Why is milk de-pooled? Well, it’s all about money. The concept of de-pooling milk from a Federal Order has existed for many decades. Prior to the year 2000, it was not used very often. In the 1900’s, fluid milk was the main use of milk. Class I fluid milk was the highest priced and had the largest volume. Producer Price Differentials (PPDs) were positive and there was no reason to de-pool. When cheese consumption increased and consumption of fluid milk decreased, Class III milk for cheese started to have more volume than Class I. At the start of the year 2000, de-pooling was not anything that really had an impact.
Starting around 2003, producers and handlers became aware that de-pooling could alter producer prices for Class III milk. De-pooling began to be used occasionally. Then the concept of de-pooling started to gain momentum. Fluid milk continued declining in volume, and cheese production grew. The use of de-pooling became a financial tool. De-pooling does not make more money; it just moves money around. Typically, only Class III is de-pooled. Then with rising prices for butterfat, Class IV milk for butter began to be de-pooled. Rarely is it possible to de-pool both Class III and Class IV at the same time.
Pooled and de-pooled milk cannot be mingled in a cheese plant (or a butter churner). So how are “non-pool” cheese plants available to handle the milk that is de-pooled. Here are some of the ways pooled milk becomes non-pool.
- A cheese plant becomes a non-pool plant in a federal order by not being fully regulated or participating in the order’s pooling program, often receiving milk from another pool or marketing outside the area’s pricing structure. In other words, when a plant that must adhere to the pooling rules for milk from its own geographical territory, processes milk from a different Federal Order, that milk is processed as a “non-pool” plant and is not subject to Federal Order rules.
- A cheese plant can choose not to participate in a specific Federal order’s pooling program, making it a non-pool plant for that order.
- A plant operated by a producer-handler (a producer who also processes and sells milk) is defined as a non-pool plant.
Table I below shows a hypothetical example as to why milk is de-pooled and how the pricing is calculated. The charts below are simplified.
The “Statistical Uniform Price” published is an index number based on 3.5% butterfat and 2.99% protein. That may change to the levels implemented in the July implementation of the new USDA rules for component levels for protein. The “Statistical Uniform Prices” are not using the actual component levels.
In Table I, the Class I milk and weighted average of the four classes are higher than the Class III price, so there is no reason to de-pool, and there would be a positive Producer Price Differential.
PRICING WHERE THE CLASS I PRICE IS LOWER THAN THE CLASS III PRICE
Table II is an example where the Class III milk price used for the first payment to a producer is higher priced than the weighted average price. In this case, the final price adjustment would be a negative amount and the producer delivering the Class III milk would be “charged” a negative fee reducing the original higher price.
This is where the de-pooling really comes into play. If the producer’s milk is delivered to a “non-pool” plant, the full Class III price could be paid. The actual price arrangement at a “non-pooled plant is not public.
PRICING WHERE THE CLASS I PRICE IS LOWER THAN THE CLASS III PRICE AND CLASS III MILK IS DE-POOLED
Table III shows how the money is shifted when the milk is de-pooled. In this example, half of the Class III milk is de-pooled and maintains the full amount paid for the Class III milk with no negative Producer Price Differential. However, the remaining milk in the pool is now lower priced. Overall, the full amount of the of money is paid, but those left in the pool get a lower payment.
SUMMMARY
The above data shows the mechanics of de-pooling. The actual calculations used in the de-pooling process are very complicated, and what is published is difficult to follow. Part of the money flow is not made public. Many comments suggest that de-pooling is not a fair system.
The next post will cover the Northeast Federal Order’s techniques to limit de-pooling.
Other recent posts are available at this link, and older posts are available at this link.
