Backcasting Formula-Based Federal Order Class Prices

In January 2000, all federal milk marketing orders began using a common set of product price formulas to establish milk component values and related Class prices. For roughly forty years before then, order Class prices were tied to the price paid for milk by unregulated manufacturing plants in Minnesota and Wisconsin. This paper addresses the question of how actual Class milk prices compare with prices that would have been generated by current product price formulas. A consistent set of product prices is derived and used to impute monthly Class prices from January 1991 to March 2003, when current formulas became effective. Between 1991 and 1995, formulas yielded higher Class I prices and lower Class II and Class III prices than prices actually experienced. Differences between actual and imputed prices narrowed in later years. A measure of minimum producer blend prices showed that, in the 13 years prior to adoption of the current product price formulas, average actual and imputed prices were almost identical.