Comparing the Federal Orders

This post will compare parameters for each of the Federal Milk Marketing Orders.  While a lot of milk is being de-pooled in the Federal Orders, most of the milk is still paid by Federal Order formulas.  The following parameters will be compared.

• Component levels of butterfat and milk protein vary  Butterfat is paid in all 11 of the Federal Orders.  Milk protein is specifically paid only in the seven Federal Orders included the Class and Component payment system.  The Federal Orders paid by the Class and Component formulas represent most of the milk.

• Somatic cell counts are paid in four Federal Orders.  They are all located in inland areas of the U.S.  

• The Uniform (average) price paid for skim milk is a weighted average of the four classes of milk and varies based on each Federal Order's mix of milk classes.  The Uniform price uses 3.5 percent butterfat as a standard.

Below is a map of the Federal Orders.  Three of the Orders, California, Arizona, and Florida are based on state lines.  The Southwest is defined by the lines around Texas and New Mexico and the Upper Midwest is primarily Wisconsin and Minnesota.  The Mideast includes Michigan, a major dairy state.  Other Federal Orders are a mix of states and partial states.

Map of the Federal Orders

Chart I lists the Federal Orders by 2020 milk receipts.  The Northeast was the largest Federal Order in 2020.  Federal Orders like California and the Upper Midwest had very significant de-pooling, so those Federal Orders appear smaller than they would be if there was no or limited de-pooling.  Florida is by far the smallest Federal Order.

Chart I - 2020 Milk Receipts by Federal Order

One parameter used to compare the Federal Orders is the component levels in milk.  Charts II and III rank the Federal Orders based on butterfat and milk protein percentages.  The Southwest is ranked highest in both butterfat and milk protein percentage with the Pacific Northwest close behind.  In a prior post, Texas, which makes up the majority of the milk in the Southwest Order, was ranked as the fastest growing state in number of cows and volume of milk.  See this prior post a review of the recent growth in component levels.

Chart II - Butterfat Percent by Federal Order

Protein is reported and paid in the seven Federal Orders using the component formulas.  Again, the Southwest and the Pacific Northwest are ranked at the top.  Surprisingly the Upper Midwest is ranked much lower in milk protein content than butterfat.  What makes it surprising is that many producers in the Upper Midwest get bonuses on top the Federal Order payment for protein because high levels of protein are needed for efficient cheese making.  Protein is very important in the Upper Midwest as more than 80 percent of the Upper Midwest milk goes to cheese.  The Northeast drops to the bottom of the chart for milk protein content probably due to a significant amount of milk used in Class I fluid milk production.

Chart III - Milk Protein Percent by Federal Order

Somatic cell counts have fallen drastically over the years.  The Mideast and the Upper Midwest are tied as the best in the ranking.  Lower somatic cell counts do improve cheese making productivity, so it makes sense that milk for cheese production is well managed to attain low somatic cell counts. With average counts at 170,000 cells per milliliter, the lower end values are well below 170,000.  Many cheese processors pay additional bonuses on top of the Federal Order payment for low somatic cell counts.

Chart IV - Somatic Cell Count ranked by the Federal Orders

The comparison of the Uniform price is saved for last in this post.  It is presented in three charts. The first ranks all 11 Federal Orders and the remaining two charts separate the Federal Orders paid on the Component system from those paid on the Advanced system.

Florida is and historically has always had the highest priced milk.  Florida is the smallest Federal Order but has over 80 percent of its milk in Class I milk for drinking.  The Southeast and Appalachian Federal Orders also have large volumes of Class I milk.

Chart V - The Uniform Price for All Eleven Federal Orders

Among those Federal Orders paid by the component system, the Northeast Uniform price is well above the pack.  The answer is that the Northeast Federal Order has a very balanced mix of all classes of milk including a lot of Class I milk for drinking.  With de-pooling in the Northeast Federal Order, Class I is the largest class by volume.  Class I milk cannot be de-pooled.

Chart VI - The Uniform Price of the Federal Orders
Paid by the Class and Component Formulas 

Florida, with its huge percent of Class I milk gets the "award" for the highest priced milk.  The Southeast and Appalachian Orders are close behind Florida.  The Arizona Federal Order has a lot of Class IV in their mix and therefore has a lower Uniform price.

Chart VII - The Uniform Price of the Federal Orders
Paid by the Advanced Formulas

As mentioned above, Class I milk cannot be de-pooled.  All other classes can be de-pooled and re-pooled based on the policies in their Federal Order.  The Federal Orders in 'Table I below are listed by their percent of Class I milk. Notice that the ranking below follows the ranking of Federal Order in Chart V which lists the Federal Orders by their Uniform Price.  

Each Federal Order has different rules for allowing de-pooling and re-pooling.  California has a very sizable cheese business, but the milk pooled has very little Class III milk. Since the beginning of California as a Federal Order de-pooling has been very significant. From time to time nearly all the Class III or Class IV milk has been de-pooled. The same can be said for the Southwest Federal Order.  If Class III or Class IV prices are above the Uniform price, the Class III or Class IV milk will be de-pooled.  

Arizona which is paid on the Advanced system has a relatively small volume of Class I milk compared to the other Federal Orders paid on the Advanced system.  Therefore, their Uniform price is much lower than the other three Federal Orders paid on the Advanced system.

Table I - Class Percent by Federal Order

What does all this mean?

If you are paid on the Class and Component system, maximizing milk protein and butterfat will provide strong revenue.  That would apply especially to the Upper Midwest.  When PPDs are positive, the Class III milk will be pooled, and when PPDs are negative, much of this milk will be de-pooled. The de-pooled milk is still typically paid at Federal Order component prices.

If your milk is marketed in Florida, you get paid specifically for butterfat.  You will want to maximize butterfat.  Milk protein is not paid for specifically and, therefore, protein carries little value.  However, you will still receive a very nice price for your milk because the system does pay well for Class I milk.

There are many scenarios that could be developed for different areas.  Please leave comments or contact the writer of this blog with comments or questions.

PPDs are Positive! Finally!

Producer Price Differentials (PPDs) have turned positive in all seven of the Federal Orders that are paid by the Class and Component formulas.  In 2020, PPDs were extremely negative and have continued negative in 2021 significantly reducing producer's milk revenue.  The PPD is the difference between the Class III price initially paid to producers in the "Class and Component" system and the weighted average (Uniform) price of the four Classes of milk in each Federal Order.  

Why is the PPD now positive?  There are many reasons.

• The price of Class IV skim milk has increased to levels not seen since 2014.  This is the major reason for the current positive PPDs.  The Class IV skim price is based solely on the price of Nonfat Dry Milk (NDM).

• The Class III skim price has decreased in 2021 and is currently at $10.20 per cwt.

• The Class IV skim price is still less than the Class III skim price, but the adjustment of $.74 in the new formulas is now adequate to make the new Class I formula positive.

• The Class II skim price is based on the Class IV skim price plus $.70.  The higher NDM prices have therefore increased the Class II milk price and boosted the Uniform price

The most important event is the significant increase in the Class IV skim price which is driven by the price of NDM. 

Class IV Skim Milk Price = Nonfat Solids Price x 9 

Historically, the highest price ever for Class IV Skim milk was in August 2007, at $17.43 per cwt.  The current price of $9.69 per cwt. is clearly not a record but does represent a seven year high.

Chart I - Class IV Skim Milk Price

NDM has become primarily an export item as covered in an earlier post and is shown here as Chart II.

Chart II - NDM Domestic and Export Use

Dairy export prices are published by CLAL, an Italian Dairy Economic Consulting firm that analyzes the international dairy market.  With so much of the NDM being exported, the price of these exports as reported by CLAL and the USDA values for NDM are almost identical (Chart III).  In a sense, the international price of NDM is now controlling the value of U.S. producer milk.

Chart III - NDM Prices

Who is importing NDM from the U.S.?  Mexico has always been the biggest buyer of U.S. NDM. However, SE Asia is now the largest importer of U.S. NDM (Chart IV).  The countries that make up SE Asia are Brunei, Burma, Cambodia, Timor-Leste, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.  This market has been developing since mid 2019 and continues to grow in 2021 with attractive prices. These events are a "game changer."

Chart IV - Exports of NDM/SMP

Class II skim milk for "soft products" also benefits from the current prices for NDM.  Although Class II milk is the smallest of the four milk Classes, it does contribute to the overall "Uniform" price.  Chart V, which is based on Class II skim milk prices is also at a high not seen since 2014.

Class II Skim Milk Price = Advanced Class IV Skim Milk Pricing Factor + 0.70

Chart V - Class II Skim Milk Price

Now, back to the Class I numbers.  Table I below has the last four months of Class I prices based on the old and new formulas.  With the increase in the Class IV price, explained above, the Class I price is increasing with the new formulas.  The old and new formulas are shown below.  The formula change occurred on May 1, 2019.

OLD FORMULA

Base Skim Milk Price for Class I = Higher of Advanced Class III or Advanced Class IV Skim Milk Pricing Factors 

NEW FORMULA

Base Skim Milk Price for Class I = ((Advanced Class III Skim Milk Pricing Factor + Advanced Class IV Skim Milk Pricing Factor) / 2) + $0.74 

With higher Class IV prices, the new base Class I skim formula price is finally higher than the old formula price.   Class III skim prices are still higher than Class IV skim prices, but with the additional $.74 adjustment in the new formula, the Class I price is higher with the new formula compared to the old formula.  This contributes to a higher Uniform price.

Table I - Skim Class I Price per Cwt.

The bottom line is that all FMMOs are finally seeing a positive PPD.  Below are charts tracking the PPD in the four largest Federal Orders.  

• The Northeast Federal Order has a diversified balance between the four Classes of milk and has returned to a near normal positive PPD currently at $1.57 per cwt.  
• The Upper Midwest has mostly Class III milk for cheese and therefore always has a very small PPD, but it has returned to a positive value. 
• The Southwest Federal Order has endured negative PPDs reaching nearly $9 per cwt.  The change in PPD to a July positive value of $1.16 per cwt. is a change of about $10 per cwt., significantly improving producer payments.
• California has a very a large Class IV business and nearly 100 percent of the Class III milk is de-pooled. But the PPD is now positive after negative PPDs in 2019 reached nearly $10 per cwt.

How long will the PPD remain positive?  It will continue to be followed in this blog.

Chart VI - PPD for the Northeast Federal Order

Chart VII - PPD for the Upper Midwest Federal Order

Chart VIII - PPD for the Southwest Federal Order

Chart IX - PPD for the California Federal Order

The Future of U.S. Cheese Production and Consumption

Fluid milk consumption continues to drop.  Cheese consumption continues to expand.  The question is, how much milk will be required to fulfill the needs?  This post will examine where U.S. cheese consumption and production is going.  Cheese is the most important growth product that can give milk producers an increasing demand for milk.

The data for this post comes from the OECD, the Economic Co-operation and Development organization headquartered in Paris, France.  They collect a great deal of economic data from the 38 member countries and provide forward looking forecasts. In the data below, the UK is shown separately from the EU because they are no longer a member of the EU.

Using this data provides insight into U.S. consumption and production of cheese and provides comparative data from other countries.  The object of this post is to quantify how the growth of cheese demand in the U.S. is developing.  Domestic consumption and net exports make up the total demand for cheese.

The EU is by far the leader in cheese production and consumption.  The population of the EU is about 448 million people, about 35 percent bigger than the U.S.   Per capita consumption of cheese is 20 percent greater in the EU compared to the U.S.  That should leave significant growth opportunities for U.S. cheese consumption.  

CONSUMPTION OF CHEESE

Chart I is a pie chart of the cheese consumption in the OECD countries.  The EU is by far the largest consumer of cheese.  Their market for cheese is very well developed and is still growing.  However, the rate of growth is slowing as the market for cheese matures.  The U.S. is the second highest consumer of cheese. The EU and the U.S. account for 84 percent of the OECD cheese consumption. Consumption of cheese by the other 36 countries is much smaller.

Chart I - OECD Countries Cheese Consumption

The growth in cheese consumption is shown in Chart II.  The EU and UK markets are very mature and are expected to increase by less than one percent annually.  The U.S. is a slightly less mature market for cheese. Although the growth rate in the U.S. is also slowing, it is still expected to grow at about 1.5 percent annually.

Chart II - Cheese Consumption Growth of the
Largest Consuming Countries

The U.S. exports cheese primarily to three countries.  They are Mexico, Japan and Korea in that order. The growth of consumption in these three countries is about two percent annually, only slightly greater than the cheese consumption growth in the U.S.  

Will the U.S. cheese export market diminish with increased local cheese production in these countries?  The OECD data does not indicate any change in cheese production in Mexico, Japan, or Korea.

Total cheese exports amount to about six percent of U.S. cheese production and have not been increasing.  Therefore, exports will not have a significant bearing on cheese demand.

Based on this data, cheese consumption and exports in the U.S. are expected to grow at about 1.5 percent annually in the upcoming years.

PRODUCTION OF CHEESE 

Chart III which shows production of cheese by country is very similar to Chart I which shows consumption of cheese.  The EU and the U.S. make up 86 percent of cheese production in the 38 OECD countries.  Production of cheese by the other 36 OECD countries is much smaller.

Chart III - OECD Countries Cheese Production 

Production of cheese in the U.S. (Chart IV) is currently growing by over two percent annually, but that is expected to fall to about 1.5 percent in the coming years, consistent with cheese consumption covered above.  EU cheese production growth is also slowing down to about one percent growth in coming years which is also consistent with expected EU consumption rates and exports.

The UK is expected have no growth in cheese production in the coming years.  Much of the cheese consumption in the UK is fulfilled with imports.  See Table I near the end of this post.

Chart IV - Cheese Production Growth of
Major Cheese Produce

OTHER FACTORS

Will some of the other OECD countries capture some of the current U.S. export business or bring imports to the U.S.?

The U.S. is exporting about six percent of cheese production but in terms of net exports (exports minus imports), the balance between production and consumption is only four percent (Table I).  Net Cheese Exports from the EU are 11 percent by comparison.  The UK imports a very significant amount of cheese to meet their consumer demand. 

Table I - Production and Consumption of the
Major Cheese Countries

Canada limits cheese imports to support cheese production in Canada.  In-turn cheese consumption and production in Canada are about equal and will not impact the demand for U.S. produced cheese.  

Australia and New Zealand are major exporters of their cheese.  However, both have had issues with milk and cheese production.  New Zealand is limited by land mass, which their forage model is dependent on.  Their switch to crossbreeds is somewhat expanding their milk supply.  There are no major changes indicated in the OECD data that suggests that Australia or New Zealand will impact U.S. exports of cheese.

Ireland has had significant success with importing Kerry Gold butter into the U.S.  They are now exporting Kerry Gold cheese to the U.S.  Will it capture some consumer interest?  Will it be significant?  Ireland is part of the EU and their country data is not not available separately.

SUMMARY

So how does the future look for balancing supply and demand of producer milk?  The factors involved to determine this include U.S. domestic consumption rates for fluid milk and cheese, changes in export levels of cheese, and increases in cow productivity, and increases in butterfat and milk protein component levels.  

In the May 16, 2021 post, the following were quantified:

• The number of dairy cows are increasing by about one percent annually.
• Milk per cow is increasing by about one percent annually.
• Butterfat percent in milk is increasing by two percent annually.
• Milk protein percent in milk is increasing by one percent annually.  Federal Orders with a lot of Class III milk for cheese, like the Upper Midwest, are increasing milk protein by two percent annually.

In the May 30, 2021 post, domestic fluid milk consumption is declining by about two percent annually.

In this analysis, it appears that cheese demand will be increasing by 1.5 percent annually soon.

In the last three months, the current milk supply increased by 3.7 percent annually.  Currently, milk production is increasing well above the levels needed.  

These numbers do not show a balance in supply and demand.  If the OECD projections hold true, U.S. milk production will have to slow to match demand in the upcoming five years.