Gould, Brian W.

Hackney, John M.

English

Research Papers in Economics

 
     
The views expressed are those of the author(s).  Comments are welcome and should be sent to: Marketing and Policy Briefing Paper, 
Department of Agricultural and Applied Economics, University of Wisconsin-Madison, Madison, WI 53706. 
 
MARKETING AND POLICY  
BRIEFING PAPER      
   
Department of Agricultural and Applied Economics, College of Agricultural and Life Sciences, University of Wisconsin-Madison 
Cooperative Extension, University of Wisconsin-Extension 
 
Paper No. 82 
September 2003 
 
 
Enrollment in the 2003/2004 MILC Program: Does Timing Matter? 
 
Brian W. Gould and John M. Hackney 
Department of Agricultural and Applied Economics and  
Wisconsin Center for Dairy Research. University of Wisconsin-Madison
1 
 
 
Introduction to the MILC Program 
The 2002 Farm Security and Rural Investment Act established a deficiency payment 
system for milk designed to reimburse dairy producers 45% of the difference between a 
target price and market prices.  This program is known as the Milk Income Loss Contract 
(MILC) program.  The market price used to determine the level of monthly payments 
made on all classes of milk is the announced Boston Class I price.  The target price is set 
at $16.94, which is equivalent to a Class I mover of $13.69 when the fixed Class I Boston 
differential of $3.25 is subtracted.
2  Under the 2000 Federal Order Reform, the Class I 
mover is the higher of either the advanced Class III or advanced Class IV prices for the 
month in question.  As shown in Chart 1, advanced prices for Class IV have surpassed 
those of Class III for most of the period from 2000 to present, with reversals during the 
last two quarters of 2001 and in isolated subsequent months, most recently August and 
September 2003.  Because the Class I mover generally declined since the inception of the 
MILC program, monthly MILC payments increased until recent months. 
                                                 
1 Contact information:  Brian W. Gould, gould@aae.wisc.edu, 608-263-3212 
2 For more information concerning the MILC program, refer to the MILC section of the University of 
Wisconsin Dairy Marketing website (www.aae.wisc.edu/future/milc.htm). M&P Briefing Paper No. 82    Page 2 of 11 
 
Producers enrolling in the MILC payment program are subject to an annual 2.4-million-
pound production cap during any one fiscal year (Oct.-Sept.).  There is no limit on 
aggregate payments over the life of the program (Dec. 2001-Sept. 2005).  The annual cap 
is applied to marketings during successive months once the producer decides to start 
receiving MILC payments.  Each fiscal year producers must specify their starting month 
and thus the term during which the deficiency payments would be received.  Smaller 
producers, whose annual milk production is under the annual cap (e.g., 80-85% of dairy 
operations in Wisconsin), are eligible to receive deficiency payments all twelve months 
so there is no decision to be made as to when to start receiving MILC payments.   For 
larger producers, however, there may be significant financial implications of the decision 
as to which month participation in the MILC program should start.
3   
 
Chart 1.  Advanced Class III and IV Prices and  
MILC Program Deficiency Payments 
 
 
                                                 
3 Again, remember that once you decide to start receiving MILC payments, you continue to receive 
payments until the 2.4 million lb. limit is reached. 
8.00
10.00
12.00
14.00
16.00
Jan-
00
Apr-
00
Jul-
00
Oct-
00
Jan-
01
Apr-
01
Jul-
01
Oct-
01
Jan-
02
Apr-
02
Jul-
02
Oct-
02
Jan-
03
Apr-
03
Jul-
03
Oct-
03
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Deficiency 
Payments
($/cwt)
Advanced Class 
Prices ($/cwt)
Advanced Class III
Advanced Class 
Deficiency Payments
Note: On 8/22/03, the September Class I mover was announced as $13.71, which determined that the month's 
deficiency payment (45% x ($13.69 -$13.71)) would be zero for the first time in the MILC program's history.                   
© 2003, University of Wisconsin (UW Dairy Market Website: www.aae.wisc.edu/future/)M&P Briefing Paper No. 82    Page 3 of 11 
 
By Sept. 15 of each year, participants must notify their local USDA Farm Service 
Agency (FSA) office of the beginning month for which payments are to be received for 
the fiscal year that starts Oct. 1.  If producers fail to notify their FSA office, their 
enrollment period will remain the same as the previous year.
4   
 
Use of Historical Data as a Guide to Future Price Movements 
Your MILC payments will increase the greater the difference between the target price of 
$13.69 and the Class I mover.  The question, then is how you might best predict 
advanced Class III and IV prices.  One strategy is to examine historical records of 
announced Class III and IV prices for patterns of seasonal variation.  In Chart 2, we show 
the average announced class prices from 1995-2003.  
 
Chart 2.  Average announced Class III and IV prices (1995-present) 
11.00
11.50
12.00
12.50
13.00
13.50
14.00
14.50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Announced Class III Avgs.
Announced Class IV Avgs.
$/cwt
Note: Prior to January 2000, the Basic Formula Price (BFP) was used in place of the Class III price and the III-a 
price was used in place of the Class IV price.
© 2003, University of Wisconsin (UW Dairy Market Website: www.aae.wisc.edu/future/)
 
 
 
                                                 
4 A producer can change the desired starting month by notifying FAS on or before the 15
th of the month 
prior to the originally designated entry date.  After this date, the starting month cannot be modified until the M&P Briefing Paper No. 82    Page 4 of 11 
Chart 2 shows the typical increase in price during the fall and decrease thereafter during 
the first quarter of the year.  The range in average monthly values of the Class III prices 
was from a low of $11.22 for February to $13.59 for September, a $2.37 difference.  The 
pattern of average milk prices shown in Chart 2 is the inverse of the typical seasonal 
pattern of milk production in the U.S.  Increased production during the spring period has 
a depressing effect on milk price. 
  
Chart 3 provides descriptive statistics for manufacturing milk prices (Class III/BFP/MW) 
observed over a longer time period than shown in Chart 2 (1988-2003).
5  The seasonality 
in the average values calculated over this 15 year period mirrors that shown in Chart 2, 
with a maximum average value in September and a minimum average value obtained in 
February.   The longer time period, however, emphasizes observed within-month price 
variability.  For example, in the month of April, the maximum monthly value was $13.09 
(1996) while the minimum value was $9.41 (2000), a $3.68 difference.   
 
Besides the average milk price, Chart 3 displays the milk price above which there is a 
33% probability of observing a higher price and the price below which there is a 33% 
probability of observing a lower price.
6  These upper and lower limits may be useful in 
your estimation of likely future milk prices in any month. 
                                                                                                                                                 
next fiscal year.  For a detailed discussion of the MILC program regulations, refer to:  
http://www.fsa.usda.gov/dafp/psd/MILCReg.pdf . 
5 The use of additional years of data compared to Chart 2 allows us to obtain a better estimate of the 
distribution of this type of milk price. 
6 To estimate these price levels, we assume that monthly Class III prices have a symmetric bell-shaped 
(normal) distribution. M&P Briefing Paper No. 82    Page 5 of 11 
Chart 3.  Comparison of Class III/BFP/MW Prices, 1988-2003 
8.00
10.00
12.00
14.00
16.00
18.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Avg.
Bottom Third
Top Third
Min.
Max.
$/cwt
© 2003, University of Wisconsin (UW Dairy Market Website: www.aae.wisc.edu/future/)
 
 
If you produce more than 2.4 million pounds of milk annually, the main conclusions to 
draw from Charts 2 and 3 are:  (i) there is significant variability in observed milk prices 
during any particular month, and (ii) there could be negative economic consequences 
from starting MILC payments during a month having typically high milk prices.  Based 
upon historical seasonal price patterns, producers likely to exceed the annual production 
cap should consider starting their MILC payments in a month that would allow their 2.4 
million pounds of production to overlap those months with typically low milk prices 
instead of starting payments in October.   
 
Use of Futures Markets as Guides to Potential Price Movements 
As an alternative to or in conjunction with evaluating historical cash price data, a 
producer may want to use the information provided by the futures markets for Class III 
and IV milk at the Chicago Mercantile Exchange (CME).  After each day of trading, the 
CME publishes a daily settlement price for each of the months for which futures contracts 
are currently available.  Settlement prices can be thought of as reflecting the collective 
opinion of futures market traders  as to the level of future Class III and IV prices given M&P Briefing Paper No. 82    Page 6 of 11 
the dairy market information available on that particular day.
7  For example, Table 1 
shows actual Class III settlement prices as of August 25, 2003.  On that day, the market’s 
opinion was that Sept. ‘03 Class III milk price would be $14.15 and the Sept. ’04 price 
would be $12.75.   Remember that this is only an opinion and this opinion changes from 
day to day given updated information about market conditions such as milk production, 
commodity stocks, herd size changes, weather, commercial disappearance of dairy 
products, etc.  A dairy producer making a decision regarding when to start receiving 
MILC payments may want to use the resulting settlement price information (in addition 
to historical price data) to assess the likelihood of future price paths. 
 
Table 1.  Class III Futures Settlement Prices, 
August 25, 2003 
 
Contact Year  Contract 
Month 
Settle Price 
($/cwt) 
2003  August  13.78 
2003  September  14.15 
2003  October  13.95 
2003  November  12.75 
2003  December  12.20 
2004  January  12.00 
2004  February  11.30 
2004  March  11.40 
2004  April  11.39 
2004  May  11.39 
2004  June  11.80 
2004  July  12.05 
2004  August  12.30 
2004  September  12.75 
2004  October  12.00 
2004  November  11.79 
2004  December  11.30 
      
Source:  U.W. Dairy Marketing Web Site 
(www.aae.wisc.edu/future/data/futures/cme/new_cme_futures/classiii_data_2003.xls) 
 
 
                                                 
7 For a detailed discussion of the futures markets for dairy products refer to the following website:  
www.aae.wisc.edu/future/front_tutorials.htm . M&P Briefing Paper No. 82    Page 7 of 11 
An Example of How to Evaluate the Entry Decision 
We have developed a number of spreadsheet models that can be used by dairy producers 
to evaluate current and future possible MILC payments.  These models can be found on 
the University of Wisconsin Dairy Marketing website (www.aae.wisc.edu/future), which 
contains an entire section devoted to the MILC program 
(www.aae.wisc.edu/future/milc.htm).  Two spreadsheet models allow the user to 
undertake farm-level analyses of the impacts of the timing of a MILC program contract 
entry date on annual total farm and per cwt program payments.   
 
In the example discussed below, we will use one of these models to illustrate how market 
information can be used to guide your selection of a starting month for MILC payments 
(www.aae.wisc.edu/future/MILC/MILC_Payments_04.xls).  We will refer to this 
program as the MILC_PAYMENTS program.  This program takes as input your estimate 
of average daily milk production (lbs./cow) and herd size over the October-September 
fiscal year.  You also need to enter the desired starting month of your MILC contract.   
 
Default future Class III and Class IV milk prices for those  months for which the Class I 
mover has not been announced are CME settlement prices for months with actively 
traded contracts.
8   The MILC_PAYMENTS program is updated daily to incorporate that 
day’s settlement prices, and the program picks the higher of Class III or Class IV as the 
Class I mover to compare with the $13.69 target price.  Settlement prices can be over-
ridden by producers who want to use their  own “best guess” or explore the impact of 
other price predictions.   
 
Following entry of your herd’s average productivity, number of milk cows, and future 
path of Class III and IV prices, the MILC_PAYMENTS model will generate estimates of 
farm level milk production and will calculate payment estimates for all months during 
which the annual cap has not yet have been exceeded.   
                                                 
8 Recent trade activity associated with Class IV futures contracts has been minimal at the CME.  This 
implies that our estimate of future Class I movers when we use settle prices, at least in the short term, will 
primarily be based on the Class III settle price. 
 M&P Briefing Paper No. 82    Page 8 of 11 
For illustration purposes consider Table 2, where we model a 135-head operation with 65 
lb./day average milk per cow.  On August 25, 2003, the operator assesses which month to 
begin receiving MILC payments for FY2003-04.  As of that date, all FY2003-04 Class I 
mover values are unknown.  Consequently, we use the Class III and IV settlement prices 
reported for August 25, 2003 as estimates of future milk prices.  This information yields 
an average of $0.569/cwt in MILC payments over the 2003/2004 fiscal year if October 
2003 is selected as the starting month. 
 
 
Table 2.   Estimated 2003/2004 MILC Payments Using Daily Settlement Prices  
(Estimates Effective August 25, 2003) 
 
Month 
in FY 
2004 
Days 
Class 
III 
Settle 
($/cwt) 
Class 
IV 
Settle 
($/cwt) 
Class I 
Mover 
Deficiency 
($/cwt) 
$13.69–
Class I 
Mover 
Payment 
rate @ 
45% 
($/cwt) 
Monthly 
Milk 
Prod. 
(cwt) 
Prod. 
Eligible 
for MILC 
Payment 
(cwt) 
Payment 
($) 
Oct '03  31  13.95  10.36  13.95  0.00  0.0000  2,720  2,720  $0 
Nov  30  12.75    12.75  0.94  0.4230  2,633  2,633  $1,114 
Dec  31  12.20    12.20  1.49  0.6705  2,720  2,720  $1,824 
Jan '04  31  12.00    12.00  1.69  0.7605  2,720  2,720  $2,069 
Feb  29  11.30    11.30  2.39  1.0755  2,545  2,545  $2,737 
Mar  31  11.40    11.40  2.29  1.0305  2,720  2,720  $2,803 
Apr  30  11.39    11.39  2.30  1.0350  2,633  2,633  $2,725 
May  31  11.39    11.39  2.30  1.0350  2,720  2,720  $2,815 
Jun  30  11.80    11.80  1.89  0.8505  2,633  2,589  $2,202 
Jul  31  12.05    12.05  1.64  0.7380  2,720  0  $0 
Aug  31  12.30    12.30  1.39  0.6255  2,720  0  $0 
Sep  30  12.75    12.75  0.94  0.4230  2,633  0  $0 
            Totals:  32,117  24,000  $18,288 
          Payment/cwt on Total Annual Production:  $0.569 
 
Note:  We assume a 135 head herd with an average production of 65 lbs/cow/day.  Due to lack of trading, 
on August 25
th, there were no settle prices for the Class IV contract after October, ’03. 
 
 M&P Briefing Paper No. 82    Page 9 of 11 
Table 3 looks at the effects of selecting starting months other than October and also 
assesses the impact of daily milk per cow greater than 65 pounds.  The results are again 
based on the daily settlement prices reported by the CME as of August 25, 2003.   
 
As illustrated, the month selected for starting to receive MILC payments influences total 
and per hundredweight payments in two ways.  First, the annual production cap may or 
may not be reached during the successive months of the enrollment period — selecting a 
late starting month may result in the year ending before exhausting the cap.  Second, 
price patterns differ according to the starting month selected. 
 
Note that for the 65 pounds/cow/day herd, delaying program entry until some time 
between December and February will result in receiving payments on less than the full 
24,000 cwt of eligible production.  In other words, monthly milk production for this herd 
is small enough that it takes about 9 months to hit the 2.4 million pound cap.  In contrast, 
the 85-pounds/copw/day herd can wait until March to begin payments, since it produces 
2.4 million pounds in seven months.  M&P Briefing Paper No. 82    Page 10 of 11 
Table 3.    Impact of Alternative Entry Dates on MILC Payments,  
2003-2004 Fiscal Year (Estimates as of August 25, 2003) 
 
MILC-Contract Entry Month       
October  December  February  March  April     
Potential Contract 
Months 
12  10  8  7  6 
 
 
3
2
,
1
1
7
 
3
2
,
1
1
7
 
3
2
,
1
1
7  32,117  32,117 
6
5
 
3
7
,
0
5
8
 
3
7
,
0
5
8
 
3
7
,
0
5
8
 
3
7
,
0
5
8
 
3
7
,
0
5
8
 
7
5
 
Annual Production 
(Cwt) 
41,999  41,999  41,999  41,999  41,999 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
9
 
9
 
8
 
7
 
6
 
6
5
 
8
 
8
 
8
 
7
 
6
 
7
5
 
Eligible Months 
Below 2.4 Million 
Cap 
7  7  7  7  6 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
Y
e
s
 
Y
e
s
 
N
o
 
N
o
 
N
o
 
6
5
 
Y
e
s
 
Y
e
s
 
Y
e
s
 
N
o
 
N
o
 
7
5
 
Is 2.4 Million Cap 
Reached? 
Yes  Yes  Yes  Yes  No 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
2
4
,
0
0
0
 
2
4
,
0
0
0
 
2
1
,
3
2
3
 
1
8
,
7
7
9
 
1
6
,
0
5
8
 
6
5
 
2
4
,
0
0
0
 
2
4
,
0
0
0
 
2
4
,
0
0
0
 
2
1
,
6
6
8
 
1
8
,
2
5
9
 
7
5
 
Eligible Production 
Under MILC 
Contract (cwt) 
24,000  24,000  24,000  24,000  20,999 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
1
8
,
2
8
8
 
2
0
,
8
3
9
 
1
8
,
1
4
2
 
1
5
,
4
0
5
 
1
2
,
6
0
2
 
6
5
 
1
7
,
8
3
2
 
2
1
,
6
5
6
 
2
0
,
6
7
7
 
1
7
,
7
7
5
 
1
4
,
5
4
0
 
7
5
 
Total MILC 
payments ($) 
16,897  22,132  21,991  19,909  16,479 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
0
.
5
6
9
 
0
.
6
4
9
 
0
.
5
6
5
 
0
.
4
8
0
 
0
.
3
9
2
 
6
5
 
0
.
4
8
1
 
0
.
5
8
4
 
0
.
5
5
8
 
0
.
4
8
0
 
0
.
3
9
2
 
7
5
 
Payments per Total  
Fiscal Year 
Production ($/cwt) 
0.402  0.527  0.524  0.474  0.392 
8
5
 
D
a
i
l
y
 
P
r
o
d
u
c
t
i
o
n
 
(
l
b
s
.
/
c
o
w
/
d
a
y
)
 
 M&P Briefing Paper No. 82    Page 11 of 11 
Summary 
With the new Federal fiscal year fast approaching some dairy producers will need to 
make some decisions as to the timing of their MILC payments.  We have intended this 
publication as a guide as to how to define the parameters of this decision and to hopefully 
improve your ability to maximize your program benefits. 
 
A final comment should be made with respect to the results shown in this publication.  
They should be considered as illustrative only not predictive.  As we all know, since the 
early 1990’s dairy markets have become much more volatile.  When making program 
participation decisions, you should obtain the most recent market information possible, 
discuss your decision with a number of industry professionals and always keep in mind 
your fiscal management objectives. 
 

Enrollment in the 2003/2004 MILC Program: Does Timing Matter?

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