Montana Amends Its Class II & Class III Producer Price Formulas
New producer price formulas went into effect in Montana for Class II and Class III milk beginning in October 2018. The price formula changes have increased producer prices by approximately 4.3% (roughly $0.70/cwt). Most of the increase is attributable to the change in the Class III butterfat price formula, which is applied to approximately half of Montana’s butterfat utilization. Montana’s blend prices, which were among the lowest in the United States, are now closer to the national median.
Montana’s classes of utilization are the same as the USDA’s classes of utilization, except that Montana’s Class III combines federal Class III and Class IV. Montana’s price formulas use advance pricing (prices set before the month of production and utilization) for its three classes, largely because over 80% of Montana’s milk production is utilized as Class I milk, which is priced across the United States using advance price formulas. Most jurisdictions outside of Montana set the Class II butterfat price and Class III and Class IV component prices after the month of production and utilization using price data collected by USDA over the entire month.
Prior to the change, the structures of Montana’s Class II and Class III price formulas were largely unchanged since being established in 1967. The formulas are now aligned with the price formula structure of federal price formulas and now all reference prices published in the USDA Agricultural Marketing Service’s Announcement of Advanced Prices and Pricing Factors. For the Montana Class III price formula, the change addressed a characteristic of the previous formula that caused the Montana Class III butterfat price to be substantially lower than the Class III butterfat prices of most other regulated markets in the United States (12.9% – 41.6% lower in the 2015-2017 time period, averaging about 22% lower). As butter prices increased this decade, the structure of the former formula caused the disparity between the Montana Class III butterfat price and federal butterfat price to increase. Additionally, by referencing the Advanced Butterfat Pricing Factor from the Announcement of Advanced Prices and Pricing Factors, Montana’s Class II and Class III butterfat prices are now based on a two-week national weighted-average butter price instead the Chicago Mercantile Exchange butter price from a single day.
New Montana Class II Price Formulas:
Montana Class II Skim Milk Price ($/lb) = Federal Class II Skim Milk Price (converted to $/lb of skim milk)
Montana Class II Butterfat Price ($/lb) = Advanced Butterfat Pricing Factor + $0.007/lb butterfat
New Montana Class III Price Formulas:
Montana Class III Skim Milk Price ($/lb) = the lower of:
- Federal Advanced Class III Skim Milk Pricing Factor (converted to $/lb of skim milk)
- Federal Advanced Class IV Skim Milk Pricing Factor (converted to $/lb of skim milk)
Montana Class III Butterfat Price ($/lb) = Advanced Butterfat Pricing Factor – Montana Class III Butterfat Price Differential ($0.10/lb butterfat beginning 7/1/2019)
The Montana Board of Milk Control establishes classified milk prices for producer milk by administrative rule. In crafting the rule change that provided for the new price formulas, the board changed the Class III butterfat price formula in a way that phased in the price increase over a nine-month period. In adopting the administrative rule, the board addressed one of the most readily actionable recommendations made in a milk market regulation study that was completed for the board in June 2018. It also addressed concerns over the Class III butterfat price formula that came to its attention in August of 2016, and was the subject of an informal petition received from producers in December of 2016.