For those producers who priced milk for October-January delivery, I would advise maintaining those hedges. I expect milk prices to fall below $11.00 during the spring flush. For those who didn't forward price, let hindsight provide a lesson.

I have answered the following two questions about a hundred times since my July newsletter. Some people may have used them as rationale for not pricing fall milk.

First, under order reform doesn't the BFP go away in October? The answer is yes. It will be replaced with a Class I price mover that reflects the value of milk used in cheese production (to be technically correct, the value of the components of milk used in cheese.) Well, that's exactly what the BFP is today.

Second, what is the basis? You don't need a historic basis chart to figure the basis as you do for corn or soybeans. Milk is priced administratively by the Federal order. In the base zone of the Carolina order, it is approximately:

BFP + (Class I Differential + Co-op Overorder Premium) x .8 + Class III Price x .2

There is currently a two month lag in the formula. Thus:

October Blend = (Aug. BFP + Class I Differential + Premium) .8 + (Oct. Class III) .2

or, using the August 9 quotes:

October Blend = ($16.10 + 3.08 +1.00) .8 + ($17.45) .2

$19.63 = $16.14 + 3.49

Put another way, the expected basis is $19.63 - 16.10 = $3.53

The calculation above assumes Option 1A differentials will be in effect. If Option 1B is in effect, the differential will be $53 less in Charlotte, but will vary widely depending on location within the new Appalachian order. I ignore Class II and IIIA (Class II and IV after reform), because it doesn't make much difference in the calculation. The Class III price is a guess. My advice is to choose a conservative figure instead of just plugging the current futures as in the example above. You can fine tune the Class I utilization, but I find that 80 percent is easy and close enough.

Post-reform mechanics call for a Class I price announcement on the 23rd for the following month's deliveries. Thus, on the 23rd of October, the November class I price will be announced based on cheese ingredient values for the first two weeks of October. The impact will be to change the two-month lag to one month, but the mechanics of basis calculation remain the same. Note that this simplistic but accurate method of calculating basis and the expected blend prices from the BFP and its replacement price mover only works in the high utilization order - Appalachian, Southeast and Florida.