Producer price differential (PPD)

Definition

The producer price differential (PPD) is the per-cwt amount a component federal order pays producers on top of the Class III component values. It is each producer’s share of the pool’s value above Class III: the extra value from milk used in Class I, II and IV.

Component orders pay pooled producers for their butterfat, protein and other solids at Class III component prices. That accounts for milk as if it were all Class III. The PPD distributes what is left of the pool, per cwt of milk, after location adjustments.

Seven of the 11 orders (Northeast, Upper Midwest, Central, Mideast, California, Pacific Northwest, Southwest) announce a PPD. The four skim/butterfat orders (Appalachian, Florida, Southeast, Arizona) have no PPD; they pay a uniform price directly.

Why the PPD goes negative

The PPD is negative when the pool’s total value per cwt is less than the Class III value of the same milk. That happens when:

Class III jumps above the other classes. Class I and II are set from advanced prices, before the month. If cheese prices rally during the month, Class III can end up higher than Class I, II and IV milk in the pool.
Class IV is well below Class III (a wide negative III–IV spread), so Class IV milk drags the pool below Class III.
Depooling. When Class III is above the blend, Class III handlers depool to avoid paying in. The milk left in the pool is weighted toward lower-valued classes, and the PPD falls further.

A negative PPD is a deduction on the milk check: the producer is paid the component values minus the PPD per cwt.

Formula

Simplified (ignores the producer settlement fund reserve and location adjustments):

PPD ($/cwt) = [ total pool value at class prices
               − value of pooled components at Class III component prices ]
              / total pooled cwt

statistical uniform price = Class III price + PPD

\mathrm{PPD} = \frac{\sum_c V_c - \sum_k L_k P_k^{III}}{\mathrm{cwt}_{pool}}
\qquad
P_{SUP} = P_{III} + \mathrm{PPD}

On the check:

PPD line ($) = shipped cwt × PPD (adjusted for the plant's location)

How to pull it in DC305

Not applicable. DC305 holds cow records, not pool or price data.

Source: each component order’s monthly uniform price announcement (USDA AMS and market administrator websites). The farm’s PPD line is on the buyer or co-op statement, adjusted to the receiving plant’s location.

Typical range

Herd context: US federal order milk; values vary by order and month.

Normal months: about −$1 to +$2/cwt, varying by order. Higher Class I orders tend to have higher PPDs.
Extreme months: large negative PPDs, on the order of −$5 to −$10/cwt, occurred in 2020 when Class III rose far above the advanced Class I price and Class IV, and depooling was heavy.

The PPD can swing several dollars from one month to the next when the III–IV spread moves.

Common mistakes

Treating a negative PPD as a buyer deduction. It comes from the federal order pool, not the buyer.
Comparing PPDs across orders. Each order’s PPD reflects its own Class I utilization and depooling.
Expecting a PPD in a skim/butterfat order. Those orders pay a uniform price instead.
Reading the PPD as the farm’s premium. Premiums are separate lines on the check.
Forecasting the PPD from Class III alone. It depends on the gap between Class III and the other classes, which are set at different times.
Forgetting the location adjustment. The announced PPD is for the base zone; the farm’s PPD depends on the plant’s location.