FMO 101 Presented by: Vince Varjabedian For CNP STC Member Meeting
Federal Market Orders
Location Differential
Federal Market Orders Federal milk marketing orders are concerned primarily with orderly marketing of raw fluid grade milk from the producer to the processor. Legal and technical language makes them complex. Define pricing rules that move milk smoothly from the farm to processors then on to consumers in desired quantities. A major function of Federal milk marketing orders is setting minimum prices for raw fluid grade milk that regulated handlers, often processors, must pay to dairy farmers (usually through dairy cooperatives).
Federal Market Orders Three key facets of FMO: 1.The prices set are minimums market conditions can and often do lead to prices higher than the minimums; 2.Fluid grade (Grade A) milk is regulated; 3.First handlers (Borden Dairy) are regulated the prices are set at the plant where milk is sold, not at the farm where it is produced. Pricing system based on milk class exists in the orders based on the end use of the milk sold under them.
Introduction to Milk Classification (FMO Classification) Class I Drinkable Milk Bottled Milk Cultured Buttermilk Eggnog
Introduction to Milk Classification (FMO Classification) Class II Spoonable Ice Cream Cottage Cheese Yogurt Sour Cream Hermetically Sealed containers Pkg. Cream Half and Half Buttermilk used for cooking
Introduction to Milk Classification (FMO Classification) Class III Cheese Cream Cheese Class IV Butter NFDM
Dairy Basics operations and procurement Milk received at the plant (in a milk tanker) and initially going thorough the quality control, temperature, rbst and fat level testing. Milk received at the dairy should not exceed 45 o F, and is typically held in storage at 40 o F or lower. If temperature exceeds this level milk is discarded. Milk standard is 3.5% fat level Raw milk is going through the separation process. Cream and Skim are separated. Cream a sweet, fatty, liquid with fat content no less than 15% Skim what is left after the cream separation Skim and Cream are usually placed in separate storage tanks and refrigerated Based on the product formula cream, skim and other ingredients are mixed to obtain desired product fat level,% of solids and density.
Dairy Basics operations and procurement Pasteurization kills pathogenic bacteria, thus making milk safer to drink. Fresh dairy plants utilize HTST (high temperature short time) pasteurization. System heats a continuous stream of milk to 168 o F and holds the temperature for 16 seconds prior to further processing. Shelf life 14 20 days. Requires refrigeration. ESL extended shelf life, temperature 285 o F for 2 3 sec and shelf life 60 90 days. Requires refrigeration. UHT/Aseptic ultra high temperature 285 o F for 2 3 sec. Shelf life 120+ days. Does not require refrigeration. The main difference between ESL and UHT processes is the need for rapid cooling of the product down to chill temperatures and the maintenance of an effective cold chain for ESL milk distribution.
Pricing Models Main Pricing Models used in the industry: Most of the Class I products in the industry are priced based on FMO numbers (~70% of the volume for Borden Dairy Company) Pricing Model that uses forecasted numbers for next month commodities is used when customer requires pricing to be submitted on the 10 th or 15 th of the month. True up model is used for Class I and Class II products that are priced based on forecasted numbers and reviewed after the price announcement date. Model uses pricing adjustment to the price to true up previous month variance or keeps the variance value in the separate account to settle by check/wire transfer. Lag N Drag model is used for Class II products due to the lag in Class II butterfat value announcement.
Milk Costing 101 Milk is priced with two components Skim Butterfat Price is dictated by the USDA Class I is Drinking Milk Class II is Creams and Cultured products Class I Skim, Butterfat, and Class II Skim prices are announced in advance Class II Butterfat is announced in arrears
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