairy products. Thus, at some point in time, the United States dairy industry could capitalize on a robust global dairy market. The problem, however, is that the global market for dairy products is very ‘‘thin.’’ Most dairy products are consumed in the countries where they

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are produced. In other cases, exports of dairy products are from countries that use large subsidies at the farm level (the United States and the European Union). Countries like New Zealand and Australia, which have very low rates of subsidies to farmers, are often caught in the middle between more industrialized countries with deep pockets. The most recent data from the USDA indicate that on a value basis, the United States has imported more than it has exported over the last 3 years (Table 5). For both 1999 and 2000, the United States was a net importer of approximately 0.5 billion dollars a year. Before the Uruguay Round trade agreement, the United States dairy industry had hoped that a global trade agreement would help the United States to gain better access to growing international markets. On December 15, 1993, the United States concluded a 7-year Uruguay Round negotiation within the General Agreement on Tariffs and Trade. Under this agreement, the United States would open their borders to greater market access. All section 22 import quotas were converted to tariff rate quotas, which made import protection more transparent. Under the new quota, there was one low tariff rate. Imports outside of this quota level had a much higher tariff rate. In addition, the quota would grow over time and the within tariff rate would decline over time. The United States, along with the European Union, also agreed to reduce trade-distorting subsidies. One issue that has sparked tremendous contention in the dairy industry is imports of milk protein concentrate (MPC), which is essentially a dried dairy product of varying levels of protein concentration. Dairy producer organizations such as the National Milk Producers Federation claim that MPCs are increasingly entering the United States border with little or no tariffs. In fact, they argue that MPCs are not subject to the same tariff rate quotas that other dairy products are because they did not exist at the time of the Uruguay Round trade agreement. In a recent study, the present author [19] examined two questions. First, did the combination of relaxed import restrictions, low world prices for protein, and relatively high domestic support levels for nonfat dry milk encourage MPC imports? Nonfat dry milk in the United States is made by spray drying skim milk that is separated from cream. The resulting product is about 40% protein. Second, did increased imports of MPCs displace domestic use of nonfat dry milk and thereby increase US Government purchases under the DPSP? For some background, MPC is a general reference to a dried protein product derived from milk using a new technology called ‘‘ultrafiltration.’’ Skim milk is pushed through a membrane with minute pores that retains larger molecules (such as protein) and allows smaller molecules (such as water, lactose, and minerals) to pass through [1]. The retained protein is then spray dried. This dried form of protein is very functional in many food products and is increasingly in demand. At the time of this writing, it was not produced in the United States.

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K.W. Bailey / Vet Clin Food Anim 19 (2003) 295–317 Table 5 United States imports and exports of milk and dairy products, 1999–2001 Value (million United States dollars)

Quantity Dairy products Imports Milk and cream Ice cream Dry milk Dry whey Cheese Butter and milkfat Casein Milk protein concentrates Other dairy products Total imports Exports Nonfat dry milk Condensed and evaporated milk Dry whole milk and cream Fluid milk and cream Yogurt and other fermented dairy products Butter and milkfat Ice cream Cheese and curd Casein Whey Other dairy products Total exports Net imports

Jan–Oct 2001

Units

1999

2000

Million L 1000 MT 1000 MT 1000 MT 1000 MT 1000 MT 1000 MT 1000 MT

16.8 6.6 10.6 11.0 197.5 18.1 108.3 44.9

8.3 1.6 8.4 15.6 189.8 13.7 120.4 52.7

120.1 32.1 88.4 23.4

NA

NA

NA

NA

1000 MT 1000 MT

141.3 4.8

84.3 5.2

1000 MT

17.7

Million L NA

1000 1000 1000 1000 NA NA

MT MT MT MT

11.0 2.0 5.9

1999

2000

Jan–Oct 2001

17.0 18.0 16.6 10.8 704.9 32.9 403.2 122.3

9.2 3.8 14.7 15.9 685.6 21.6 500.4 152.8

12.8 4.0 13.0 13.3 428.5 50.5 435.3 83.1

99.4 1425.1

129.7 1533.6

307.3 1347.8

74.0 8.3

192.9 3.6

136.3 4.2

151.0 7.8

25.4

31.2

21.5

37.9

37.8

18.3 NA

24.0 NA

21.3 NA

16.2 7.8

20.4 8.2

18.0 8.2

3.2 39.6 38.3 5.2 NA NA

8.2 40.4 46.8 5.0 NA NA

3.2 34.8 43.4 2.9 NA NA

4.5 84.5 130.2 25.5 126.2 298.5 911.6

7.4 88.1 138.4 48.7 170.8 327.3 987.8

4.3 72.4 133.4 16.7 122.7 309.9 882.3

513.5

545.8

465.5

Abbreviations: MT, metric ton; NA, not applicable. Data from US Department of Agriculture, Foreign Agriculture Service. Dairy, world markets and trade. Washington, DC: USDA; 2001. Available at: http://www.fas.usda.gov/dlp/ circular/2001/01–12Dairy/toc.htm. Accessed November 2002.

The author’s study [19] reached three conclusions. First, imported MPCs clearly substituted, to some degree, for domestically produced nonfat dry milk. As a result, US Government purchases of nonfat dry milk under the DPSP increased. Second, increased imports of MPCs occurred whenever the world price of nonfat dry milk fell below the United States price, creating an economic advantage to importers of MPCs. Third, some levels of MPC imports are not related to changing global protein prices: food processors in

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the United States import the higher valued MPCs (those with protein levels well above the 40% level) because of their functional properties in food processing, not because they are less expensive than domestic sources of protein in the form of nonfat dry milk. Summary The United States dairy processing sector is dynamic and adaptive to new changes in the market place. Changes in consumer preferences and manufacturing technologies are resulting in new challenges to the processing sector. Consumers want a wider array of quality dairy products. Fluid processors are adapting to changing consumer demands for beverage products by introducing new flavors, providing ultrapasteurization, and using creative packaging. In addition, United States food manufacturers are requesting dairy processors to provide new dairy fractions such as MPC for new nutrition products. United States dairy policy is attempting to adapt to these changes. Federal order reform has resulted in new market-oriented signals for dairy farmers to produce what the market wants; namely, quality milk components. US dairy farmers, however, also wants to maintain programs such as the DPSP that have had the unfortunate consequence of spurring demand for protein imports (ie, MPCs, casein, and caseinates) and also resulted in a disincentive to produce these new innovative protein products here in the United States. Surplus skim milk solids are now moving into US Government warehouses rather than into commercial markets. The future of the United States dairy industry will clearly be toward producing innovative products that the market wants. There is a strong market for dairy products not only here in the United States but also overseas, which will mean learning to compete on a global scale. The challenge is to modernize our United States milk pricing programs to provide dairy farmers and processors proper price signals while providing a minimum level of support to dairy farmers. The benefit of a greater orientation toward the market place will be stronger rates of growth for United States–produced dairy products. References [1] Chandan R. Dairy-based ingredients. St. Paul (MN): Eagan Press; 1997. [2] US Department of Agriculture, Agricultural Marketing Service. Dairy Market News. Week of February 24–28, 2003. Volume 70, Report No. 9. p. 13. [3] Ling KC, Liebrand CB. Marketing operation of dairy cooperatives. ACS Research Report No. 133. Washington, DC: Agricultural Cooperative Service; 1994. [4] US Department of Agriculture, Rural Development, Rural Business Cooperative Service. Cooperatives in the dairy industry. Cooperative Information Report No. 1, Section 16. Revised 1995. Available at: http://www.rurdev.usda.gov/rbs/pub/cir4/cir4.htm. Accessed November 2002.

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[5] Lenz JE, Mittelhammer RC, Hillers JK. Pricing milk components at retail via hedonic analysis. J Dairy Sci 1991;74:1803–14. [6] Coggins JS, Hammond JW. Component values for milk used in cheddar cheese. Rev Agric Econ 1994;16:203–13. [7] Perrin RK. The impact of component pricing of soybeans and milk. Am J Agr Econ 1980;62:445–55. [8] Cox T, Cropp R. Federal order reform: the final rule. Marketing and Policy Briefing Paper No. 68. Madison (WI): Department of Agricultural and Applied Economics, University of Wisconsin–Madison; 1999. [9] Jesse E, Cropp R. Federal milk marketing order reform (continued). Marketing and Policy Briefing Paper No. 73. Madison (WI): Department of Agricultural and Applied Economics, University of Wisconsin–Madison; 2001. [10] Bailey K, Abdalla C. Dairy title to the 2002 Farm Bill: implications for dairy producers in the Northeast. Staff Paper No. 352. University Park (PA): Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University; 2002. [11] US Department of Agriculture, Agricultural Marketing Service. Dairy Market News. Week of November 18–22, 2002. Volume 69, Report 47. p. 13. [12] US Department of Agriculture, Agricultural Marketing Service. A study of the Dairy Forward Pricing Pilot Program and its effect on prices paid producers for milk. Washington, DC: USDA; 2002. [13] Cropp RA, Jesse EV. USDA’s recommended decision on replacing the M-W price. Marketing and Policy Briefing Paper No. 48. Madison (WI): Department of Agricultural and Applied Economics, University of Wisconsin–Madison; 1994. [14] Bailey K, Tozer P. An evaluation of federal order reform. J Dairy Sci 2001;84:974–86. [15] Jesse E, Gould B, Cropp R. Federal milk marketing order reform: November 2002 final decision on class III/IV formulas. Marketing and Policy Briefing Paper No. 79. Madison (WI): Department of Agricultural and Applied Economics, University of Wisconsin– Madison; 2002. [16] Kinnucan HW, Forker OD. Asymmetry in farm-retail price transmission for major dairy products. Am J Agr Econ 1987;69:285–92. [17] Heien DM. Markup pricing in a dynamic model of the food industry. Am J Agr Econ 1980;62:10–8. [18] Elitzak H. Food cost review, 1950–97. Agricultural Economic Report No. 780. Washington, DC: USDA, Economic Research Service; June 1999. [19] Bailey KW. Implications of dairy imports: the case of milk protein concentrates. Agric Res Econ Rev 2002;31(2):248–59.