Tuesday, March 31, 2009

How is SCC Premium Related to Cheese Prices?

How is the Federal Milk Marketing Order adjustment for Somatic Cell Count related to Cheese Prices?

In a word - Directly!

The premium (or penalty) for Somatic Cell Count above or below 350,000 cells per milliliter is directly related to the cheese price. The formula is:

SCC pricing adjustment = monthly price for cheese x .0005

Therefore, there is a significant correlation between the SCC premium and the price paid for protein.

When Cheese is around $1.25 (its current pricing) the SCC value is .000625. If a cow is producing 80 lbs. of milk and the SCC is 250,000, that is worth 5 cents per day. When cheese is $2.00 per lb., the SCC premium is .001 and is worth 8 cent per day, an increase of 4 cents per day. For a herd of 1000 cows, this is a difference of $10,950 per year.

A higher cheese price is worth more than just the increased value of protein.

Friday, March 27, 2009

Cheese & Butter Prices Come off the 2009 Lows

Cheese and butter prices firmed this past week at prices above their year beginning lows. The lows in the first weeks of 2009 were the lowest prices in the last 5 years.

The graphs shown below are always available via the links in the right hand panel, but they are published in this post to bring them to your immediate attention. The charts linked in the right hand panel are updated every Friday based on the week's trading activity.

The cheese prices shown here are from the CME statistics. The prices used for the Class III milk protein valuation are actually from the NASS market survey which typlically lags about two week behind the CME numbers. More on this in an upcoming post.

Butter prices also firmed near $1.20/lb. While they are below the the longer term average of ~ $1.50/lb., they are finally coming off the lows of ~ $1.10 recorded in early 2009.

Which graph - cheese or butter - is most important to dairy producers? The answer may surprise you. We'll analyze this in an upcoming post.

Tuesday, March 24, 2009

Butter Imports and Exports have a Big Impact

What happened to Butter prices in 2008? Did Americans stop eating butter? Well maybe a few have "tightened the belt" on butter purchases, but decreasing exports are the real story.
Butter is a commodity, and a little change in supply or demand can make a big difference in prices.

During 2008, the U.S. dollar went from a weak position vs. other currencies to a strong position. When the dollar is weak, our products look "cheap" on the world market. In early 2008, butter exports were GREAT! The increased demand increased prices.

But when the U.S. Dollar strengthened near the end of 2008, U.S. produced butter became very expensive on the world market. Demand dropped, and prices fell.

The U.S. imports a lot less butter than it exports - typically - but in 2008, as the dollar strengthened, imports started looking cheap and imports surged! The demand for U.S. produced butter fell further, and so did prices.

How much did the dollar strengthen against other currencies? The simple answer is "a lot." This change is what has made U.S. butter so expensive on the world market. The chart below shows the U.S. Dollar Index valued against 6 other major currencies as measured by the NYBOT calculated index.

The change is nearly 20%. That's a big swing in the price of butter.

The world is increasingly connected. What can a dairyman do in this climate? He can't have much impact on exchange rates, but he can manage his business in the best way possible based on all the facts. We need to keep the best facts available to him.

Monday, March 23, 2009

Why are protein prices lower?

We all know that milk protein prices are significantly lower. Why??

One small factor that seems to have not gotten much notice is the October, 2008 change in the "Make Allowance" for calculating protein values.

Beginning with the October price announcement, the "make allowance" for making milk into cheese was increased from $.1682 to $.2003/lb. - a 19% increase. This has the effect of lowering the value of milk protein by $.10 per pound.

When protein prices were more than $4, this would have been a small difference, but with protein prices under $2, the $.10 becomes significant.

The formula for protein pricing is:

((Cheese price – 0.2003) x 1.383) + ((((Cheese price – 0.2003) x 1.572) – Butterfat price x 0.9) x 1.17).

The protein value calculation is made by removing the "make allowance" from the price of cheese to leave the value for the ingredients. As the "Make Allowance" goes up, the value of protein - and therefore milk - goes down.

Friday, March 20, 2009

Current FMMO Component Pricing

With the current interest in milk component pricing, I thought I would try relaying the information in a blog format. Let me know how you like this format.

The graph shown is the one we have followed for years.

The most recent component prices are made through the monthly announcements from the USDA following the close of the month. The next month's prices are due out April 3.

Links to the most recent cheese and butterfat prices are on the right. These are based on the CME prices and are updated every Friday. The fat and protein prices follow these, so they can be used to judge where the market is going.

As you can see from the links on the right, both Cheese and Butterfat prices increased this week - good news!

Please add your comments - that's what a Blog is all about.