Component Levels are Rising. FAST!

Component levels in producer milk have been slowly but steadily increasing for years.  Now, the growth in component levels is growing much faster. Technology to increase component levels is available and improving.  Producers and nutritionists are implementing these practices at an accelerating rate.  The data used in this analysis is for pooled Class III milk.

Chart I covers the years from 2018 through August of 2021 with data based on 12-month moving averages.  During this time, butterfat levels have increased from 3.81 percent to 3.96 percent.  Butterfat prices were at historically high levels in 2018 and 2019, starting at $2.61 per pound, but have fallen to more normal levels and are currently at $1.75 per pound.  Butterfat percentage set a record in the Southwest Federal Order in February 2021 at 4.25%.

Chart I - Butterfat Percentage and Prices

Chart II presents the same data for milk protein.  Milk protein levels have experienced a bumpy ride, but protein levels are now increasing very fast.  The growth in 2021 compared to 2020 is from 3.18 percent to 3.20 percent.  The price of milk protein has also been a bumpy road.  Over the span from 2018 to August 2021, the 12-month average price has increased from $1.83 per pound to $3.21 per pound.  The highest monthly percent for milk protein was also achieved by the Southwest Federal Order at 3.38 percent in January 2021.

Chart II - Milk Protein Percentage and Prices

Individual Federal Orders show major differences (Chart III).  The Southwest Federal Order has increased butterfat levels steadily from 2018 to the present and is clearly the leader in butterfat levels with a 12-month average currently at 4.12 percent. The other five Federal Orders have all significantly increased butterfat levels in 2021, setting record levels for their individual Orders.

Chart III - Butterfat Percentages by Federal Order,

The growth in 2021 can be clearly seen in Table I below.  The numbers in Table I are the eight-month averages for 2020 and 2021.  The Upper Midwest Order is increasing butterfat percentage faster than any other order.  For the first eight months of 2021 compared to the first eight months of 2020, the upper Midwest butterfat averages increased by .10 percent.  The Southwest, Northeast, Mideast and Central Federal Orders also had very nice increases ranging from .06 percent to .08 percent.

The four Federal Orders paid by the Advanced system had the lowest butterfat levels and the smallest increases in butterfat levels.  All Federal Orders get paid for butterfat.  Those Federal Orders having the lowest levels of butterfat have an opportunity to increase butterfat and revenue with proven practices.

Table I - Growth of Butterfat Percent by Federal Order.

Milk protein for the seven Federal Orders paid for butterfat, milk protein, and other solids is shown graphically in Chart IV.  The Pacific Northwest has had the highest protein levels for years, but it has now slipped to second place behind the Southwest. The second to the lowest protein levels are in the Upper Midwest, where most of the milk is used for cheese and there is vast de-pooling.  

Chart IV - Protein Percentages by Federal Order

Table II displays the milk protein levels for 2020 and 2021 by Federal Order.  The Southwest, California, and Northeast Federal orders have improved protein by .05% in 2021 over the prior year.  The Mideast, Central, and the Pacific NW increased protein by slightly less.  

Amazingly, the Upper Midwest where nearly 90 percent of the milk is used for cheese which needs high protein levels for efficient production has the lowest protein percentage and the lowest increase in protein levels, comparing 2021 to 2020.  This is an opportunity for producers in the Upper Midwest.

Table II - Growth of Protein Percentage by Federal Order

SUMMARY

The Southwest, which was ranked highest in the recent post on "Where are the Cows Going?" again comes out at the top of the analysis in this blog post.  The Southwest is a model for other Federal Orders.  

The Upper Midwest is at the top of the charts in percent growth of butterfat, but it is at the bottom of the charts for protein.  This seems very strange for a Federal Order primarily supplying cheese plants and creates another great opportunity.  Balanced feeds to increase milk protean also generally increase butterfat.

The lack of butterfat in the Orders paid by the Advanced system is also an opportunity for producers to increase butterfat.  They are paid for each pound of butterfat, and making more butterfat increases revenue.

Overall, the 2021 increases are record setting and demonstrate the potential for increasing components and revenue.  As an example, a producer with one thousand cows producing 80 pounds of milk per cow per day who increased component levels at the averages in the Tables I and II, would increase revenue by $68,000 a year.

How Much Milk is Being De-pooled? Lots!

In the Federal Milk Marketing Orders (FMMO), Class I milk for drinking cannot be de-pooled.  However, all other Classes of milk can be de-pooled.  When milk is de-pooled, it is not counted in the Federal Order statistics and it is not subject to the Federal Order processes, pricing, or statistics.

When is milk de-pooled?  When it is advantageous financially, milk will be de-pooled.  As an example, when the Class III milk is higher priced than the Class I milk the Producer Price Differential (PPD) will likely be negative.  To avoid a negative PPD, the Class III milk will be de-pooled.  When milk is de-pooled, it is not subject to Federal Order pricing, but Federal Order pricing nevertheless is typically used for the de-pooled milk.

How much milk is being de-pooled?  It varies by Federal Order as the de-pooling rules and Class usage mix varies among Federal Orders.  This post will review de-pooling of Class III milk in four of the major Federal Orders.  This includes California, the Southwest, the Upper Midwest, and the Northeast Orders.

The analysis is based on state-by-state cheese manufacturing data used in the prior post.  The amount of Federal Order cheese produced is estimated by totaling the states or partial states included in each Federal Order.  The amount of milk used for cheese is estimated based on a conversion of eight pounds of milk for each pound of cheese.  That amount of milk needed for cheese production is then compared to the amount of Class III milk listed by that Federal Order.  The data used is for the first seven months of 2021.

This allows a comparison of milk used for cheese compared to the amount of Class III milk listed for a specific Federal Order.  These comparisons are not an exact science.  The ratio of milk to cheese can vary, the timing of milk shipped vs. when cheese is made can vary, and the state vs. Federal Order boundaries can vary.  Nevertheless, by using seven months averaging, a reasonably accurate calculation of de-pooling can be developed.  

Why did California become a Federal Order?  In hindsight, the ability to de-pool seems to be a big factor.  Since the first months of becoming a Federal Order, massive de-pooling has occurred.  So far in 2021, 98 percent of the Class III milk was de-pooled in California.  That amounts to 11.1 billion pounds of Class III milk that was de-pooled in the first seven months of 2021 in the California Federal Order.

The Southwest Federal Order also had major de-pooling.  The Southwest Order is composed of New Mexico and Texas.  In the first seven months of 2021, the Southwest de-pooled 5.7 billion pounds of Class III milk, which is 93 percent of the Class III milk.  

The Upper Midwest produces mostly Class III milk for cheese.  Therefore, the Class III price and the "Uniform" or average price are typically very close.  The amount of the PPD is very small with only a few exceptions.  In 2021 through July, the Upper Midwest de-pooled 82 percent of their Class III milk.  By the calculations used for this post, 17.9 billion pounds of Class III milk were de-pooled in the first seven months of 2021.  The Upper Midwest is the only Federal Order that estimates the amount of de-pooled milk every month and their published estimates totaled 18.5 billion pounds of milk de-pooled in the first seven months of 2021, close to the estimate developed for this post.  The difference between the two estimates is just three percent which adds credibility to both de-pooling estimates.

De-pooling in the Northeast Federal Order is a little more difficult.  Nevertheless, 33 percent of the Class III milk was de-pooled.  This amounts to two billion pounds of de-pooled milk in the first seven months of 2021. 

WHAT DOES IT ALL MEAN?

The table below summarizes the estimated de-pooling in the four largest cheese producing Federal Orders.  In total for the first seven months of 2021, 81 percent of the Class III milk in these orders was de-pooled.  Milk for cheese is the largest use of milk in the U.S.  

If Idaho, the third largest cheese producing state was included, the amount of milk for cheese not included in Federal Order pricing would jump from 81 percent to 87 percent.  Idaho is not in any Federal Order.  These four Federal Orders covered and Idaho together make up 80 percent of the U.S. cheese production.

Estimated De-pooling in the Four Largest FMMOs

With most of Class III milk being de-pooled, does this mean the Federal Order system of payments is broken and out-of-date?  Does it need revision?  Does it serve any purpose or is it just wasted bureaucratic overhead?  This post will not attempt to answer these questions, but comments are welcome.

When de-pooling occurs, it does not create value, it only spreads the wealth differently.  Those who de-pool make more money, and those that are left in the pool make less.