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.