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Australia Launches Milk Price Index To Help Understand, Interpret Market Signals

The Australian Ministry of Agriculture and Water Resources recently launched a Milk Price Index that’s intended to help farmers understand and interpret market signals.

The new Milk Price Index includes, among other things, an Australian Commodity Milk Price Index (CMPI), which is based on Australia’s dairy commodity exports.
Australia exports around one-third of its dairy production, which means global dairy prices affect farmgate prices in Australia. This includes farmers who supply the domestic fresh milk market, although for these farmers, farmgate prices will be more stable.

The CMPI has been calculated from Australian export prices for cheese, butter, skim milk powder and whole milk powder. These make up around three-quarters of Australia’s dairy exports.

The CMPI combines the prices and volumes for these products into an index. That index is not expressed in dollars, but a number that started at 100 in July 2008. The preliminary CMPI for June 2018 is 98, down 1 percent from May 2018 but up 1 percent from June 2017.

The CMPI is updated every month. The data for the index is sourced from the Australian Bureau of Statistics and Global Dairy Trade (GDT).

The CMPI also forecasts 12 months into the future. The forecast uses historical data from the CMPI, as well as Deloitte’s forecasts of Australian rural commodity exports (Deloitte Access Economics is providing the economic modeling and analysis for the Milk Price Index).

Every quarter, a 12-month forecast of the CMPI will be produced. For example, the June 2018 edition of the “Dairy Bulletin” included a forecast of the CMPI for every month out to June 2019. The forecasts will be updated every quarter.

The forecast is made using a regression model based on the historical relationship between the CMPI and export prices, and how the CMPI has behaved in the past. Deloitte Access Economics forecasts of agricultural commodity export prices and the recent history of the CMPI are used to forecast what value the CMPI will take in future months.

“The commodity milk price index will be an extra tool to help dairy farmers plan ahead, with more market information on commodity dairy prices and global conditions,” commented Australian Agriculture Minister David Littleproud. “Better price transparency and market signals for farmers is a good thing.”

Also included in the Milk Price Index is a Regional, Retrospective Farmgate Milk Price Index.

This index for each region and month will comprise three values: the average of the milk price received in dollars per kilogram of milk solids or cents per liter; the average of the fat price received; and the average of the protein price received. The range of prices received (the maximum and the minimum) will also be reported).

The Regional, Retrospective Farmgate Milk Price Index will be reported for Gippsland, Murray and Western Victoria if 20 or more responses are available. For other regions, the index will be reported if 10 or more responses are available.

These thresholds are set based on the number of dairy farmers in different regions, and expected variation in farmgate prices in each region (in regions where milk is not used for manufacturing it is expected there would be less variation in prices, so fewer responses are needed to provide an indication of prices in the region).

The Regional, Retrospective Farmgate Milk Price Index is not, strictly speaking, an index. Rather, it is the simple average of the data points available in each dairy region in each period.

Data used to calculate the Regional, Retrospective Farmgate Milk Price Index will be sourced directly from Australian dairy farmers by the Department of Agriculture and Water Resources. Data will be provided on a voluntary basis.

“Once farmers begin providing prices via an online form, an index of actual prices received in each of the eight dairy regions will be built,” Littleproud explained. “The more dairy farmers take part, the better this index will be.”
Finally, the Milk Price Index will include regular global, national and regional commentary to go with the indexes.

The Milk Price Index is part of the Australian government’s $579 million dairy support package assisting farmers affected by retrospective cuts to farmgate milk prices in 2015-16 and is being managed by the Australian Department of Agriculture and Water Resources.

The Department of Agriculture and Water Resources will also work with the industry to educate farmers on how best to use and interpret market signals from the index.