REVISITING THE CLASSIFIED MILK PRICING SYSTEM: SEASONAL AND SPATIAL MILK PRICING IN THE U.S.

A key policy issue deliberated by the U.S. federal milk marketing policy group involves the setting of spatial price differentials for Class I milk. The Class I price differentials were established in 2000 and remain in use today. These differentials reflect transport and other factors that vary across space. Since 2000, there have been changes in some factors, such as fuel price and supply/demand locations. We examined how the differentials match up with the distribution of shadow prices in a spatial transport model and found that consideration of fuel costs and supply/demand location shifts raises the magnitude of the differentials by 115%. We also found that seasonal shifts are also a factor, particularly for Class I milk, but not for manufacturing milk differentials. In particular, the seasonal differences do appear to be of a magnitude which would suggest that Class I differential levels need to be revisited seasonally. Collectively, the results indicate that it may be desirable to revisit the policy determined price differentials