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Effect of Two Component Pricing Systems on Producer Income^{1 ,2,}

Department of Animal Sciences, Washington State University, Pullman 99164

A. E. Freeman

Department of Animal Science, Iowa State University, Ames 50011

J. Dommerholt

Institute for Animal Husbandry, Zeist, Netherlands

R. E. Deiter

Department of Economics, Iowa State University, Ames 50011

ABSTRACT

Factors affecting the amount of milk sold and its fat and protein content were evaluated. Data in the analysis were monthly milk sold and its average fat and protein content from 359 producers for 1975, 1976, and 1977 in the Midwest. Monthly fluctuations in protein content were similar but less pronounced and consistent than fluctuations in fat content. The regression of monthly herd average protein content on fat content was about .4.

The effect of three pricing systems on the average price received by producers for their milk was evaluated. The pricing systems included the present system with only a fat differential, a system with both a fat and protein differential (fat-protein system), and a system with a fat differential and protein differential utilizing an expected protein content estimated from the fat content (Froker-Hardin system). Total payout was the same for the three pricing systems. For each of the assumed protein differentials, the present pricing system overcompensated producers of low fat milk and undercompensated producers of high fat milk. The fat-protein and the Froker-Hardin system resulted in about the same average price for milk of different fat levels. However, significant differences in payment occurred between the Froker-Hardin and fat-protein system for milk from different producers containing the same fat content because of differences in protein content.

¹ Scientific paper No. 5393. College of Agriculture Research Center, Washington State University, Pullman 99164. Project No. 0389.

² Journal Paper No. J-9569 of the Iowa Agriculture and Home Economics Experiment Station, Ames 50011. Project No. 1053. This work was done while the first and third authors were on sabbatical leaves at Iowa State University.