Is De-pooling from Federal Orders Growing?

This post will cover de-pooling in the three largest Federal Orders, the Upper Midwest, California, and the Southwest.  In the Upper Midwest, an estimate of de-pooled milk is included in their monthly statement.  In the California and the Southwest Federal Orders, the amount of de-pooling was estimated by comparing the volume of milk produced and the amount marketed through the Federal Orders.  Most of the milk produced within a Federal Order is processed in that Federal Order and this calculation provides a reasonable estimate of de-pooling.

De-pooling does not make more money.  It only moves money around with the de-pooling party getting more money and others getting less.  Who is the main looser?  Class I milk, because it cannot be de-pooled.  Who else may be on the loosing end?  Once milk is de-pooled it is not protected by the Federal Order minimum pricing and may be getting a lower price than the pricing in the Federal Order.

The three Federal Orders reviewed below have some very consistent patterns.

• Starting in early 2020, huge amounts of milk was de-pooled.
• There were huge negative producer price differentials in 2020 as COVID policies upset the balance of supply and demand.
• None of these three federal Orders had any negative producer price differentials (PPDs) in 2022.
• The established patterns of all three of these Federal Orders is to de-pool all Class III or Class IV when they are the highest paid of the four Classes of milk.

The Upper Midwest is primarily focused on Class III milk for cheese.  Class III monthly milk volume makes up to 90% of the Upper Midwest milk.  In 2020 and the first half of 2021, 77% of the total Upper Midwest milk was de-pooled (Chart I).  

Chart II shows the dip in pooled Class III milk as up to 3000 million pounds of milk per month were de-pooled in the Upper Midwest Order.  During this time Class III milk was priced at over $20 per cwt. and PPDs were consistently negative.  Chart III shows the course of the PPD over the last 10 years.  The disruption caused by COVID now appears to be healed.  For all of 2022 and into 2023, the PPDs have all been positive.

In 2020 and 2021, most of the Class III milk was de-pooled to avoid the payment of a negative PPD (Chart III).  

Chart I - Pooling and de-pooling in the
Upper Midwest Federal Order 

Chart II - Upper Midwest Class III Milk

Chart III - Upper Midwest PPD

California has been a Federal Order since November 2018. Beginning with the first month as a Federal Order there has been de-pooling of close to 50% of California producer milk.  Charts V and VI below show the similarity in volume of Class III and Class IV California milk.  Both Class III and Class IV when not de-pooled account for 1400 million pounds per month.  One or the other has been heavily de-pooled in California on a consistent basis since it became a Federal Order.  Under the California system, no de-pooling was allowed.  In 2023 de-pooling has dropped to around 30% as both Class III and Class IV milk prices fell. 

Chart IV - California Milk Included and Excluded
from the Federal Order.

Chart V - Volume of Class III Milk Pooled in the
California Federal Order.

Chart VI - Volume of Class IV Milk Pooled in the
California Federal Order

Chart VII - California PPD

The Southwest Federal Order is growing fast and will likely become the third largest Federal Order in 2023.  The Southwest Order has a decent balance between Class III and Class IV milk.  Class III milk peaked at 761 million pounds a month in 2022 and Class IV milk peaked at 521 million pounds in 2022.  Charts IX and X below show a mirror image for de-pooling.  When Class III is the highest paid, it is de-pooled and when Class IV is the highest paid, it is de-pooled.  In both cases, the de-pooling is nearly total.

In 2020 and 2021, de-pooling accounted for 48% of the Southwest milk and in 2022 it accounted for 42%.  In 2022, most of the de-pooling was Class IV which is a smaller volume than Class III and therefore less milk has been de-pooled.  So far in 2023, de-pooling has averaged 38%.

Chart VIII - Southwest Federal Order Milk Included and
Excluded from the Federal Order.

Chart IX - Volume of Class III Milk Pooled in the
Southwest Federal Order.

Chart X - Volume of Class IIVMilk Pooled in the
Southwest Federal Order.

Chart XI - Southwest PPD

Overall, de-pooling has become a tool regularly used every month.  The de-pooling does diminish the presence of the Federal Orders and makes milk pricing less visible. 

The good news is that the massive pricing swings that occurred with COVID policies has now been eliminated.