The big change, which can now be recognized as a trend, is the increasing price of dry whey. Dry whey prices are the basis for pricing Other Solids. Dry whey prices started 2016 at $.24/lb. As of February 2017, the price has more than doubled to $.49/lb. As a result, the price of Other Solids has increased from $.04/lb. at the beginning of 2016 to its current price of $.30/lb.
From January to February, the changing value of Other Solids increased the Class III price by $.27/cwt. Compared to a year ago, the change in Other Solids has increased the Class III price by $1.49/cwt. This change is far from insignificant.
What makes dry whey a valuable product? Whey is what is left over when cheese is made. Cheese is composed of milk protein and butterfat. What's not in the cheese is whey. Whey is primarily lactose with a little less than 10% protein. The proteins in whey are the non-casein proteins collectively referred to as whey proteins. While whey is typically marketed as a protein source, the major ingredient, lactose, provides a sweet taste, which gives it the name "sweet whey." It provides a nice addition to health foods, bakery products, and other food products. In 2016, 44% of dry whey was exported so the domestic price is heavily influenced by international dry whey prices.
Will the current prices hold up? Dry whey prices in the futures market indicate a steady price in the upcoming months with a somewhat lower price around $.40/lb. by the end of the year.
Another important analytic is how the U.S. pricing is compared to international prices. As shown in the chart below, U.S. dry whey prices are competitive with Europe and both have increased dramatically during 2016 and 2017. The final number in the chart below includes a March forecast number which anticipates a further increase in the international prices.
Based on these analytics, it would appear that domestic dry whey prices will hold close to the current prices.
In March of 2016, I published an article in Progressive Dairyman analyzing the differences in California milk pricing as compared to FMMO pricing. In the February 12, 2017 post to this blog, the proposed change in California from state controlled milk pricing to a Federal Order was reviewed. How Other Solids are priced is one of the reasons California is considering a change to become a Federal Order. California's pricing system also has a "lid" on the value of Dry Whey used for producer pricing. The change to an FMMO would eliminate this "lid."
Other Solids are now worth $.30/lb. compared to $2.23/lb. for milk protein. The current payment system in California recognizes only "Solids Not Fat" which is currently valued at $.82/lb. Therefore, milk protein is currently worth only $.82/lb. in California. If producers vote to change California to a Federal Order, protein will be worth $2.23/lb. and Other Solids would be worth $.30/lb. If California producers vote to become a FMMO, it will certainly change producer strategies and practices in California. Considering that 20% of the nation's milk is produced in California, this change could impact the entire U.S. dairy industry. How this may impact overall pricing in the U.S. is uncertain. The USDA's proposal is under review and will be analyzed more in an upcoming blog post.
PROTEIN & BUTTERFAT
The other changes in prices were small compared to the movement in dry whey and Other Solids. Milk protein increased slightly in February only because butter prices fell. See a prior post to this blog for a review of this relationship. Inventories of cheese and butter were both up increasing concerns of oversupply. The potential oversupply has weighed on prices of cheese and butter which both declined in February.
Nonfat dry milk is the basis for pricing Class IV milk. Class IV milk is always used to price Class II milk, and when it is higher than Class III, Class IV prices are used to price the Class I price. Class I milk is significant in size and can significantly influence both the uniform milk price and the producer price differential.
Because nonfat dry milk is priced based on international markets, the price has improved somewhat, but is still not near 2013/14 levels. Therefore, no potential boost in the uniform milk price or the producer price differential caused by a spike in NDM and Class IV milk looks likely in the near future.
The next post to this blog will cover export/import data as it becomes available. As covered in the prior two posts (part one and part two), imports are becoming more worrisome than exports.
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