Saturday, October 17, 2009
(click on image to enlarge)
The point, in theory, of a make allowance is the underpinning of the support system for dairy. Since the government buys no raw milk, only products, the government wanted to be certain the milk would be made into dairy products which could be stored.
In recent years, the government used the NASS product survey plus a formula which included a deduction for the make allowance, to arrive at the farm milk price. The formula is found at: http://www.ams.usda.gov/AMSv1.0/ams.fetchTemplateData.do?template=TemplateD&navID=IndustryMarketingandPromotion&leftNav=IndustryMarketingandPromotion&page=PriceFormulas2009&acct=dmktord
If you study the pricing formulas, you will notice two important points. First, the make allowance is fixed (see above graph). Secondly, with a little further analysis, you will notice, Class I (fluid, drinking milk)benefits from the make allowance -why?
Probably, the biggest problem with the make allowance is; while many talk about "market" prices, processors are somewhat removed from "market forces." The make allowance guarantees costs plus profit. It is all similar to an heiress living on a fixed income.