The November Class and
Component Prices were announced on
December 5. The Class III milk price of $20.83/cwt was down by only 1%
from the October price of $21.02. While both butter and cheese prices
fell, protein remained high at $3.72/lb. Because butter prices fell more
than cheese prices, milk protein prices remained almost unchanged, down only
.3%. See the August 8, 2010 post for an explanation of this relationship.
The long term component price trends are shown
below. Milk protein continues to be valued well above the trend line at a value
that represents historical highs, excluding the period in 2007/08 when protein was
briefly priced above $4/lb.
Butter prices did fall about 4%, but this has
very little impact on the Class III milk price. The Class III milk
price is dominated by the cheese prices as explained in the April 23, 2009
post to this blog.
"Other solids" have not had much
impact on Class III milk prices in the past, but the high price of dry whey is
making the value of “other solids” a
critical part of the Class III milk calculation. The price of "other
solids" is determined by this formula.
Other
Solids Price = (Dry whey price – 0.1991) times 1.03
In the month of November, cheese, butter, and
dry whey, contributed the amounts shown in the table below to the Class III
milk price. By comparison, the contributions for November, 2009 are also
shown. This illustrates the dynamics that are happening in dairy pricing. The math behind the calculations used in the
table below is detailed in the August 8, 2010 post to this blog.
Over the last three years, the
price of dry whey and therefore "other solids" has steadily increased. While cheese and butter prices have gone up
by 33% and 32% respectively, dry whey has gone up 86%.
In November, 2009 "other
solids" made up 6% of the Class III price but by November, 2012, “other
solids” made up 13% of the Class III price.
Whey is being recognized
more as a co-product than a by-product of cheese manufacturing and is establishing its value as a food product, not a by-product..
This is a market dynamic that may be permanently shifting the Class
III milk prices. Assuming that it
continues, it could have nearly a $2/cwt positive impact on the Class III milk
price.
Protein
continues to dominate the Class III milk check and milk protein development remains
key to a producer’s revenue.
OTHER SOLIDS
Whey exports remain high helping to keep the "other
solids" price high. Because whey is a by-product (or co-product) of cheese
production, the available volume of dry whey is determined by the amount
of cheese produced. The amount of whey produced is nearly equal to the
amount of cheese produced on a solids basis. At the current time, 40,000
metric tons of whey are being exported every month. By comparison, there is
about 20,000 metric tons of cheese exported, which on a dry basis would amount
to about 12,000 metric tons of cheese solids. The disappearance of dry
whey is clearly driven by exports.
This has created an increasingly tight supply of dry whey. As stocks are depleted, the laws of supply and demand result in increased prices.
CHEESE
Cheese prices as reported by NASS are currently high
at over $2/lb, but they are falling rapidly. The cheese price is the most
important parameter for Class III milk pricing. The November NASS price
for cheese was $2.01/lb. By comparison, the December 7 price for barrel cheese
on the CME is $1.66/lb and block cheese is $1.76/lb. This would indicate
that NASS prices may fall by 15% in the month of December. CME cash prices for cheese lead the NASS prices by about two weeks.
The drop in cheese prices is unusual considering
the relatively tight inventories reported for October.
Cheese production remains consistent with long term trends, and exports
remain well above prior year levels.
Because the reporting of cheese inventories and exports lag, this
analysis lacks current data, but as of the most recently reported data, there
is nothing that should be driving down cheese prices as much as is currently
happening.
BUTTER
Butter prices calculated by NASS were $1.84/lb
for November. Current CME cash prices are at $1.61/lb or 13% below the
reported NASS prices. Although butter prices have a lesser impact on
Class III milk prices than cheese, this would also suggest that December milk
prices will be well below October and November prices. This price decline
is also unusual as butter stocks remains at reasonable levels.
WHERE ARE MILK
PRICES GOING?
Class
III milk prices are headed for their own fiscal cliff beginning in
December. The futures prices show a
continuation of lower Class III milk prices beyond December.
However, because exchange rates remain favorable and inventories for cheese, butter and dry whey are not high, it seems reasonable that the drop in
future Class III milk prices that exist at the present time may moderate or at least
not deteriorate further.
