Producers are Making Money with $22.05 per cwt.

The August 18 post covered the pricing trends of the commodities used to price produce milk.  One had upward trends and the rest had lower trends.  This post will concentrate on trends in component levels and their impact on producer revenue. 

The Agricultural Marketing Service (AMS) calculates and publishes data for all Classes of milk.  For Class III, the largest Class, the protein value is calculated based on 3.0% and butterfat is based on 3.5%.  The resulting Class III prices are quoted in many published articles. The 2024 YTD actual levels of milk protein and butterfat are 3.3% and 4.2%.  

The actual percent varies within each Federal Order and each herd.  In 2024, the actual milk protein levels have varied from 3.2% to 3.40% and butterfat has varied from 3.9% to 4.4% within the Federal Orders. Herd level data is not available, but the variance would be much wider.

This post will compare the producer revenue based on actual component levels and the current AMS index prices (the USDA has proposed changing many of the formulas).

Chart I plots the AMS values based on the current formulas.  Over the last three years, butterfat prices have increased significantly, and milk protein prices have dropped.  (See this post for a review of the pricing formulas.)  The values in Chart I are based on 3% protein and 3.5% butterfat.  The current spread between the value of protein and butterfat is a huge $5.21 per cwt.  These are indexes and no one is paid by these values.  They represent the movement of commodity prices with a constant level of components.

Chart I - AMS Index Prices for Butterfat and
Milk Protein

Chart II lists the real average butterfat and protein values based on the most recent component levels.  The spread between butterfat revenue and milk protein revenue per cwt. is $6.87.   Clearly, butterfat alone is keeping producer milk prices at reasonable levels.  Butterfat provides nearly 200% more revenue in Class III milk than milk protein.  Butterfat is paid in all Classes of milk and all Federal Orders.

Chart II - Producer Revenue Based on
Actual Component Levels

The final chart in this post compares the Class III prices based on the AMS index value and the actual producer revenue.  The most important number on the chart is the current Class III actual prices based on actual component levels (the blue line).  The average actual Class III revenue is currently $22.05 per cwt.  The AMS Class III value is $19.87 per cwt.  

This chart shows the increasing spread between the index price and the actual price as component levels have increased.  The current spread is $2.18 per cwt.

Chart III - Class III Prices at Index Formulas
 and Actual Component Levels

SUMMARY

Once again, the same conclusion is reached.  If producers want to stay in business, they need to make higher component levels a priority.  Butterfat is really keeping milk prices at reasonable levels.  The risk is,  how long butterfat prices will remain at record highs?  Enhancing protein levels improves revenue and provides a more balanced revenue as component prices vary.

Dairy Commodity Prices are Used to Calculate Producer Milk Prices. One Commodity is up and all Others are Down.

The last two posts, July 21 and July 28, covered the impact of the USDA proposed changes on producer payment for their milk. The changes will decrease producer revenue. This post will examine the trends in the prices of the commodities used to price producer milk to see how they might offset the lost revenue. The commodities used for pricing producer milk include cheese, butter, dry whey, and nonfat dry milk (NDM). Cheese prices are analyzed in both Block and Barrel pricing as the USDA proposal includes a change to using only Block cheese to price milk protein. The trends charted cover 2018 to present, and the most recent 31 months. To provide the most current data, the Agricultural Marketing Service (AMS) weekly published prices are used. They are based on the wholesale values of these commodities.

BUTTER PRICES

Charts I and II show the trends in butter prices. Butter prices are the only commodity used to price butterfat. Butterfat is paid in all Classes of milk. This makes increasing butterfat a very high priority for all producers.

The history and trend lines for AMS butter prices in both charts are projecting further increases. Butter has increased in consumption and retail prices. Butter retail purchases are unique due to their cyclical demand which is very high at the end of each year as holiday baking increases.

The trend lines in both charts show current prices to be very close to the trend lines. In 2024 prices have increased steadily and are well above the prior year prices. As 2024 continues to the end of the year when demand is high, it is likely that butter and butterfat prices will continue to increase.

Chart I – Butter Prices per Pound from 2018 to 2024 YTD

Chart II – Butter Prices per Pound Over 31 Months

CHEESE PRICES

Cheese prices are reviewed for Block Cheddar cheese and Barrel Cheddar cheese as the new USDA proposal includes a change to use only Block prices instead of an average of Block and Barrel prices. Cheddar cheese prices are used to price milk protein in Class III milk. Cheese prices have increased in the last four months but are still showing declining trends.

Charts III and IV show negative trends for Block Cheddar cheese. Even if this trend reverses in the near future, cheese prices will remain low in 2024. With higher priced butterfat and lower priced cheese, milk protein will continue to be low priced. See this prior post for details on the pricing formula for milk protein.

Chart III- Block Cheddar Prices per Pound 
from 2018 to 2024 YTD

Chart IV – Block Cheddar Prices per Pound
Over 31 Months

Barrel Cheddar cheese prices (Charts V and VI) are also showing a declining price in the 2018 to 2024 data. Both Block and Barrels are showing the same price in July 2024 but when expressed to four digits, Barrels are slightly higher priced. The shorter trends in Chart VI indicate a slight improvement but the prices will remain low compared to 2022 Cheddar prices. Cheddar prices with both the new Block only pricing or the average Block and Barrel pricing will remain low for at least the remainder of 2024.

Chart V – Barrel Cheddar Prices per Pound 
from 2018 to 2024 YTD

CHART VI – Barrel Cheddar Prices per Pound
Over 31 Months

DRY WHEY

Dry whey prices are used to price “other solids” in the Class III milk. The value is always low and has a small influence in the Class III price. Dry whey has significant exports, with large exports to China to sweeten swine diets as “Whey Permeate” (Whey with protein removed). The longer-term trends in Chart VII indicate a decreasing price while the short-term Chart VIII shows a slight increase. Dry whey prices are well below 2022 prices and will remain low through the remainder of 2024.

Chart VII – Dry Whey Prices per Pound from
2018 to 2024 YTD

Chart VIII – Dry Whey Prices per Pound
Over 31 Months

NONFAT DRY MILK

Nonfat dry milk (NDM) is used to price the skim milk in Class IV. NDM is really a by-product of butter churning. Most NDM is exported, and it competes internationally with the much larger category of skim milk powder. The largest U.S. customer for NDM is Mexico. The impact of skim Class IV milk expands to Class I. Currently the Class IV skim milk and Class III skim milk is averaged and $.74 is added to calculate the Class I skim price. With the proposed USDA formula changes it would be based on the higher of Class III skim or Class IV skim.

NDM prices have fallen significantly from 2022. In 2023 and 2024 the price has stayed around $1.15 per pound (Chart IX and Chart X). Prices will remain in that area for the remainder of 2024.

Chart IX – Nonfat Dry Milk per Pound from
2018 to 2024 YTD

Chart X – Nonfat Dry Milk Prices per Pound
Over 31 Months

SUMMARY

For at least the remainder of 2024, butterfat prices will remain high, and effort should go into increasing butterfat levels in all milk. All other skim milk prices will remain low. Combined with the proposed USDA formulas, producer prices will continue to be difficult. This will increase the trend of declining small farms. All producers can improve revenue with higher butterfat levels.