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