What Does the Class III Price Represent?

Response to the prior post on dairy pricing formulas has been very strong.  This post will build on that with an analysis of Class III price and what it represents.  The Class III price is often quoted in written material and conversations.  It is the basis for the initial milk payment for the majority of producers. When the Class III milk price goes up, payments to producers go up.  

The most recent Class III price announcement was made on January 3, 2019 and represents the Class and Component prices for December, 2018.  The price was a disappointing $13.78/cwt.   It was composed of butterfat at $2.5080/lb., milk protein at $1.1417/lb., and "all other" solids at $.2775/lb.  Calculation of the Class III price is based on skim milk at 3.1 percent protein, and "other solids" at 5.9 percent.  That calculates to a Class III skim price of $5.18/cwt,  

Butterfat is based on a 3.5 percent content in the milk which equals $8.78/cwt.  The final value for Class III is then 96.5 percent skim milk and 3.5 percent butterfat, which equals $13.78/cwt., the Class III price.

December Class III milk price = $5.18 x .965 + $8.78 = $13.78/ cwt.

The announced Class III price is only an index.  It is always based on milk with the same component levels, 3.1 percent protein and 5.9 percent "other solids" in skim milk and 3.5 percent butterfat.  That is what an index is.  An index price is based on a constant volume of components that makes it comparable with all other calculated values for prior months.

However, it is very rare that a producer supplies milk at exactly these component levels.  A more likely component level would be around 3.8 percent butterfat, with 3.2 percent milk protein and 5.9 percent "other solids" in the skim portion of the milk.  For that level of components, the effective Class III price would be $14.64/cwt.,  That price is $.86/cwt. or 8 percent higher than the published Class III index price.

Example Class III Price with higher component levels

 = (3.2 x $1.1417 + 5.9 x $.2775) x ,965 + 3.8 x $2.5080 = $14.64/cwt.

The standards used for the Class III milk price index were developed prior to January 1, 2000, when the current payment system was implemented.   The standards in the Class III index were probably reasonable standards at that time.  Because changing an index price makes it inconsistent with past statistics, an index is kept at standardized levels.

Increased component levels can increase producer revenue.  Further improvements in component levels can be achieved.  While $14.64/cwt. is not a sustainable price for most dairy production, it is certainly better than $13.78/cwt.  With just an additional 1 percent increase in protein and butterfat, the milk in this example would be worth $15/cwt.

Clearly, all effort to increase component levels for butterfat and milk protein can help improve dairy profitability.  Technology is available to achieve higher levels of butterfat and milk protein.  Implementation is being achieved in many herds today.

The majority of dairy products require only components.  Measurement of dairy productivity by pounds of milk is not an effective measurement.  The important statistic is component levels.  The current growth products like cheese and butter require only components.