|Missouri Dairy Business Update|
|Volume 4, Number 4|
With the rapid run up in the price of milk for manufacturing purposes, depooling has become a big issue, like it did last August. Dairymen in northern Missouri tend to be especially concerned about depooling because it tends to occur during periods of negative producer price differentials and they often feel depooling takes money out of dairymen's pockets.
When milk prices surge, manufacturing milk prices can move higher than fluid milk prices for a month or two as the price increase works through the price transmission dictated by the federal milk pricing formulas. During this time, milk for manufacturing purposes may move to plants without being pooled in the normal federal milk marketing order. That's depooling. In the links below are some good discussions of depooling.
Dairyline's depooling interview with Dairy Economist, Bill Brooks http://dairyline.com/GreatDebateDePoolingText.htm
Forward Contracting, Hedging, Negative PPDs and Depooling http://www.aae.wisc.edu/future/publications/negppd_jesse_cropp.pdf
April Marketing Service Bulletin, Central Milk Marketing Administrator http://fmmacentral.com/PDFdata/msb0404.pdf
Depooling Shifts National Class Utilization of Milk Pooled on Federal Orders
Evidence of depooling in March can be seen in the chart below. Class utilization under all the federal orders in the country is depicted for March of the past three years. People don't shift their dairy buying habits much from year-to-year, so the utilization percentages tend to reflect the seasonal balancing in the milk supply. However, as the chart indicates, when Class III (cheese milk) prices jump quickly and move above the class I (fluid milk) price, milk flows directly to cheese plants bypassing pooling on the federal order system. One can see that a lot of the milk that previously was pooled as Class III milk in March 2002 and 2003 instead diverted directly to cheese plants causing the national utilization by class to shift to a higher utilization of class I milk.
Depooling will stop when the class I price again moves above the value of manufacturing milk. Milk marketers will then have an incentive to pool milk and get a share of those class I premiums in the blend price. Unless Class III futures rise significantly from $19.65 level, there will no incentive to depool in May.