July Prices Showed Improvements Over June. What will August bring?

In the July post, the June analytics of high cheese and Class III milk prices combined with a large negative Producer Price Differentials (PPD) and massive de-pooling was reviewed.  July analytics followed some of the same patterns, but with improvements and a few negatives.  This post will provide insights into what happened in July and where the market seems to be going in August.

The highlights of this post will cover the following:

• The July PPD was again negative for all Federal Orders paid on the component system.  On the average, the negative PPD was 16 percent greater in July than June.

• The Uniform (average) price for all classes of milk increased in all Federal Orders.  On the average, the Uniform price was 16% higher in July than June.  That is very good news for those who remain in the FMMO pools.

• Massive de-pooling continued in July.  De-pooling of Class III milk in the Upper Midwest increased further in July.  California continued to de-pool almost 100 percent of their Class III milk.

• The July price of milk protein increased to $5.63 per pound, a record high and 24 percent higher than June.  This very good news for producers focusing on milk protein production.

• The July Class III milk price was $24.53 per cwt., a 17 percent increase from the prior month.

• Cheese exports did spike in June with a 29 percent increase.  However, year-to-date, cheese exports are still showing no growth over the prior year.  The spike in June was primarily forward purchases from Mexico at low April and May prices.  It is a one time event, not a change in ongoing exports.

• Cheddar cheese production has remained robust and published inventories have remained within normal ranges.  However, the combination of increased exports executed in late April and May at low prices and delivered in June, CFAP purchases put out for bids in May for delivery in June and July, and other forward buying of Cheddar when prices were low have put stress on Cheddar resulting in higher prices.  The change from food service to retail purchases. have also created havoc in Cheddar production, processing, and purchasing.  Read this article from the New York Times for details.

• The record high cheese prices are starting to decline in the weekly NASS surveys.  Will the August price signal a return to normal?

Table I below shows the Uniform Price and PPD for each of the Federal orders paid on components.  July Uniform milk prices were higher than May or June prices.  That is very good news for those that stayed in the Federal Order pools.

The PPD reached a more negative level in July.  This was caused by the very high Class III milk price compared to the Uniform price.   The low Nonfat Dry Milk (NDM) price held down both the Class I and Class IV prices.

With Class III at $24.53 per cwt. and an average negative PPD of $7.51 per cwt., the combination of the Class III less the PPD adds to $17.02, very close to the Uniform price of $17.00 per cwt. shown in Table I.  While there are multiple adjustments in Federal Order PPD calculations, the essence of the PPD concept and calculation is to produce an even pay for those in the pool. The data in Table I clearly shows this relationship.

Table I - The Uniform Price and PPD

With a large July negative PPD, de-pooling was again very aggressive.  Below are Charts I and II showing the Class III pooled volumes of two of the largest Federal Orders, the Upper Midwest and California.  When milk is de-pooled, Federal Order pricing does not apply.  Typically, the producer is able to maintain near Class III prices when de-pooling, but the price can be lower.

In July the Upper Midwest the pooled Class III milk dropped to 446 million pounds.  That is about 15 percent of the milk that was being pooled in the first half of 2019.

Chart I - Class III Milk Volume in the Upper Midwest

California Class III milk pooled was at 1,411 million pounds shortly after becoming a Federal Order.  In 2020, that has fallen to a very low level and in July reached a new low of just 11 million pounds.  Practically all of the California Class III milk is not pooled.

Chart II - Class III Milk Volume in California

Charts III and IV show the estimated de-pooling in the Upper Midwest and California.  In the Upper Midwest de-pooled milk is reaching record levels. 

Chart III - Estimated Upper Midwest de-pooled Milk

De-pooling in California went down slightly only because less Class IV was de-pooled.  As long as the Class III milk price is high, it will remain out of the pool.

Chart IV - Estimated California de-pooled Milk

With the high cheese prices and lower butter prices, milk protein, as covered in the prior post reached an extraordinarily high value of $5.63 per pound in July.  Producers spiking diets for protein development are getting high returns.

Chart V - Milk Protein Prices

WHERE IS AUGUST PRICING GOING?

In the July 31 post to this blog  an analysis of the August Class I price was detailed.  It was based on high cheese prices, but the new Class I formula brought the base skim milk price down to $13.34 per cwt.  The September Class I skim price was just announced at $13.02 per cwt.

The Class III skim price is primarily based on the NASS price of cheese.  As shown in Chart VI, the price of Cheddar cheese is falling in the NASS surveys, but at $2.21 per pound it is still high.  Based on the first two weeks of data, the August Class III Skim price would be $17.08 per cwt.  With the Class I skim price still well below the Class III skim price, a strong negative PPD can again be expected in August.

Chart VI - Weekly NASS Survey of Cheese Prices

With cheese prices declining, historically, the Class III price for the month would have been lower than the Class I and the PPD for August would be positive.  However, with the new formula for Class I, which is based on a combination of the Class III and Class IV prices, the Class I is much lower.  (See the July 31 post to this blog for details on the change in formulas.)

Unfortunately, there seems to be little movement in the Class IV skim price.  The Class IV skim milk price is based on the NASS value of NDM.  As shown in Chart VII, the price of NDM is low and steady.  Based on the first two weeks of data, the Class IV skim price would be $7.14, very close to the July price of $7.16 per cwt.  This will keep the PPD well into negative territory in August.

Chart VII - NASS Survey of NDM Prices

If cheese prices continue to fall, the August Class III price will be lower than the price mentioned above which is based on the first two weeks of the four-week month.  Regardless, the August PPD will be negative.

Updates will be covered in this blog as additional data becomes available.