Predicting Milk Basis in the Southeast Federal Milk Order John Campbell, Area Farm Management Specialist Background for Study Basis is the difference between a cash price for a commodity and a particular futures price. Accurately predicting basis is important to successfully use the futures market for price risk management Class III milk futures are traded on the Chicago Mercantile Exchange and settles near the USDA Class III each month. The study of milk basis differs from that of other commodities since milk is priced only one time per month. Other commodities like corn, soybeans, feeder cattle, and finished cattle, are priced nearly every business day. The Federal Order marketing system for milk is unique in that class prices are determined based on products made from raw milk. Milk for fluid use is Class I, soft product use Class II, cheese Class III, and butter and milk powder Class IV. The amount of milk used in each class varies widely among the different Federal Orders. The price for fluid milk (Class I) in each order is determined by pre-determined price differentials based on the location of processors. Class I prices are determined by adding the location differential to the Class I Mover Price (a predictor of the Class III price). This study used the Southeast Uniform price for 3.5% butterfat milk to calculate basis. Actual farm prices will vary from the uniform price based due to factors such as the producer’s butterfat content, specific location within a federal order, quality premiums/discounts, and over order premiums. Each producer should record basis for their farm calculated from their actual milk price. Marketing economists suggest producers in federal orders with low Class I utilization calculate basis using the current month Class III milk price and the current month farm price while producers in orders with high Class I utilization use the previous month Class III price and the current month farm price. These two methods of basis calculation were used in this study. Conclusions There was little correlation between the selected variables in regression analysis. t analysis found no significant difference between the means of monthly basis when comparing to the methods of basis calculation. Frequency analysis found the most often occurring basis was between $2.00 and $3.00 for both basis calculation methods. There appears to be a tendency for basis to be smaller when the Class III price is increasing from month to month and larger when the Class III price is decreasing from month to month. Southeast Milk Order Basis (Uniform and Class III Price for Same Month) Avg. STD Low High Jan 2.72 0.872 1.75 4.74 Feb 2.41 0.828 1.10 3.88 Mar 2.51 0.773 1.12 3.50 Apr 1.67 1.916 -2.94 3.51 May 1.99 1.162 -0.31 4.03 Jun 2.20 1.005 0.59 4.32 Jul 2.49 1.060 0.69 4.25 Aug 2.56 1.271 -0.26 4.04 Sep 2.30 0.826 1.35 3.70 Oct 2.68 0.967 1.68 4.66 Nov 3.33 1.319 1.84 5.57 Dec 2.11 1.288 0.89 5.14 Correlation of Milk Basis to Selected Variables Variable R-squared Value Previous Month Class III Current Month Class III Class III Price 0.04 0.17 Class I Percentage 0.06 0.001 Class III Percentage 0.01 0.07 Change in Class III from Previous Month 0.15 0.38 Frequency of Milk Basis Range Previous Month Class III Current Month Class III No. Pct. No. Pct. > $0 1 1 3 3 $0-$1 2 2 3 3 $1-$2 25 26 22 23 $2-$3 42 44 41 43 $3-$4 15 16 16 17 $4-$5 9 9 9 9 $5-$6 2 2 2 2 t Analysis of Milk Basis Previous Month Basis Calculation Versus Current Month Basis Calculation Two Tailed P Value Statistically Significant Confidence Interval t Value Standard Error of Difference Jan 0.8285 No 0.1250 0.2207 0.566 Feb 0.9287 No 0.0400 0.0911 0.439 Mar 0.7195 No -0.1775 0.3664 0.484 Apr 0.2462 No -0.9413 1.2104 0.778 May 0.5063 No -0.4363 0.6822 0.640 Jun 0.8673 No -0.1088 0.1702 0.639 Jul 0.7559 No -0.1687 0.3170 0.532 Aug 0.7905 No 0.1475 0.2708 0.545 Sep 0.1733 No -0.5888 1.4348 0.410 Oct 0.4332 No -0.3750 0.8069 0.465 Nov 0.2924 No -0.7213 1.0942 0.659 Dec 0.6031 No -0.3582 0.5319 0.674 Southeast Milk Order Basis (Uniform and Class III Price for Previous Month) Avg. STD Low High Jan 2.60 1.219 1.02 5.36 Feb 2.37 0.814 1.32 4.16 Mar 2.69 1.022 1.57 4.65 Apr 2.61 0.749 1.77 4.15 May 2.43 1.230 0.61 4.48 Jun 2.31 1.359 -0.47 4.41 Jul 2.66 0.927 1.42 4.77 Aug 2.42 0.678 1.32 3.49 Sep 2.89 0.705 1.85 4.03 Oct 2.31 0.760 0.80 3.29 Nov 2.60 1.411 1.33 4.76 Dec 2.87 1.235 1.97 5.94

Background for Study

Basis is the difference between a cash price for a commodity and a particular futures price.

Accurately predicting basis is important to successfully use the futures market for price risk management

Class III milk futures are traded on the Chicago Mercantile Exchange and settles near the USDA Class III each month.

The study of milk basis differs from that of other commodities since milk is priced only one time per month. Other commodities like corn, soybeans, feeder cattle, and finished cattle, are priced nearly every business day.

The Federal Order marketing system for milk is unique in that class prices are determined based on products made from raw milk. Milk for fluid use is Class I, soft product use Class II, cheese Class III, and butter and milk powder Class IV. The amount of milk used in each class varies widely among the different Federal Orders.

The price for fluid milk (Class I) in each order is determined by pre-determined price differentials based on the location of processors.

Class I prices are determined by adding the location differential to the Class I Mover Price (a predictor of the Class III price).

This study used the Southeast Uniform price for 3.5% butterfat milk to calculate basis.

Actual farm prices will vary from the uniform price based due to factors such as the producer’s butterfat content, specific location within a federal order, quality premiums/discounts, and over order premiums. Each producer should record basis for their farm calculated from their actual milk price.

Marketing economists suggest producers in federal orders with low Class I utilization calculate basis using the current month Class III milk price and the current month farm price while producers in orders with high Class I utilization use the previous month Class III price and the current month farm price.

These two methods of basis calculation were used in this study.

Conclusions

There was little correlation between the selected variables in regression analysis.

t analysis found no significant difference between the means of monthly basis when comparing to the methods of basis calculation.

Frequency analysis found the most often occurring basis was between $2.00 and $3.00 for both basis calculation methods.

There appears to be a tendency for basis to be smaller when the Class III price is increasing from month to month and larger when the Class III price is decreasing from month to month.