Want to Increase Revenue? Here's how!

As prices for milk fall (see the prior post) and feed and labor costs continue to increase, what can producers do to increase revenue to stay in business and prosper?   Higher component levels will certainly help.  As shown in Chart I, component levels have been rising quickly over the last two years.   What is covered here is not new or in any way confidential.  What makes higher component levels possible?  A mixture of genetics, cross breeds, diet formulations, management, and more. 

Thomas Overton, PhD at Cornell University recently addressed the financial importance of improving components.  His presentation was titled "Ways to Fatten up the Milk Check."  The technology and ability to improve revenue with higher component levels is a regular topic in conferences.

Chart I - Butterfat and Protein Component Levels

Table I below shows the economic impact achieved in 2021 in the U.S.  These numbers are based on U.S. averages.  In 2021, increased component levels for butterfat and milk protein, increased producer revenue by $623,000,000.  That is just the 2021 increase which will continue, and future years will build on this.  All producers are paid for butterfat, but those paid on the Advanced system are not paid specifically for protein.  The data in the table is based on 2021 prices for butterfat and protein.  In 2022, with higher butterfat and protein prices, higher component levels will result in larger financial gains.

To put this on a more personal basis, the third column puts the money in terms of increased revenue per 1000 cows.  The 2021 increase is worth $69,000 for every 1000 cows at 2021 prices.  That is not a one-time increase, but a lasting increase to build on.

Table I - Increased Revenue from

Certainly, there are variations in the gains in component levels.  Every herd is different, and some have seen results well above those in Charts II and III below.  Obviously, some Federal Orders and some producers are further ahead in increasing component levels than others.  

As of March 2022, butterfat (Chart II) in the highest Federal Order (the Northwest Order) is .21 percent higher than the lowest (the California Order).  It is interesting that the highest and the lowest are both on the West coast.  And, within each Federal Order some producers are well ahead of others.  There is opportunity.

Chart II - Butterfat Component Levels for FMMOs
paid on the Class and Component system.

There is a similar relationship with milk protein (Chart III).  The Southwest Order is .19 percent higher than the Northeast Order.   Again, there is opportunity.

Chart III - Protein Component Levels for FMMOs
paid on the Class and Component system.

There is one other revenue generating opportunity.  It applies to only four of the Federal Orders, but it can generate additional revenue.  When Somatic Cell Counts (SCCs) decrease below 350,000 cells per milliliter, there is a bonus payment included in producer revenue.  As shown in Chart IV, there have been recent improvements in the Southwest and Central Orders, raising producer revenue.

Chart IV - Somatic Cell Count for four Federal Orders

However, there is one revenue generating parameter that is not growing (Chart V).  The slow down started in mid 2021 and has continued with no significant growth in milk pounds per cow.  The growth in pounds of milk per cow have been growing for a very long time.  Perhaps the current slow down is because of challenges to reduce feed cost, but considering the loss in revenue, that may not be advantageous.

Chart V - Milk Pounds per cow per day

The technologies for increasing butterfat and protein levels in milk have been implemented by many producers nationwide.  Others can benefit by these proven technologies.  The shifting economics and technologies of the dairy industry must be implemented if one is to stay financially sound in the coming years.

One technology that is typically used to increase component levels is amino acid balancing in dairy cow diets. Research indicates a typical increase of .18 percent butterfat, a .14 percent increase in milk protein, and a two-pound increase in milk production.  At the April 2022 prices for butterfat ($3.15 per pound) and protein ($3.42 per pound), those increases would be worth $485,000 per year for a herd of 1000 cows producing 80 pounds of milk per day per cow.  Because there is typically an increase in feed costs with amino acid balancing, the net income would lower.  With the typical increase in feed costs, the net income would be closer to $448,000 per year.

What Controls the Class III Price? Butter, Cheese, or Dry Whey?

In the prior two posts, ( Butter, Butter, Butter and Cheese, Cheese, Cheese) the pricing, the fundamentals, and the impact on producer milk prices for butter and cheese were analyzed.   In the last 10 years, the Agricultural Marketing Service (AMS) prices of wholesale butter and cheese have varied significantly.  Butter had a low of $1.26 per pound and a high of $2.85, a variation of 126 percent (Table I).   Cheese had a low price of $1.30 per pound and a high of $2.59, a variation of 100 percent.  In April 2022, butter was valued at $2.79 per pound, near the record for the last 10 years.  Cheese in April 2022 was valued at $2.29 per pound, well above the average and close to the 10-year high.  The Class III price for April 2022 was $24.42 per CWT.

Table I - Butter and Cheese Highs and Lows

Chart I below shows the breakdown of the Class III price.  Based on the April 2022 prices of butter and cheese in Table I, butterfat made up $11.01 of the Class III price and protein made up $10.24.  Other solids contributed $3.17 to the Class III price.

Chart I - April 2022 Breakdown of the Class III Price

What happens when butter and cheese prices rise and fall?  Below are four tables illustrating what happens when butter and cheese prices vary. The prices used are the highs, lows, and midpoints for butter and cheese over the last ten years.

In Table II, cheese prices are low and butter prices range from a low of $1.30 per pound to $2.80 per pound.  Even with the high prices for butter in Table II, the Class III price stays in the $14 per CWT range.  The price for milk protein drops to a very low value of $.58 per CWT of milk.  This example is used to illustrate the movement of butter and cheese prices and their impact on the Class III milk price.  In the last 10 years, cheese has been that low and butter has been that high.  But those highs and lows did not occur simultaneously.  The lowest price for milk protein in the last ten years is $1.14 per pound and that contributed $3.42 to the Class III price.

Table II - Butter Prices Increasing and Cheese Prices Low

Table III uses the same range of butter prices as Table II but has the price of cheese at a high of $2.60 per pound.  In this case, milk protein has risen significantly, and the Class III price is in the range of $26 and $27 per CWT of milk.  The higher price of cheese nearly doubles the price of Class III milk.

Table III - Butter Prices Increasing and Cheese Prices High

Table IV keeps the price of butter low and has an escalating price for cheese.  As the price of cheese increases, even with a low price for butter, the Class III milk prices rise above $20 per CWT of milk.

Table IV - Cheese Priding Increasing and Butter Prices Low

Chart V has a high price for butter and an escalating price for cheese.  The difference between Table IV (butter at $1.30 per pound) and Table V (butter at $2.80 per pound) is a change of less than $1 per CWT in all cases.  Butter prices have a very minimal impact

Table V - Cheese Prices Increasing and Butter Prices High

In the prior posts, the fundamentals favored a further increase in butter prices and a drop in cheese prices.  In the comparison in Table VI, butter prices were increased by $.20 per pound and cheese price reduced by $.20 per pound.  If this occurs, the price of Class III milk will drop by nearly $2.00 per CWT.  (For the first two weeks of May, the weekly AMS prices show a small decrease in butter prices and steady cheese prices.)

Table VI - Possible Changes From Current Prices

Clearly, the price of Class III milk is controlled by the price of cheese.  See this prior post for more details on the pricing formulas for Federal Order pricing.  The vast majority of producers are paid on the Class and Component system which pay only for components.

The next post will quantify the importance of component levels in a time of high inflation.  If the prices of cheese and butter fall, which is likely, and feed and labor costs continue to escalate, higher component levels can help maintain cash flow.

Cheese, Cheese, Cheese

The prior post covered the financial shifts of butter prices, the reasons behind them, and the impact on producer milk prices.  This post will cover the more complicated financial shifts of cheese prices.  Chart I shows the price of cheese beginning with 2017.  During the COVID lockdown, cheese prices were extremely volatile with some major highs and lows.  Those fluctuations were caused by the disruption between food service and retail sales of cheese.  The current high Agricultural Marketing Service (AMS) cheese price of $2.29 per pound is a near record ignoring the extreme fluctuations that occurred in 2020.

The survey data for the AMS cheese price is more complicated than the price of butter.  Butter is butter with few significant differences.  There are many different types of cheese with varying values.  The USDA process for developing a price for cheese was implemented in 2020 and relies on surveys of only one type of cheese, newly produced Cheddar cheese.

Chart I - AMS Cheese Price

Before getting into some of financial aspects, the charts below quantify cheese production by the major types of cheese.  As shown in Chart I, Cheddar cheese makes up just 29 percent of total cheese production.  The price of newly manufactured Cheddar becomes the AMS cheese price used to calculate milk protein and producer milk prices.  No other cheeses are considered in establishing the AMS cheese price.

Chart II - Pie of the two leading Cheeses and All Other

USDA cheese analytics characterize cheese as "American" or "All Other."  The American cheese category includes Cheddar cheese as well as other cheeses like Colby and Jack cheeses.  The "American Cheeses" represent 41 percent of all cheese production (Chart III). The "All Other" category includes Italian and other non "American Cheeses."  Mozzarella cheese is by far the largest "All Other" cheese.

Chart III - Pie of American and All Other Cheese

Within the "American Cheese" category, Cheddar makes up 72 percent of total production (Chart IV).  This is important because inventories of Cheddar are not disclosed publicly, so inventories can best be estimated by the inventory of "American Cheese." 

Chart IV - Pie of American Cheeses

Chart V compares the price of cheese to the wholesale inventory of all cheeses.  The prior post compared the inventory of butter to the price of butter.  There was a clear and consistent correlation; as the inventories of butter were lower, prices were higher.  There is not a clear correlation between total cheese inventories and the AMS calculated price of cheese (Chart V).

Chart V - Total Cheese Inventories and AMS Price of Cheese
12-Month Moving Averages

There is a clearer correlation when comparing the inventory of "American Cheese" to the AMS calculated price of cheese (Chart VI).  Remember that Cheddar cheese makes up 72 percent of "American Cheese."

Charr VI - American Cheese Inventories and AMS Price of Cheese
12-Month Moving Averages

Cheddar cheese production has an average growth rate of just over two percent per year.  The growth rate was consistent between mid 2019 through the end of 2021.  The first quarter data for 2022 shows no growth in production Cheddar cheese (Chart VI).

Chart VI - Cheddar Production
12-Month Moving Averages

The long-term growth of "American Cheese" is very consistent for total "American Cheese", Cheddar cheese, and all other American cheeses as shown in Chart VII.  

Chart VII - Production of Total American Cheese,
Cheddar Cheese, and All Other American Cheese 

However, between December of 2021 and April of 2022, the AMS cheese price increased by 30 percent, from $1.75 per pound to $2.29 per pound (Chart I).  During 2022, production of all "American Cheese" continued to grow at its normal rate, but the percent of Cheddar production did not grow and fell from 75 percent of "American Cheese" production to 69 percent of "American Cheese" production (Chart VIII).   

"American Cheese" production has shifted in 2022 from Cheddar to other "American Cheeses."  Overall, in the first quarter of 2022, production of all other "American Cheese" grew by eight percent over the prior year while production of Cheddar shrank by two percent.  Therefore, inventories of Cheddar cheese have undoubtedly shrunk while inventories of other American cheeses have grown.

Chart VIII - Percent Production of American Cheese
Which is Cheddar Cheese

The conclusion from this is that the current high AMS cheese prices are linked to the lower production of Cheddar   This lower production of Cheddar will lower Cheddar inventories.  This is not based on lower milk availability or some other long-term issue, but just a shift from Cheddar production to all other "American Cheeses."  This will not last long as production must come into sync with demand.  Expect Cheddar production and inventories to increase and the AMS price of cheese to decrease in the short-term.  This is a different conclusion from the prior post on butter, which will likely experience continued increases in the AMS price of butter.

The next post to this blog will compared how the price of producer butterfat and milk protein change with changes in butter and cheese prices.  Remember, that when butter prices go up, butterfat prices go up and milk protein prices go down.

Butter, Butter, Butter

Butter and butterfat prices continue to drive high milk prices.  In the April 15 post to this blog, dairy prices since 2000 were reviewed.  This post will center on butter and butterfat in detail as they are the main drivers of the current high producer milk prices. The current price of butter is $2.77 per pound for April 2022.  That is not a record as butter prices in 2014 reached $2.85 per pound.  However, $2.77 is a record monthly price over the last five years.

When butter inventories are high, butter prices are low and when butter inventories are low butter prices are high.  Chart I below shows the correlation between the 12-month moving averages of butter inventories and butter prices.  Clearly, butter inventories drive the price of butter.

Butter inventories have dropped by 11 percent from the high in July 2021 to February 2022.  However, butter inventories are not near record lows, so butter inventories may continue to decline and drive butter prices even higher.  

Chart I - Butter Prices vs. Butter Inventories

Chart II shows the declining production of butter in 12-month moving averages.  In April 2022 butter production continued to decline, but at a slower pace than in late 2021.  The growth rate of butter production slowed down at the beginning of COVID in early 2020 and started declining in 2021. Producer milk availability and logistics are typically blamed for the slowdown in butter production.

Chart II - Butter Production

The largest butter producing state by far is California with 33 percent of butter production (Chart III).  Pennsylvania is a poor second.

Chart III - Butter Production by State

The decrease in butter production is not coming from California.  California butter production has leveled-off starting in 2021 but has not significantly declined.  Pennsylvania, the second largest butter producing state, is much smaller than California and is also not showing declines.  The declines are coming from the many other states that produce smaller amounts of butter.  Together the smaller butter producing states make up 63 percent of the U.S. butter production.

Chart IV - Butter Production by state and all Other

Over the course of Chart V, California's percent of U.S. butter production has grown from 30 percent to 33 percent over five years.  It appears that California butter production is upward bound to increase their market share.

Chart V - Percent of USA Butter Produced in California

Changes in the inventory of butter (Chart I) are driven by production, but the rate of domestic butter disappearance and exports and imports also impact butter inventories.  Chart VI tracks the domestic butter disappearance.  Butter disappearance from wholesale inventories does not fluctuate much.  So far in 2022, despite tighter inventories, disappearance has declined by less than one percent.  However, the wholesale prices have escalated significantly.

Chart VI - Butter Disappearance

In times of tight butter supplies, exports typically decline.  In this case, butter exports and butter imports both grew.  However, the increase in imports was greater than the increase in exports, causing net exports to decrease (Chart VII).  Imports have continued to grow with significant imports of Irish butter such as "Kerry Gold."  For the first two months of 2022, imports grew by 64 percent vs. the prior year.  Imports of butter now account for 3.5 percent of total butter additions to inventory with production contributing the other 96.5 percent.  Exports have also continued to grow, but at a slower rate than imports.  

Chart VII - Butter Net Exports

PUTTING THIS ALL TOGETHER

There is not presently a shortage of butter in U.S. retail stores as domestic disappearance has keep pace with retail butter sales. However, there is a significant increase in retail butter prices as wholesale prices have increased.

If butter production does not increase soon, inventories will continue to decrease and butter prices at the wholesale and retail levels will increase. With higher retail prices some slippage on butter sales and consumption may occur as there are plant-based alternatives.

As covered in the previous post, fluid milk is on a linear decline of about 80 million pounds of milk per year.  Over the period of this analysis, butterfat harvested from fluid milk has decreased at a rate of about 1.6 million pounds of butterfat per year which converts to about two million pounds of butter per year.  This is significantly impacting butter production. Compounding annual butter churning declines of two million pounds per year reduces butter churning by 10 million pounds over five years.

Lack of producer milk and logistics are often sighted as the problems, but the decrease in butterfat from fluid milk is also very significant.  Fluid milk has declined for decades and that is not likely to change.

Nonfat dry milk and skim milk powder production decreases when butter production decreases.  This has also inflated nonfat dry milk and Class IV milk prices.

Retail Milk Prices are Way Up. What is that Doing to Sales?

Retail milk prices are reaching record levels.  Conventional milk is selling for over four dollars per gallon.  Organic milk is selling for nearly nine dollars per gallon.  Because of the price point, organic milk is typically sold in half gallon containers.  Between the start of 2021 and April 2022, conventional retail milk prices have increased by 18 percent and organic retail milk prices have increased by nine percent.  Beverage milk has been characterized as a necessity which is not subject to price elasticity of demand (if it costs more, people will buy less).  In the coming months, we'll see if this is true. 

Federal order pricing and retail milk prices in this blog are current through April 2022.  Data on milk sales is available through February 2022.   Flavored milk is included in the charts for whole and two percent milk.  Buttermilk is a very small category and is not included in this data.

Whole and two percent milk are retail priced identically (Chart I) despite the difference in cost with a different amount of butterfat (Chart II).  With butterfat at high prices, whole milk is more expensive to produce than two percent milk.  Organic milk makes up only six percent of total beverage milk.

Chart I - Retail Prices of milk

Chart II - Federal Milk Order Prices for Whole and two Percent Milk

Total beverage milk sales continue to decline linearly (Chart III).  That means that the percentage decline is accelerating.  In 2018, total milk sales declined by two percent from the previous year.  In 2021, total milk sales declined by four percent from the previous year.   In 2020, there was a "bubble" caused by the COVID "Stay at Home" policies.  It looks like the decline of around 80 million pounds per year is returning.

Chart III - Total Milk Sales Volume

Whole milk had a major increase in 2020 as "Stay at Home" policies were implemented (Chart IV).  Some of this was caused by hoarding as retail milk was in short supply in March 2020 and this influenced the twelve-month averages in Chart V.  However, by the start of 2022 whole milk sales have declined to 2019 levels.

Chart IV - Whole Milk Sales Volume

Two percent fat milk sales (Chart V) follow a linear declining pattern with a small surge at the beginning of COVID policies.  It is now back to a linear decline.  Two percent milk has declined by 13 percent over the course of Chart VI

Chart V - Sales of Two Percent Fat Milk

Sales of one percent milk and fat free milk are declining quickly.  In February 2018, they made up 23 percent of total milk sales.  By February 2022, they made up only 18 percent of total milk.

Chart VI - Comparison of 2018 and 2022

Charts VII and VIII show the decline in one percent milk and fat free milk.  One percent milk has declined by 20 percent over the course of Chart VIII and fat free milk has declined by 40 percent over the course of Chart VIII.

Chart VII - Sales of One Percent Fat Milk

Chart VIII - Sales of fat Free Milk

Organic milk saw tremendous growth in 2020, perhaps influenced by the COVID policies of "Stay at Home."  However, that surge is fading as shown in Chart IX.  Organic milk sales grew by 14 percent in 2020 but in 2021 and 2022 YTD, sales have slide by five percent.

Chart IX - Sales of Organic Milk

SUMMARY AND CONCLUSIONS

Prices for milk are up, significantly up.  Sales of milk are down, and the worst may be yet to come as March and April data becomes available.

Two percent, one percent, and fat free milk are all in a linear decline, meaning that the decrease is becoming a larger percent.

Fat free milk is falling very fast.  Less retail shelf space will be used for fat free milk and some private label brands may eliminate fat free milk further escalating the decline in sales.  As an ingredient, nonfat dry milk is always an alternative.

Organic milk has started to decrease after a long term of static to increasing volumes.

With these declines, less butterfat will be available for butter churning.  See the January 2022 post to this blog for details.