Location Matters for Producer Revenue

Every milk producer wants to maximize his revenue.  Advice centers around efficient operations, maximizing components, etc.  Some of the revenue is not in a producer's control such as the value of cheese, butter, and other solids.  This post will take a very different approach.  The location of the producer's operation can also significantly impact revenue.

The majority of U.S. milk is paid for based on the Federal Order pricing which sets a minimum price for producer milk.  The payment system is somewhat complicated.  Being in the right place can make a big difference.

As an example, in March of 2023, prices in different Federal Orders varied from $18.29 per hundred weight to $23.51 per hundred weight.  The location difference is based on the Class mix of milk in a Federal Order.  That mix can come from the needs in a Federal Order and that blend can be significantly varied based on de-pooling.

One way of comparing the milk prices is by the Uniform price of each Federal Order.  The table below shows the Uniform price of eight Federal Orders for 2019, 2020, 2021, and 2022.  The reason for listing only these Orders is that the three in the Southeast U.S. are major Class I producers which do have the advantage of high prices, but a declining market,.

In each of these four years, the ranking is similar with a few exceptions.  The Northeast Federal Order ranks at the top of the list each year.  Other Federal Orders like the Southwest ranked second in 2019, but fell to fifth place in 2020.  The Upper Midwest was at the bottom of the list in 2019 but rose to fifth place in 2021 and 2022.  California has moved from fifth place in 2019 to last place the following three years. 

At the top of the chart, the Northeast has two things in its favor.  It has a very balanced mix of milk Classes and has strict rules for de-pooling which helps maintain that balance.  Class I milk is 31% of the mix in 2019 and then maintains a stable 30% for the next three years.  The pie charts for each year look nearly identical.  Class III milk for cheese is the second largest piece of the pie, varying from 26% to 29%, a minimal change.

California is the other extreme.  All four pie charts below look entirely different and are entirely different.  Why is the California mix so volatile and at the bottom of the Uniform price charts?

When California had its own payment system, no milk could be de-pooled.  The conversion to a Federal Order on November 2018 allowed any milk except Class I to be de-pooled.  Major de-pooling began immediately in the first month.  California's natural mix of milk Classes includes a lot of Class III milk for cheese and a large amount of Class IV milk (about 33% of U.S. butter comes from California).  California's de-pooling rocks back and forth from near total Class III milk de-pooling to near total Class IV milk de-pooling.  In the 2020 pie chart there was almost no Class III milk and in 2022 there was very little Class IV milk.  The highest priced Class is de-pooled lowering the average Uniform price for those remaining in the Federal Order pool. 

The Upper Midwest is also unique.  Almost all the Upper Midwest milk goes to cheese production.  However, when cheese prices are high, a lot of Class III milk is de-pooled.   In years like 2020 and 2021, more than half the Class III milk was de-pooled.  When that happens, the other Class percentages appear bigger but only because the Class III is much smaller.  In 2021, more than 16 billion pounds of Class III milk was de-pooled in the Upper Midwest.

What does de-pooling do?  It moves money around.  It does not increase the amount of money and in some cases, it may reduce total producer revenue.  

Does location make a difference in Federal Order prices?  ABSOLUTELY!