Saturday, May 30, 2009

Somatic Cell Count is Worth $s

Since January 2000, the Southwest Federal Milk Order (FMMO) has reduced their average Somatic Cell Count (SCC) by approximately 100,000 cells/ml. What is this worth? At today's very low cheese prices, that is still worth $.06/cwt of milk. When Cheese was at its highest, it would have been worth twice that.

Only four of the six FMMOs paying on components also pay a premium for low SCC. Those that do not, the Northeast and the Pacific Northwest, have the lowest percentage of their milk going to Class III Cheese production.

The March 31 post discussed how SCC premium payment is directly linked to the price for cheese. That formula is;

SCC pricing adjustment = monthly price for cheese x .0005,

which provides the basis for the "adjustment" per cwt of milk.

The "adjustment" for SCC centers around 350,000 cells/ml. A count under that receives a premium. A count over that receives a penalty. A dairy with 1000 cows averaging 20,000 lbs of milk annually would, at today's pricing, have premium income of $13,000 annually with a SCC averaging 250,000, 100,000 under the 350,000 guideline level. In 2008, this may not have seemed like a lot of money, but in today's tough economic environment, it suddenly seems huge.

How have the four FMMOs that pay a premium done on reducing SCC? - actually, very good. Shown below are the graphs of SCC for the four FMMO paying a premium for low SCC.

In today's tough market, the smaller components of the pay check take on more importance. Proper diet and sanitation do have value in many ways.

How much lower can SCC go?

The peaks occur consistently in the hot summer month of July and August. Emphasis, and perhaps different procedures, during the summer months could pay off.

Friday, May 29, 2009

May Component Prices - Announced Friday

The May Class III milk component prices and the Class II, III, and IV prices will be announced Friday afternoon - June 5, 2009. Will the prices improve? Unfortunately, no, they won't.

While the final details for the calculation will not be available until Friday when the final last four weeks of data are available, we can look at the last four weeks that are available now to get a pretty good idea of where the prices will be.

Butterfat pricing is pretty straight forward. Butter has been increasing and the National Agricultural Statistical Service (NASS) price average over the last four weeks is $1.19. The Butterfat formula (simplified - see April 23 post) is as shown below:

Butterfat Price = 1.21 x Butter Price - $0.21

Therefore, the butter fat price should be near $1.23/lb, a slight improvement over last month.

Cheese prices are down! The graph below depicts the Chicago Mercantile Exchange (CME)prices. The protein formula (simplified) is as follows:

Protein Price = 3.22 x Cheese Price - 1.28 x Butter price - $.43

Given the four week NASS average for Cheese of $1.17 and Butter of $1.19 , that would calculate to a protein price of $1.81/lb, a very dramatic drop from last month.

The Class III milk price formula (simplified) is as follows:

Class III milk price = 9.6 x Cheese Price + 5.9 x Dry Whey Price + .04 x Butter Price - $3.20.

With Cheese at $1.17, Butter at $1.19, and Dry Whey at $.22, we can expect a Class III milk price around $9.38 a significant drop from last month's Class III price.

The actual data will be slightly different once the four week averages are advanced two weeks and the final calculations are made, but it will be ugly.

The final numbers and their impact on the long term trend and the milk pay check will be explored in the June 6 post.

Tuesday, May 19, 2009

Pacific Northwest Order #124 PPD

The Pacific Northwest Federal Order (FO) #124 is very different from the Northeast and Upper Midwest FOs discussed in prior posts to this blog. It has a very low PPD - averaging just $.14 over the course of the last 4+ years.

The Pacific Northwest is a much smaller order than many of the other orders. It's total reported milk is only 27% of the Upper Midwest Order. It processes an extremely large amount of Class IV milk (Butter and Nonfat Dry Milk); nearly three times as much as the Upper Midwest Order which in total is four times its size. Because Class IV milk is the lowest paid, the high percentage of Class IV milk drags down the average milk price to nearly the level of Class III milk. Hence it has a very small PPD, just $.14.

This FO has a very significant amount of depooling when the Producer Price Differential (PPD) goes negative, and because it is always close to "0", it's easy for the PPD to go negative. This has created a lot of volatility in the FO.

As done in the previous posts on FOs, the PPD chart is shown directly above the volume by milk class to illustrate the dramatic swings in volume (mostly Class III) when the PPD becomes negative.

Overall, the Pacific Northwest Order is not growing at all. In fact, it is slightly shrinking.
The chart below shows the volume of Class III milk by month. There are huge swings in volume due to depooling. In spite of this, the volume of milk going to cheese has shown a slight increase over the last 4+ years.

The Class IV milk has taken a significant dive in volume while Class I fluid milk, the green line below, has actually increased. This may be the only example of fluid milk increasing in volume.

In a later post to this blog, the various FOs will be compared. Dairy profitability can vary significantly depending on where the dairy is located. Is it fair?

Sunday, May 17, 2009

Northeast Order #1 - PPD

Northeast Federal Order (FO) #1 is very different from the Upper Midwest FO #30 (May 13 post). In FO #1 the Producer Price Differential (PPD) is a very significant part of the milk paycheck. The table below shows the makeup of the FO #1 milk check based on the most recent pricing - April, 2009.

While payments in a component pricing milk order are typically described as being made up of component quantities only, the PPD, based on cwt of milk in FO #1, is the third largest piece of the check and is significant. In other words, volume matters in FO #1.

To the right is a pie chart based on the most current 4+ years. The relatively large PPD is a result of the relatively large volume of Class I fluid milk in FO #1 - 45%. Class I typically carries the highest price and therefore drives up the average price of milk vs. the Class III price.

Shown below are two charts - the PPD by month since 2005 and the volume of milk by class during that same period. Note that in early 2009, the PPD peaked above $3.00. The rapidly increasing cheese prices can cause a negative PPD, but rapidly decreasing cheese prices like early 2009, can have exactly the opposite effect, significantly increasing the PPD. This would be only a temporary situation before the PPD returns to more normal levels.

The PPD has dipped negative only a few times in the recent history of FO #1. Therefore, there has been a minimal impact on depooling (dropping out of the FO pricing pool) in this order.
The decrease in volume can be detected in the chart below the PPD chart. The change in volume is minimal and infrequent.

Where is FO #1 headed? Overall milk volume is very steady in this order. There is no growth or decrease in overall lbs. However, we do see small shifts among the various classes that does have an impact on overall order pricing.

Class I fluid milk shows a slight decline, while Class IV shows a slight increase. Because Class I is typically the highest priced and Class IV is typically the lowest priced, this will over time shrink the PPD portion of the milk check. There will be a much more dramatic example of this when the Pacific Northwest Order is examined in a future post to this blog.

Wednesday, May 13, 2009

Upper Midwest Order #30 - PPD

The largest Federal Milk Marketing Order (FMMO) is the Upper Midwest - FO #30. As mentioned in the previous post, each of the Producer Price Differentials (PPDs) in the six orders paid on components will be analyzed separately as they are all very different.

The Upper Midwest Order is all about Cheese - Cheese - Cheese. Over the course of the last 4 + years, Class III milk for hard cheeses have consumed 75% of the milk reported by this Order. Class III usage is really greater, but the ability to withdraw from this Federal Order "Pool" or not "touch base"when the Producer Price Differential (PPD) is negative reduces the amount of Class III milk reported. "Depooling" is a major problem in this Federal Order.

The average PPD over this same 4+ year period was only $.28 -the lowest in all the 6 orders. The out sized scale used for the graph below was chosen so all orders could be compared in a later post. Because the PPD is primarily a comparison of the weighted average of all milk classes to the Class III price, it not surprising that with 75% of the milk being Class III, the difference between Class III and the average is pretty small.

Immediately below the graph on PPD is a graph showing milk volume by class in the order. The graphs were arranged in this way to identify the impact of "depooling". When the PPD becomes negative, a significant amount of the Class III milk is "depooled" from the FMMO. Frankly, this seems like a major issue that needs to be addressed in the Upper Midwest Order - they do make their own rules on this. The "depooling" increases the volatility of the PPD and producers don't need more volatility in their milk prices.

Why does the PPD become negative? It happens primarily when cheese prices are escalating quickly and due to the timing difference of about 6 weeks between when Class I milk pricing is established and when the Class III pricing is established, the Class III price can be higher than the Class I price. The volatility due to the timing difference in pricing Class I and Class III milk is exaggerated by the "depooling".

Where is the Upper Midwest Order going? The graph below shows the same trends we have seen in many places. Cheese usage grows while fluid milk remains flat or shrinks. When will this order hit 80% to 85% cheese? The trends show that it will probably reach these levels.

With the very high cheese production in the Upper Midwest Order the milk checks are minimally impacted by changes in the PPD. It would appear that the biggest issue in FO #30 is the very lenient rules on "touching base", "pooling", and "depooling".

Sunday, May 10, 2009

Producer Price Differential

Producer Price Differentials (PPDs) for each of the 6 Federal Milk Marketing Orders on component pricing are announced between the 10th and the 13th of the month. The PPD is an adjustment for the previous month's milk payments based on the relative volumes of each class of milk and their respective prices. New PPDs will be announced this week for April, 2009.

The PPD is typically positive, however it can be negative and is another factor in the extreme volatility of milk prices.

When milk prices are at $10/cwt, a change of $4.00+/cwt can be a tremendous variation. Some of this variation can be accredited to the amount of Class III milk versus other Classes. Two examples are shown below.

The Upper Midwest has a smallest average PPD - $.32/cwt - and the smallest range of variation - $1.29/cwt.

This is primarily because most all the milk in this Federal Milk order goes to cheese. In the March 2009 time period, 78% of the milk in the Upper Midwest order (also the largest order) went to Cheese.

Therefore, there cannot be much variation between the weighted average of all Classes and Class III.

However when you look at the Northeast Federal Order, the average is $1.66/cwt and the range during the period between January 2005 and now is $4.37/cwt.

As can be seen below, the largest class of milk in the Northeast Federal Order is Class I, so the weighted average of all classes is significantly different from Class III which makes up only 23% of the total milk receipts.

Because the PPD is a very significant variable and the reasons for it's variability are very different among the Federal Milk Marketing Orders, each region will be examined separately in a future blog.

Should you be interested, the PPD announcements can be obtained at the following links.

Northeast Marketing Order #1

Upper Midwest Marketing Order #30

Central Federal Marketing Order #32

Midwest Marketing Order #33

Pacific Northwest Federal Order #124

Southwest Marketing Order #126

Thursday, May 7, 2009

The Competition - New Zealand

For the first two months of 2009, U.S. imports of cheese were 17,314 metric tonnes. New Zealand accounted for 8593 metric tonnes or 50% of the total imports. There were no "close seconds"! This post reviews a few facts about the New Zealand Diary Industry, a strong influencer of the U.S. cheese prices.

New Zealand's population is 4,173,400. The U.S. population is 394, 590,000 - almost a 100:1 difference!

However, when it comes to cows, New Zealand has 4,013,000 cows compared to 9,315,000 in the U.S.
In other words, New Zealand has nearly one cow for each person. In the U.S. one cow has to be shared by approximately 42 people.
Because no one can consume 50+ lbs. of milk a day, obviously, New Zealand's dairy business is primarily an export business.

New Zealand's dairy industry is really focused on milk solids - defined as Milk Fat + Protein. The graph below shows the growth in milk solids per cow over the last 16 years.

Milk Solids (Milk Fat & Protein)

New Zealand's dairies have averaged 3.7% protein and 4.7% milk fat in 2008. Clearly, New Zealand is a fine-tuned cheese machine.

What kind of cows produce this? Shown below is the breakdown of the New Zealand dairy industry by breed.

As shown in an earlier post, cheese imports into the U.S. from New Zealand spiked at the end of 2008 which was one of the factors that caused a huge decrease in the price of U.S. cheese.

Currency exchange rates were the primary factor for the change in imports. Shown below is the exchange rates between the New Zealand Dollar and the U.S. Dollar.

Much of the data in this post was taken from the newly-published 2008 New Zealand Dairy Statistics.

New Zealand's dairy industry is the competition, not the neighbor's dairy farm. What can be done about it? There will be more discussion in a future post.

Sunday, May 3, 2009

April Milk Prices Hold Firm

While not showing much improvement, the Class III component prices for April at least held close to last month's prices. This is better than expected based on current cheese prices. The Class III milk price was announced Friday, May 1 at $10.78.

Protein was unchanged at $2.20/lb, butterfat improved a little to $1.20/lb, and other solids remained negative. The Dry Whey price was below the "make allowance" for Dry Whey, meaning that the raw material - primarily lactose - continued to have negative value! (See formulas at the USDA site)

Protein pricing and Class III milk prices are very dependent on cheese prices. The National Agricultural Statistical Service (NASS) prices lag the Chicago Mercantile Exchange (CME) prices by about two weeks (see April 2 post). CME cheese prices - also announced on Friday - gave a different - much lower view of prices than the NASS cheese price. The NASS cheese price for April was $1.27/lb. The CME weekly cheese prices - also announced on Friday - were under $1.20/lb for both Block and Barrel prices.

The Hoard's Dairyman comparison of NASS and CME prices helps illustrate where cheese prices are heading. The Class III prices that were announced on Friday could be taken as a sign of coming improvement in prices or at least a bottoming out of prices. Unfortunately, the leading indicators say that prices are still headed downward.

It is important to remember that the majority of the milk check comes from protein. Even if the price per pound is lower, more protein is still extremely important!