The Seasonal Pricing Plan for Milk

Abstract

Seasonal pricing of milk is practiced in most fluid milk markets in the United States to provide producers with an incentive for keeping supplies in line with fluid needs. The effect of present seasonal pricing systems on producers' annual returns may be less than it is believed to be. An analysis in which Boston blend prices were used to price 12 New England seasonal patterns showed little variation in annual returns regardless of the production pattern. A new system is suggested for determining each producer's contribution to market imbalance. A graded deduction from payments to those who contribute the most to imbalance is used to make premium payments to those who more nearly conform to market needs. The suggested system goes far in separating seasonal pricing from other price changes, increases the incentive for a balanced supply, and rewards or penalizes individuals on the basis of their contribution to the market supply. T IS generally acknowledged that the farm price of milk per hundred pounds reaches an annual low in June and rises to a peak in November. Although a major factor in this price picture is the normal pattern of high production in June and low production in November, another factor is a deliberate attempt-through the machinery of pricing itself, acting as an income incentive-to achieve the stable production which is desirable to meet the needs of a fluid market. Currently there are in use at least four methods of seasonal pricing. The first one is based on use classification of milk. The blending of high Class I prices with low Class II prices results in a lower blend price in the spring when milk supplies are flush than in the fall when supplies are low. The second method accentuates the spring-fall difference by adding to the Class I price a seasonal differential-a reduction in the spring and an addition in the fall. The third is the Louisville take-out, pay-back plan whereby money is deducted from the blend price in the spring and added to the blend price in the fall. The fourth is the base-surplus plan, in which producers establish, generally in the short fall months, a base amount of milk for which they receive a Class I price. Throughout the year they are paid the Class I price for the base amount and the Class II price for any surplus.