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This paper demonstrates that multiple-component pricing of milk to farmers is more equitable than butterfat differential pricing because butterfat and nonfat components are not produced in fixed proportions. Conditions are derived for directly calculating producers' multiple-component prices, and for determining the expected relationship between butterfat differential and multiple-component prices. Prices for 274 Oregon producers are calculated under these alternative price regimes. Producers with protein tests less than the pool average are overpaid under butter fat differential pricing and, consequently, experience price declines under multiple-component pricing. Concomitantly, high-test producers are underpaid and experience price increases.


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