Which Federal Orders Will Grow and Which Ones Will Shrink?

Milk needed in each of the 11 Federal Orders will increase or decrease based on their mix of the four different classes of milk.  Those heavy on fluid milk will shrink with the declining domestic consumption of milk and very limited export opportunities.  Those heavy in cheese will grow as the domestic consumption of cheese increases.  For review, the four Classes of milk are defined below.  All Class I milk must be included in the FMMO pool.  Milk in all other Classes can be de-pooled and are then not subject to FMMO pricing or reporting.

Class I - The milk we drink

Class II - The milk used to make soft dairy products like yogurt, ice cream and sour cream

Class III - The milk used for hard cheese

Class IV - The milk used for butter, nonfat dry milk, and whole milk powder

Altogether, the 11 Federal Orders produced 98,337 million pounds of milk through July of 2019.  Chart I shows the breakdown by Class.  Class III milk for cheese now consumes nearly half of the total milk supply and the category is growing.  Class I milk for drinking now makes up only a quarter of the milk supply and that category is declining.  Class IV milk for butter and nonfat dry milk make up a healthy 16% and Class II for soft dairy products like ice cream and yogurt is the smallest category and shrinking.

Significant amounts of milk for cheese and nonfat dry milk are de-pooled.  The de-pooled amounts are not included in the FMMO numbers in Chart I.  If they were included, Class III would be over 50 percent.

Chart I - Milk for all Federal Orders by Class

The data for the Federal Orders now includes California.  This data below covers only the reported milk from the Federal Orders.    Table I below shows how the Federal Orders rank by reported volumes.  The Upper Midwest is by far the largest at 21.8 percent of the total.  The Northeast is second in size and California is third and adds significantly to the total milk from the Federal Orders.

As mentioned above, some of the Class II, III, and IV milk is not included as the producers can and do de-pool from their Order when financially desirable.  De-pooling has become huge in the new California Order.

Table I - Ranking of Federal Orders by Size

Table III shows the volumes paid on the "Component" system and those paid on the "Advanced" system.  Those paid by the component system comprise nearly 90 percent of the milk and considering that some of the Class III and IV milk is de-pooled, the real number is in excess of 90 percent.

Table II - Component and Advanced Payment Systems Ranked by Volume

Cheese consumption is growing, and fluid milk consumption is decreasing.  In which Federal Orders will milk volume increase and in which Orders will milk volumes decrease?

The biggest winner will be the Upper Midwest (Chart II).  With nearly 90 percent of the milk used for cheese, increased milk volume will be needed for the increased domestic consumption of cheese.  They are the largest Federal Order and will grow with the growth of cheese consumption in the U.S.  In 2018, milk reported in the Upper Midwest increased by over three percent

Chart II - Upper Midwest Milk by Class

California has the second largest Class III volume with nearly 50 percent of the milk going to cheese (Chart III).  California also has a significant volume of Class IV milk which is also growing.  Class I milk is a relatively low volume.  That reduces the uniform price and contributes to de-pooling in the California Order.  Also, when Class IV prices are higher than Class III prices, it is often advantageous for Class IV producers to de-pool.  This is one of the main reasons that a significant amount of California milk is being de-pooled and is not in the California numbers in this post.

Due to de-pooling, the volumes of Class III and IV milk vary significantly month-to-month as significant volumes of milk is de-pooled.  As an example, in 2019 the lowest monthly volume of Class IV milk was 53 million pounds and the highest monthly volume was 1175 million pounds.  If all the Class IV milk was reported, it would nearly double the reported volume of Class IV milk.  Class III milk ranged from a low of 320 million pounds per month to a high of 1416 million pounds.  See the July 2018 post to this blog which explains in detail the huge impact of de-pooling in California.

The total milk volume reported by the California FMMO is therefore significantly understated.  If all the milk was reported through the California FMMO, California would be ranked second in size behind only the Upper Midwest (See Table I).

Chart III - California Milk by Class

The Northeast is ranked second in size of reported milk.  As shown in Chart IV below, the Northeast has a very balanced mix of the four Classes of milk.  Class II is significantly larger than other FMMOs due to the significant production of yogurt in the Northeast Order.  In 2018, the Northeast actually gained volume in Class I milk.

Chart IV - Northeast FMMO Milk by Class

The three FMMOs (Appalachian, Southeast, and Florida) in the southeast U.S. are very dependent on Class I milk volume and are paid on the "Advanced" system.  Florida is the most dependent on Class I milk for drinking with 84 percent of its milk used in Class I.  The Appalachian and Southeast Orders have 69 percent and 67 percent respectively of their milk used in Class I.  As the Class I category declines, these areas will lose the most volume.  Significant reductions in the number of cows will be needed.

Chart V - Appalachian, Southeast, and Florida FMMOs milk by Class

The Pacific Northwest is very small compared to most other FMMOs but is nevertheless exceptional in growth.  They were reviewed in the last post to this blog because of their astounding increase in component percentages.  They are also significantly growing their volume of Class III and Class IV milk.  Comparing 2018 to 2017, Class III milk increased by 24 percent and Class IV milk grew by 10%.  While their Class I volume is shrinking, the gain in Class III and IV have allowed a 12 percent increase in total milk in 2018 over the prior year.  This growth appears to be continuing in 2019.

In total, the Pacific Northwest is significantly growing component levels and milk volume with the increased milk going to cheese and nonfat dry milk.

Chart VI - Pacific Northwest FMMO by Class

SUMMARY

The dynamics of milk consumption are changing, and the milk supply must change to meet these changing consumption characteristics.  Somewhere around 75 to 80 percent of the milk needed to meet consumer and export demand requires components, not milk volume.  The components most needed are butterfat and milk protein.  Water has no value (maybe a negative value) and lactose is mostly sold as whey at a very low price.

By the data analyzed in this post and the prior post, all emphasis should be on increased amounts of butterfat and milk protein.    Increases in both of these components can have a significant impact on producer revenue and helps match the needs for production of growth dairy products.  This can be achieved with fewer cows as cow component and milk volume increase.

Geographically, those orders that depend on fluid milk will need to reduce milk production by at least two percent annually and those that produce cheese will need to grow by at least two percent or more annually.