An Analysis Of Over-Order Premiums Paid For Milk Used At Manufacturing Plants In New York State During 1989

Transcription

1 An Analysis Of Over-Order Premiums Paid For Milk Used At Manufacturing Plants In New York State During 1989 November 1990 Prepared By Divi sion ot Dairy Industry Services New York State Department Of Agricul ture and Markets and Program On Dairy Markets and Policy Cornell University

2 It is the policy of Cornell University actively to support equality of educational and emp loyment opportunity. Na person sholl be denied admission to any educational program or activity or be denied employment on t he basis of a ny legally prohibited discrimination involving, but not limited to, such facto rs as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action progra ms which wlll a ssure the continuation of such equality of opportunity.

3 PREFACE This report was prepared by staff of the Division of Dairy Industry Services of the Department of Agriculture and Markets in collaboration with Professor Andrew Novakovic of the Department of Agricultural Economics at Cornell University. The assistance of operators of milk manufacturing plants and cooperative associations who provided the data and other information for this study is greatly appreciated. Copies of this report can be obtained through Cornell University. Requests should be directed to: Wendy Barrett Department of Agricultural Economics Cornell University 314 Warren Hall Ithaca, NY

4 6 January, fell to a low of $.90 in June and increased to $1.22 in December. The total premium and handling charge paid in 1989 ranged from $.15 to $2.05 per hundredweight among plants in the survey. On most of the milk received at the study plants from other handlers (either cooperative or proprietary), a flat or base premium was paid. For the year, such premium averaged 54 cents per hundredweight. The rate of payment dropped from January to June and then increased through the end of the year. Manufacturing dealers typically paid a handling charge on milk received from other handlers. For the plants in the study, such charges averaged 32 cents per hundredweight for the year. In some instances, the amount of handling charge reported not only included the usual charges for services but also premiums because the reporting dealer could not separate them. Therefore, the average per hundredweight handling charge is probably overstated. The rate of premium payments for quality, protein and volume in total averaged 14 cents per hundredweight for the year. The rate of payment for all of these premiums was nearly constant throughout the year. In Summary Over-order payments made directly to dairy farmers by the manufacturing dealers averaged 20 cents per hundredweight less than the amount paid to cooperatives and proprietary handlers for milk they supplied to the plants of such dealers. Because of the way in which some of the premium payments were reported, it was difficult to know precisely how specific premiums varied. Nevertheless, it appears that the difference in the rate of payment was mostly related to the handling charge paid on the milk supplied by other handlers. The average amount paid for premiums was about the same for milk received from producers as for the milk received from other handlers. The total premiumsnd handling charges paid to other handlers varied seasonally in the same manner as payments to producers but did not show as great a decline from January through midsummer nor as great an increase through the end of the year. The reason there was less seasonal variability in the over-order payment rate to cooperatives and proprietary handlers is because the handling charge, which was 30 percent of the total amount, remained nearly flat throughout the year. To determine the extent of the relationship between over-order payments directly to producers and those paid to other handlers, the two categories of payments were subjected to a regression analysis. The results of this analysis indicate a strong relationship between monthly average premium payments directly to producers and those to cooperatives and other handlers. DIS 4LJ K II du J 8 STATE OF NEW YORK APPENDIX A

5 PREFACE This report was prepared by staff of the Division of Dairy Industry Services of the Department of Agriculture and Markets in collaboration with Professor Andrew Novakovic of the Department of Agricultural Economics at Cornell University. The assistance of operators of milk manufacturing plants and cooperative associations who provided the data and other information for this study is greatly appreciated. Copies of this report can be obtained through Cornell University. Requests should be directed to: Wendy Barrett Department of Agricultural Economics Cornell University 314 Warren Hall Ithaca, NY

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7 INTRODUCTION In 1989, 13.1 billion pounds of milk and dairy products were utilized by New York dairy plants and two-thirds of it was used for manufacturing either within the State or at out-of-state locations. Because of the competition for milk in the Northeast in 1989, manufacturers and order handlers had to pay substantial premiums above minimum federal and state order prices to obtain milk supplies. The payment of premiums by handlers began on a limited basis in 1986, but became widespread in subsequent years. Such premiums have increased the cost of farm milk to manufacturers while enhancing the return to dairy farmers. The Department, in collaboration with Cornell University, undertook a study to determine the cost of farm milk to manufacturing dealers operating in New York State during Dealers who purchased substantial quantities of milk for manufacture were contacted and asked to provide information on the amounts paid in excess of the minimum order price on such milk (other than for butterfat) received from cooperatives and other dealers. Milk payment reports filed by manufacturing dealers were used to ascertain over-order payments they made directly to producers. Data on the cost of milk used in manufacturing in 1989 were obtained for nineteen of the largest manufacturing plants in New York State. These plants are operated by twelve licensed milk dealers. Two-thirds of the plants manufacture Cheddar and/or Italian cheeses and the remaining plants produce various other products. Milk receipts included in this study totaled 4.2 billion pounds, more than 70 percent of all milk received at New York State manufacturing plants in PROCEDURE The plants chosen for this study receive producer milkleither from their own producers through their bulk tank units or from cooperatives and proprietary handlers. The cost data for these two categories of receipts were collected and analyzed separately because milk received from dealers' own producers is paid for directly by the dealer, whereas payments for bulk shipments from cooperatives and proprietary handlers are paid in lump sum with the cooperative or handler being responsible for paying the producers. 1 Bulk Tank Units are established pursuant to provisions of Federal Order 2, and all pool milk picked up from farms in tank trucks is priced and pooled in such units. Regulated handlers and cooperatives designate the farms assigned to the unit. These units are primarily used for accounting purposes and do not necessarily correspond to a tanker of milk or a specific truck route. They may involve a small number of farms or a very large number of farms.

8 2 Data on producer payments were obtained from monthly payment reports (DIS 423PR - see Appendix A) dealers file with the Department. Of the plants chosen, eleven had direct payments to dealers' own producers and were included in this section. These reports ask for information on the volume of milk, price paid per hundredweight, premiums paid, and deductions for such items as hauling, cooperative dues, and insurances. The premium secton asks for a breakdown on types of premiums paid such as RCMA, volume, protein, quality, and "other". RCMA premiums were not included in this study because they did not represent a cost for manufacturing milk. Volume premiums included year-over-year, fall-over-spring, and other-dealer-volume incentives. Quality and protein premiums are based on criteria set by the dealer. Quality criteria are usually somatic cell counts and/or other microbiological tests. Protein premiums are paid when the percentage of protein in the milk delivered by a producer or cooperative exceeds a basic percentage established by the manufacturing plant. The "other" category included base premiums which are flat amounts set by the dealers and are not generally tied to incentive programs. Some dealers did not report the breakdown of premiums paid, claiming this information was not available. In those instances, the dealer's over-order payment was entered into the base/competitive category. It is unclear if other premiums such as for protein, quality, and volume are included in such payments. Hauling costs absorbed by some dealers were not taken into account because they do not appear as a payment to producers. In this respect and with regard to the cost of field services, the data for the two categories of receipts for manufacture are not entirely comparable. For receipts from cooperatives and proprietary handlers, sixteen plants voluntarily provided data via a survey form sent from the Department (see Appendix B). Eight of these dealers also had direct producer payments as previously discussed. The survey form asked for the amounts paid on volume, quality, protein, and base/competitive piemiums and for handling charges on the dealers' largest sources of such receipts. Handling charges were to include the amount paid for all services, including market administrator fee and any assessment for hauling. Volume, quality, protein, and base/competitive premiums were defined in the same manner as for direct producer payments. 2 RCMA is the Regional Cooperative Marketing Agency. members are other cooperatives and non-member producers. purpose is to bargain for premiums above minimum prices established by federal and state milk marketing orders. In first seven months of 1989, it obtained premiums from fluid processors and distributed them among their members. RCMA farmers who shipped to manufacturing plants shared in RCMA premiums, but manufacturers did not have to pay premiums to Its Its the milk RCMA.

9 3 Again some dealers did not show a breakdown of types of overorder payments and totaled the entire amount in the base/competitive premium category. In addition, some appear to have included handling charges in the base premium category, showing only MA fees as handling. Others showed no base premiums but high handling charges which may include the base premium. These entries do nqt affect the total amount paid per hundredweight over and above the minimum order price (i.e., Class II price adjusted to plant location). The data were summarized and analyzed using a spreadsheet program. For each category of receipt, per hundredweight averages were calculated using total quantity of milk, not just pounds for dealers with entries in the particular category. It should also be noted that over-order payments are reported in the month paid, which is not necessarily the month they were earned. Direct Payments to Producers FINDINGS Total over-order amounts paid directly to producers by manufacturing plant operators in this study averaged 80 cents per hundredweight in 1989 (Table 1). The premium rate declined from $.81 for February to a low of $.64 for July and increased to $1.05 for December. The total premium rate also varied among plants, and in 1989 ranged from $.28 to $1.38 per hundredweight. All of the manufacturing dealers paid a flat rate or basic premium that was received by all of their producers supplying the plant. This base premium averaged 57 cents per hundredweight for the year and accounted for more than 70 percent of the total over-order payment rate. The rate of payment for such premium declined from late winter to midsummer then increased throughout the rest of the year. Most of the manufacturing plant operators participating in the study also paid their producers premiums based on volume, quality, and level of protein. For the year, the total of all three types of premiums was 23 cents per hundredweight. The volume premiums, which averaged 12 cents per hundredweight for the year, were the highest in October, November and December, reflecting the payment of year to year and/or fall over spring incentives. Premiums based on quality and protein averaged 9 cents and 2 cents per hundredweight, respectively, for Such premiums ere usually at about the same rate throughout most months of the year. Payments to Cooperatives or Other Handlers The total amount of premiums and handling charges paid by manufacturing dealers participating in this study to cooperatives and proprietary handlers for milk delivered to their plants averaged $1 per hundredweight for 1989 (Table 2). The total premiums and handling charges were $1 per hundredweight in

10 4 a a M N 00 M a m a a 00 a a a a a a a a a a a.... p H M a 00 a M m 00 M a N M N N M M 00 N a N M 00 a N m N,, 00,,,,,,,,,,, N M 00 a 00 M N M a a a a m 00 00,,, N,,,, N N M 00 a U a a a 0 a 0 0 G 0 6 January, fell to a low of $.90 in June and increased to $1.22 in December. The total premium and handling charge paid in 1989 ranged from $.15 to $2.05 per hundredweight among plants in the survey. On most of the milk received at the study plants from other handlers (either cooperative or proprietary), a flat or base premium was paid. For the year, such premium averaged 54 cents per hundredweight. The rate of payment dropped from January to June and then increased through the end of the year. Manufacturing dealers typically paid a handling charge on milk received from other handlers. For the plants in the study, such charges averaged 32 cents per hundredweight for the year. In some instances, the amount of handling charge reported not only included the usual charges for services but also premiums because the reporting dealer could not separate them. Therefore, the average per hundredweight handling charge is probably overstated. The rate of premium payments for quality, protein and volume In total averaged 14 cents per hundredweight for the year. The rate of payment for all of these premiums was nearly constant throughout the year. In Summary Over-order payments made directly to dairy farmers by the manufacturing dealers averaged 20 cents per hundredweight less than the amount paid to cooperatives and proprietary handlers for milk they supplied to the plants of such dealers. Because of the way in which some of the premium payments were reported, it was difficult to know precisely how specific premiums varied. Nevertheless, it appears that the difference in the rate of payment was mostly related to the handling charge paid on the milk supplied by other handlers. The average amount paid for premiums was about the same for milk received from producers as for the milk received from other handlers. The total premiumsnd handling charges paid to other handlers varied seasonally in the same manner as payments to producers but did not show as great a decline from January through midsummer nor as great an increase through the end of the year. The reason there was less seasonal variability in the over-order payment rate to cooperatives and proprietary handlers is because the

11 7 A 1989 study by Christensen et al. provides similr data for manufacturing plants in other regions of the U.S. Nineteen milk manufacturing operations representing approximately 30 plants in four key dairy areas were surveyed. These areas are Wisconsin, Minnesota, Utah-Idaho-Wyoming, and Indiana-Ohio-Western Pennsylvania. Price data were collected for the period July 1987 to June 1988, and the prices were compared to the M-W price and the California Class 4 price over that period. The 12 month averages for plants in each region are reported in Table 3. TABLE 3 Average Prices Paid Per Hundredweight for Milk by Manufacturing Plants July 1987 to June 1988 Region Price Premium Over M-W M-W $ All Survey Plants Grade B Milk $ Grade A Milk Grade A Milk Survey Plants $ Minnesota Wisconsin UT/ID/WY IN/OH/PA California, Class Because the time periods are different, it would be inappropriate to draw comparisons between these data and the data for New York. It can be said that premiums paid by manufacturing plants vary with local competitive conditions, even in markets where the minimum Class II (Class III) prices are identical. Because California prices are based on a state pricing program, California manufacturers have been able to purchase milk at a much lower cost. Although no data were collected on premiums in California, discussions with California industry representatives reveal that premiums were very uncommon until fall 1988 when drought conditions led to higher prices nationwide. 3 R. Christensen, J. Hammond, R. Jacobson, and E. Jesse, Plant Costs of Milk Used for Manufactured Dairy Products in Selected Regions, ESO 1590, Dept. of Agr. Econ. and Rural Soc., The Ohio State University, August 1989.

12 DIS 4LJ K lil/u} 8 STATE OF NEW YORK DEPARIMENT OF AGRICUL'lURE AND MARKETS DIVISIOO OF DAIRY llidusl'ry SERVICES CAPITAL PLAZA, I WINNERS CIRCLE AlBANY, NEW YORK APPENDIX A PAYMENl' REPORT Fat" Month of, 19 'ttl is t:ep:lrt pt:oped Y prepar:ed and signed must be subnitted to the arove ad<:1t"ess not later than the 28th day following the rronth to which the r:ep:jrt applies. SCHEOOLE G - ALL PAYMENTS MADE: DIRECTLY 'ID NEW YORK DAIRY FARMERS TI:IIS 11:Nl'H Line GOOOl GOOO2 GOOO) GOOO4 GOOOS GOOO6 GOOO7 GOOO8 GOO09 G0010 GOOll GOO12 GOal) GOO14 GOalS GOO16 GOO 17 GOO18 Fat" Milk Receipts Rep:Jrted in Line 9998, Schedule A of YoUt" Plant Rep:Jrt Fat"m DIS 423 or Schedule R of Yout" Bulk Tank Unit Rep:Jrt Code (for office 1.lSe): Control N:J. Line N:J. Number of New York Dait"Y Farmers Pounds of Milk Butter:fat Test Pay Pr'ice per cwt ).5 Milk at Plant or B1U (Exclusive of Special PremitmlS) Butterfat Differential Applied to ).S Average Price at Plant at Receiving Test $_---- peice (per.1%) $_-- (Exclusive of Special PremitmS) - - (Line 0008 divided by line 000)) $_---- Gross Value of Milk (Exclusive of Special PremitmS) S Special Premiums Paid This Month: (Total a through e) $ (al lola. S (bl Volume $ (e) Quality $ (d) Protein $ (e) Other (Identify) $ Cboperative Associations Rep:Jrt Cash Dividends Paid This I-t)nth $ Gross Value of Milk Inclwing Special l't:'eiili.tds a:jd O:lop. DivideOOs $ Deductions fran Gross Value: Hauling Lbs. PIrount $ Cbop. dues $ Milk Prarotion $ Equity Payments $ Othet" (Explain) $ TOtal Deductions S Net PIrount Paid Dait"Y Farmers s I hereby certify that the in fot:rnat ion in this report is oorrect to the best of my knowledge. Signature of Person Preparing Rep:>rt I Title I Date Please PRINr Nane of Person to Contact About This Rep:>rt I Prone NuIber

13 DEALER: MONTH: (Locat:ion) (plant: Name) (Months ) SUPPLIED BY (Coop/Handler).. PREMIUMS/CHARGES/OTHER DIFFERENTIALS PAID FOR CLASS II MILK; (IN DOLLARS) HANDLING BASE PROTEIN VOLUME POUNDS 1 CHARGES 2 PREMIUM QUALITY OR SNF 00,000, : " TOTAL PAYMENT FOR MILK (INCLUDING PREMIUMS AND CHARGES) \.0 1 If pounds do not agree with your records, please correct. 2 Include any hauling and M.A. Admin. fee paid. Please direct any questions regarding this survey to Kathleen Kelly at (5l8) I to

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