Co-op base and quota plans

Definition

A base or quota plan is a co-op’s (or a state program’s) way of paying members two prices for milk, to manage supply:

Quota (base) milk: each member’s assigned volume, usually set in lb/day or lb/month, paid the higher quota price.
Over-quota (over-base) milk: everything shipped above that volume, paid a lower over-quota price. It is often tied to a manufacturing value, such as the lower of Class III or the blend, or a powder or protein product value.

The gap between them is the quota spread. Plans differ on how base is set (historical shipments, purchase), whether it can be bought, sold or leased, and what happens to unused base. Read the plan rules for each co-op.

The co-op’s implied blend is its average pay across all member milk. It is not the federal order uniform price (see milk pooling); it also reflects over-order premiums, deductions and plan rules.

Formula

Definitions (all prices $/cwt, volumes in cwt or lb for the month):

Q  = quota milk
O  = over-quota milk
T  = Q + O                 total milk
Pq = quota price
Po = over-quota price
X  = Pq − Po               quota spread
s  = O / T                 over-quota share

b  = (Q × Pq + O × Po) / T     implied blend

b = \frac{Q P_q + O P_o}{T}, \qquad X = P_q - P_o, \qquad s = \frac{O}{T}

Pool-neutral pricing

If the co-op decides the total pool will pay exactly the blend b, and sets the spread X, then the two prices are fixed by s:

Pq = b + X × s
Po = Pq − X = b − X × (1 − s)

quota premium over blend      = Pq − b = X × s
over-quota discount vs blend  = Po − b = −X × (1 − s)
marginal pay signal           = Po − b

\begin{aligned}
P_q &= b + X s \\
P_o &= P_q - X = b - X(1 - s) \\
P_q - b &= X s \\
P_o - b &= -X(1 - s)
\end{aligned}

Check: (1 − s)(b + Xs) + s(b + Xs − X) = b, so the pool pays exactly b.

Worked example (illustrative): b = $20.00, X = $2.00, s = 0.25. Pq = 20.00 + 2.00 × 0.25 = $20.50; Po = 20.50 − 2.00 = $18.50. Pay: 0.75 × 20.50 + 0.25 × 18.50 = $20.00.

The marginal pay signal Po − b is what the next cwt shipped above quota earns relative to the average. This is the number that matters for decisions about adding cows or milk.

Quota value

Owning one more unit of quota moves that much milk from the over-quota price to the quota price, so it earns the spread X, not the premium X × s:

annual gain per lb/day of quota = X × 365 / 100   ($ per year)
quota value ≈ annual gain × payback years   (or the present value of the gain stream)

G_{annual} = \frac{365\,X}{100}, \qquad V \approx G_{annual} \times n

At X = $2.00/cwt, 1 lb/day of quota earns about $7.30/year.

How to pull it in DC305

DC305 does not hold prices, quota or milk-check data.

Source: the co-op’s plan rules and member statements (quota lb, over-quota lb, prices). DC305 can help with planning only: herd milk from test-day MILK and a projection of future cows in milk give an estimate of shipments against quota. Test-day milk is not shipped milk; use shipped lb for any pay calculation.

Typical range

Herd context: US co-op and state quota programs; values vary by plan, region and month.

Quota spread X: commonly on the order of $1–$5/cwt, wider when the plan is actively cutting supply.
Over-quota share s: from near zero (plan not binding) to 20–40% of shipments for herds growing faster than their base.
Quota prices: often quoted as a payback multiple of a few years of the annual spread gain, and highly dependent on how long the plan is expected to last.

Common mistakes

Valuing quota on the premium over blend (X × s) instead of the spread X. The premium falls as more milk is over quota; the value of each quota unit does not.
Using the blend for growth decisions. Added milk earns the over-quota price; the right signal is Po − b, or simply Po.
Comparing a co-op’s quota price to the federal order uniform price. They are different bases.
Assuming pool-neutral pricing. Some plans set Po from a market value and let the blend float. Check which side is fixed.
Mixing lb/day quota with monthly shipments. Convert both to the same period before computing s.