Pricing Milk to Farmers at Butter- Nonfat Dry Milk Plants

A new method of pricing milk to farmers at butter-nonfat milk plants that will reflect accurately and equitably the true net farm values of milk of various fat contents is urgently needed. On completion of a regional research study on the costs and efficiencies of 12 specialized butter-powder plants in the Pacific Northwest it became apparent to the author of this paper that such an accurate, equitable, and feasible producer pricing system could be devised.' The study was conducted in cooperation with the Bureau of Agricultural Economics and the Farm Credit Administration. This paper describes and analyzes the pricing plan that was developed from a detailed analysis of the physical and monetary input-output relationships in these plants. This plan is a simple and logical approach to the joint-cost problem that is so often a source of confusion in marketing studies. Essentially, it provides a formula for evaluating the differential in net farm value of milk, delivered to butterpowder plants, corresponding to differences in butterfat tests of milk. It does this in a way that gives a valid reflection of the differences in net returns from milk without involving allocations of overhead costs between the joint products. The paper is published with the approval of the Director of the Idaho Agricultural Experiment Station as Research Paper No. 368.