How do the Producers Maintain Class III Revenue?

The Upper Midwest Federal Milk Order used 30.5 trillion pounds of Class III milk for cheese in 2023.  This is far above the volume of any other Federal Order.  The Upper Midwest is and has been "all about cheese" for a very long time.  There is a lot of press about the current low Class III prices, usually using the Agricultural Marketing Service (AMS) Class III index parameters.  The index is based on 3% milk protein and 3.5% butterfat.  The Upper Midwest Class III milk in March is at 3.31% milk protein and 3.99% butterfat.  It makes a big difference.

Data used below is based on 12-month moving averages to reduce monthly volatility.  The raw data is from the USDA monthly statistics for the Upper Midwest.

Chart I shows the Class III protein revenue by month in the Upper Midwest Federal Order.  With the current low price for protein the contribution to revenue has declined by more than 50% in the last three years.  The reason for the decline is a low price for cheese and a very high price for butterfat.  For an explanation of the impact of high butterfat prices on protein prices, click here.

Chart I - Upper Midwest Revenue per Cwt. of Milk
From Protein

Chart II shows the Upper Midwest butterfat revenue by month.  The recent butterfat prices have escalated as high as double the lowest prior price on the Chart.  Butterfat revenue per cwt. reached a high in October 2022.  Can butterfat revenue offset the low protein prices?

Chart II - Upper Midwest Revenue per Cwt. of Milk
From Butterfat

Chart III show the combined revenue per cwt. for both protein and butterfat.  The range from high to low is 19%.  If the total value included Other Solids, the Class III value would be $18.31 per cwt.  Not a great price, but not a horrible price.

Chart III - Upper Midwest Revenue per Cwt. of Milk
From Protein and Butterfat

How were producers in the Upper Midwest able to get this decent price per cwt.?  A lot has to do with increasing component levels.  Protein percent (Chart IV) has increased from 3.13% to $3.25 in the last five years.  This is contributing an additional $.35 per cwt. of milk.

Chart IV - Protein Percent by Month

Butterfat component levels (Chart V) have increased from 3.71% to a 3.90% high in December 2022.  The current $3.90 price is contributing $.57 per cwt. more than in the beginning of 2019.   Combined, the protein and butterfat component increases are adding $.92 per cwt. of milk compared to five years ago.

In the last 12 months, the butterfat percent in Class III has slightly dropped (Chart V) and as a result, the butterfat revenue in Chart II above has also fallen.  This is unusual as butterfat prices are currently reaching new highs.  If the butterfat percent in Class III had continued to increase, the impact would be significantly more.

(The butterfat delivery in the Upper Midwest is greater than that reported in their monthly USDA statistical statements.  The butterfat test as delivered by the handlers for the Upper Midwest is 4.3%.  Class I and Class III make up 99% of the milk used in the USDA monthly Federal Order report for the Upper Midwest.  Class I is reported to have 2% butterfat and Class III is reported to have 4%.  Where is the rest of the butterfat that was delivered?  Who gets paid for the butterfat delivered to the Federal Order and that is not included in the monthly reports and what is the price?  More on this will be covered in the next post to this blog.)

Chart V - Butterfat Percent by Month

Compared to the index prices using 3% protein and 3.5% butterfat, the current revenue is $1.62 per cwt. of milk greater.   The index prices used by the USDA formulas for Class III milk are based on the protein and butterfat levels in 1999.

Current prices for milk protein are very low.  This is largely impacted by the out-of-date USDA price formula for milk protein.  The is no current effort to change this formula.   

Producers in the Upper Midwest have worked to maintain decent prices through the tough times.

Are Commodity Inventories Impacting Producer Milk Prices?

The most important commodities for pricing producer milk are butter and cheese.  Butter prices are very high.  Cheese prices are stable, trading within a close range.  Butter prices since the start of 2018 have ranged from $1.51 to $2.87 per pound, a 90% difference.  Cheese prices have ranged from $1.51 to $2.12 per pound, a 40% difference.  Wholesale inventory levels are key to the Agricultural Marketing Service (AMS) prices used to value producer milk.  (See this post for information on the pricing formulas).

This post will review the impact of inventory levels on pricing.  All data used in this post is based on 12-month moving averages to reduce monthly volatility.

BUTTER

The wholesale price of butter has varied tremendously (Chart I). The prices in 2018 and 2019 were very stable around $2.30 per pound.  In 2020 and 2021, with COVID protocols in place, prices dropped by one third.  In 2022, prices rose peaking at $2.87 per pound.  Retail sales dropped with these high prices and inventories increased. Sales recovered in 2023 as prices declined but remained relatively high.  In 2023 and 2024 YTD, butter prices dropped by about 8% and remained at near historical highs.

Chart II shows the wholesale inventories expressed in days of supply.  Chart II is the mirror image of Chart I on butter prices.   As inventory levels increase, prices go down and as inventory levels decrease, prices go up.  The current inventory levels are in the range of 2019 levels, but the prices are significantly higher. 

Chart I - AMS Butter Price per Pound

Chart II - Wholesale Inventory Levels

Chart III below shows the total inventory levels.   They follow the pattern of Chart II but show increasing inventory levels in 2023 and YTD 2024, higher than those in 2018 and 2019.  

The higher inventory levels have not reduced prices because as shown in Chart IV below, domestic disappearance has increased significantly as consumption of butter has recovered.  Domestic disappearance has increased by 18% compared to 2018 and retail consumption has increased by 15%.

Butter inventory levels and domestic disappearance have very strong annual fluctuations with inventories building during the Spring and Summer months and demand increases in November and December due to the year-end holidays.  To minimize monthly volatility, this data is presented in 12-month moving averages.

Chart III - Butter Inventory Stocks

Chart IV - Domestic Disappearance

Exports and imports are a small factor compared to domestic demand.  The lack of domestic inventories keeps exports low, and a combination of competitive brands and domestic needs has increased imports to 6% of domestic production.   The net of imports and exports is shown in Chart V and current amount of imports exceeds imports by  5.2 million pounds.

Chart V - Net Exports of Butter

CHEESE

The prices and supply of Cheddar cheese are shown below in Charts VI and VII.  Analyzing changes in cheese prices in more complicated than butter because cheese is composed of both butterfat and milk protein.  The AMS price of cheese is based on Cheddar cheese only but wholesale inventories levels are not publicly available for Cheddar cheese.  This section is partially based on American cheese inventory data as it are consistently composed of about 70% Cheddar cheese. 

The charts below on cheese prices and inventories are not the exact mirror of each other as the butter charts above are.  Currently the days of supply is in a midrange position and the price of cheese is also in a midrange.

Chart VI - Wholesale Cheddar Cheese Price per Pound

Chart VII - Days Inventory of Wholesale American Cheese

Production of American cheese has grown nicely over the span of these charts to meet demand, but the growth has recently slowed as shown in Chart VIII.  Cheese consumption fell by 6% in 2022 causing a pause in the growth of American cheese production.

Chart VIII - Production of American Cheese 

With the reduction in production in 2022, American cheese inventories fell (Chart IX) causing AMS cheese prices to escalate (Chart VI above).  The lower production is keeping inventories beneath their peak in 2022 (Chart IX).

Chart IX - Wholesale Inventories of American Cheese

American cheese domestic disappearance (Chart X) has flattened out to compensate for the drop in consumption in 2022 and bring the days of supply (Chart VII above) in balance.

Chart X - American Cheese Wholesale
Domestic Disappearance

As with butter above, American cheese exports are minimal.  Exports are currently just 4% of domestic disappearance and imports are less than 1% of domestic disappearance.

Chart XI - American Cheese Net Exports

WHAT DOES IT ALL MEAN?

It's very clear that wholesale butter prices move with the wholesale supply of butter.  Butter domestic consumption is growing and the dependence on imports indicate that domestic inventories will remain tight.  Therefore, butter and butterfat prices will remain high and will likely continue to grow.

Cheese prices fluctuate with changes in butterfat prices and milk protein prices.  As has been covered in prior posts to this blog, as butterfat price rise, milk protein prices decline.  The days of supply of American cheese is not high or low and prices of cheese should remain stable. 

Location Matters! Florida: $25.10/Cwt. - Upper Midwest: $19.89/Cwt.

Producer pricing in the Federal Orders is based on the USDA formulas.  All producers in an Order receive equal payment per cwt. That does not mean that all Federal Orders receive the same payment!   

Producer payment calculations are made in the Federal Orders by long standing formulas.  Once all milk Classes in the Federal Order are priced, each Federal Order then uses a weighted average of the four Classes and payment to all producers is leveled.  The weighted averages, mean that if one Order produced primarily Class I the average would be close to the Class I price.

Currently, due to the USDA formulas, Class III milk is being priced very low.  (See these posts for an explanation of the USDA formulas;  April 3, 2024: March 19, 2024: March 2, 2024)  Therefore, in Federal orders, with a lot of Class III milk, the average price will be close to the Class III average.

Below in Table I, the 11 Federal Order "Uniform" prices (really the averages) are ranked from highest paid to lowest paid.  The difference is HUGE!  These prices are for March 2024 in each Federal Order.  The states paid on the "Advanced" process are in red.

Florida, the Federal Order, with the lowest in butterfat production and the lowest in milk per cow, pays the most per cwt.  By contrast, the Upper Midwest, which has high butterfat production and high milk per cow is the lowest paid per cwt.  Producers in the Upper Midwest get paid 20% less per cwt. for their milk than producers in Florida.

So, bottom line, the Federal Order with the lowest productivity gets the highest prices per cwt.  Is this what the Federal Orders intended?  When producer payments are high, there is little incentive to improve productivity.  When producer payments are low, there is a very strong incentive to improve productivity.  That is how capitalism works.  Is the USDA payment plan defeating the power of capitalism with its pricing process.

(Table I Below was changed from the original version to represent the Uniform price based on component tests, not 3.5% butterfat.)

Table I - March 2024
Uniform Prices

WHAT MAKES THE DIFFERENCE?

Class I milk is formulated to be the highest priced Class.  When the pricing systems were developed, it was done to ensure that drinking milk would be available to all at a reasonable price.  This process was appropriate in the era when the Federal Orders were formed.  Is making sure milk is available for everyone a problem today?  Does it need USDA regulation?

In March 2024, the Class III milk index price was $16.34 per cwt. Class I milk base index price was $18.80 per cwt.  In Class I milk pricing there is an added Class I differential based on location.

Table II ranks the percent of Class I milk by Federal Order.  Florida milk marketing has 82% Class I milk.  The Upper Midwest has only 5.7% Class I milk

Table II - Percent Class I
by Federal Order

Class III rankings (Table III) are almost the exact opposite.  The Upper Midwest is the clear leader with 92% of its milk going to Class III milk for cheese.  The four Federal Orders paid by the "Advanced" process are all at the bottom.

Table III - Percent Class III
by Federal Order

With the origin of Federal Orders, Class I milk had to be Grade A milk.  All other Classes could use Grade B Milk.  Today, virtually all milk produced is Grade A.   Class I milk cannot be de-pooled, but all other Classes can be de-pooled depending on each Federal Order's rules.

SUMMARY

Strangely, none of these issues seem to on the USDA agenda for revisions.  Why should Class I milk be higher priced than other milk of equal quality?   Would producers or grocery stores quit supplying fluid milk for consumption if it was priced similar to other Classes?  If grocers did stop selling fluid milk, shoppers would go to a different store.  Fluid milk today is never delivered to the front porch of homes.  It is in the grocery stores like cheeses and ice cream.  Why is the USDA using the logic from more than half a century ago to price producer milk?

Every Dairy Producer has an Incentive to Increase Butterfat Production.

Butterfat prices remain high and milk protein prices remain low.  The high butterfat prices have opened the market to justify amino acid and other tools to maximize butterfat production.   This post will cover butterfat production in the Federal Orders paid on the "Advanced" system.  Those Federal Orders do not pay specifically for protein and represent the most difficult place to justify techniques like balancing amino acids.

The Federal Orders paid by the "Advanced" process make up only 10% of the milk marketed in the U.S. Federal Orders or about 7% of the total U.S. milk production.  Chart I is a pie chart illustrating production of Federal Order Milk.  That milk in 2023 made up 69% of U.S. milk production with 31% coming from areas not in a Federal Order or de-pooled from a Federal Order.

Chart I - Pie of Milk Marketed under the
Class and Component System and
the Advanced System 

Chart II below shows the pricing of butterfat and milk protein through March 2024.  Butterfat prices are not declining and as a result the producer value of milk protein continues to be near record lows.  (See these posts for an explanation of the USDA formulas.  April 3, 2024 ; March 19, 2024; and February 13, 2024.)

Chart II - Recent Price Trends in Butterfat
and Milk Protein

Chart III below shows the revenue from butterfat for the Southwest Federal Order which is paid by the component system.  Monthly revenue for butterfat per cow is at $269.

Chart III - Revenue per Cow for
Southwest Federal Order

The four charts below show the same data for the four Federal Orders paid on the "Advanced" system.  the current revenue per cow ranges from $197 per cow to $223 per cow.  Taking Florida as an example, if they increased butterfat component levels and milk per cow to the level of the Southwest Federal Order, the revenue increase for a herd of 1000 cows would be $864,000 per year.

Chart IV - Revenue per Cow for
Southeast Federal Order

Chart V - Revenue per Cow for
Appalachian Federal Order

Chart VI - Revenue per Cow for
Arizona Federal Order

Chart VII - Revenue per Cow for
Florida Federal Order

Why does this huge difference in revenue exist?  Tables I and II below make the difference clear.  In Table I the 11 Federal Orders are ranked in order of percent butterfat for 2023. All four for the "Advanced" Federal Orders are at the bottom of the chart with the lowest percent butterfat in their milk.

Table I - Ranking of Federal
Orders by Precent Butterfat

Chart II below lists the 11 Federal Orders ranked by monthly milk per cow.  Again, the Federal Orders paid by the "Advanced" formulas fall near to the bottom of the rankings.  The Northwest Federal Order is low in this group only because they are at the top of the list in percent butterfat.

Table II - Ranking of Federal
Orders by milk per cow

SUMMARY

There is money on the table for the "Advanced" paid Federal Orders.  The trend of increasing butterfat prices and decreasing milk protein prices continue.  (See the February 13, 2024 Post to review the 20 year trends).  Breeding and feeding technology can make a huge difference!

Producer Milk Prices are down. What States are doing best?

Producer Milk Prices are down.  Much of this comes from the Agricultural Marketing Services (AMS) price changes for butterfat and milk protein.  This post will cover the financial impact of the changes for the U.S. dairy industry and will drill down to the impact in the major milk producing states.

Chart I below quantifies the changes in the price of the major commodities used to price butterfat and milk protein.  The price of butter has consistently increased in the last five years and the price of cheese has gone down. 

Chart I - AMS Prices of Cheese and Butter

Collectively, Charts II through IV follow the revenue per cow for butterfat and milk protein over the last five years in the U.S.  They are calculated by combining component levels, milk per cow, and the AMS prices of butterfat and milk protein to calculate the monthly revenue per cow.  

Chart II tracks the monthly revenue of butterfat per cow.  Over the last five years, the value of butterfat dropped and then increased significantly.  The current butterfat revenue per cow reached a new record high.  In 2020, prices of butterfat declined largely influenced by the COVID "stay at home" policies.  In 2021 they recovered and then continued to increase to record highs.  In 2023, butterfat value per cow leveled off but remains near record levels.

Chart II - U.S. Producer Revenue per Cow for Butterfat

Chart III follows the revenue of milk protein per cow.  It is the inverse picture of butterfat value in Chart II.  It reached highs in 2021 and is at near record lows in 2024.  The reason for the inverse relationship is the impact of the USDA protein pricing formula covered in the prior post.  As butterfat prices increase, the value of milk protein decreases.

Chart III - U.S. Producer Revenue per  Cow for Milk Protein

Chart IV shows the combined value of butterfat and milk protein per cow.  They declined in 2023 but are still well above the January 2019 values.  The increase from the start of 2019 to the high in 2023 is a 55% increase.  The increase from the start of 2019 to February 2024 is 26%.  While the value of butterfat and milk protein has dropped in 2023, it is still well above 2019 prices.  The 2023 drop in value is 19% which has led to many articles about the drastic drop in producer milk prices.  However, the prices are in line with the long revenue trends.

The drastic price drop in 2023 will likely accelerate the long-term trends of fewer small dairy producers and increased large herds which have economic advantages of their size.

Chart IV - U.S. Combined Revenue per cow for
Butterfat and Milk Protein.

Below is the revenue per cow financial impact on three of the largest milk producing states.  All show the same general up and down revenue trends, but the amount of swings and the total revenue are significantly different.

Monthly California butterfat and protein prices per cow are now just 4% higher than the beginning of 2020.  Twelve-month moving average data for 2019 is not available, as California did not become a Federal Order until the end of 2018

Chart V - California Producer Revenue per Cow for
Butterfat and Milk Protein

Wisconsin's current revenue per cow for butterfat and protein is 27% higher in February 2024 compared to the start of 2019 (Chart VI).  The value peaked at a 55% increase in December 2022.  The current pricing is in line with long-term trends.

Chart VI - Wisconsin Producer Revenue per Cow for
Butterfat and Protein

Texas's current revenue per cow is 28% higher than the start of 2019.  It peaked with a 59% increase in January 2023.

Chart VII - Texas Producer Revenue per Cow for
Butterfat and Protein

The table below shows the February 2024 revenue per cow for three of the major dairy producing states covered in the three charts above.  They range from $388 per cow per month to $362 per cow per month, a 7% difference.  For a herd of 1000 cows for a year, that is a herd revenue difference of $312,000 per year.

Table I - Butterfat and Protein
Revenue per Cow

What makes the difference in revenue per cow?  Table II compares the parameters that influence revenue per cow of the three large states.  Texas, which had the highest revenue per cow, and was highest in two of the parameters. Wisconsin was highest in one category.  The parameters of high components and milk per cow lead to high milk revenue per cow.

Table II - Parameters that Lead to High Revenue per Cow

SUMMARY

Being a milk producer in the U.S. can be financially volatile.  Maximizing component levels and milk per cow has a strong influence on revenue.  There are multiple methods such as balancing amino acids in diets that are used to maximize the parameters shown in Table II.  Survival and financial success depends on using all the tools.

The next post to this blog will cover an analysis of maximizing revenue in areas paid on the "Advanced" system where payment for butterfat exists, but not for protein.  Can they benefit financially by increasing butterfat levels and milk per cow?

U.S. Milk Production is down. Which States have continued to grow?

There is a lot of concern about the decline in U.S. milk production.  Producer milk prices are low compared to prior years and many farmers are struggling to stay in business.  This post will cover where the lower milk production is occurring geographically and where milk per cow is growing or shrinking.  Increasing milk per cow has a financial benefit and the improvement in milk per cow has slipped in some regions.

U.S. MILK PRODUCTION

The first part of this post will cover the change in milk production as a percent change from the prior year.  Chart I illustrates the overall percent changes in the U.S. from the prior year.  Increasing milk production was positive through mid 2021.  Beyond that, there were more negative months than positive months.  The trend lines show a pattern of lower milk production in the U.S.  The charts below Chart I cover the changes in the major dairy states and are ranked by the current volume of milk production, largest to smallest.

Chart I - Percent Changes in U.S. Milk Production
vs. the Prior Year

California is the largest milk producing state.  The monthly decreases in milk production were spotty beginning in 2021 and by 2023 the monthly decreases have become regular.

Chart I - Percent Changes in California Milk Production
vs. the Prior Year

Wisconsin is the second largest milk producing state in the U.S.   Most of the. milk produced in Wisconsin is used in cheese production.  The decline of milk production began with slower but still positive increases starting in 2022.   For the last two years, Wisconsin milk production has only increased at about 1% annually (Chart II).

Chart II - Percent Changes in Wisconsin Milk Production
vs. the Prior Year

Idaho is the third largest milk producing state and is not in a Federal Order.  Idaho had significant growth in milk production in 2019 and 2020 and still maintains positive but with slower.growth through 2023.  The trend lines do show a steady decline in growth over the last five years (Chart III).

Chart III - Percent Changes in Idaho Milk Production
vs. the Prior Year

Texas, Chart IV, has a decline in the growth of milk production starting in 2021 and continuing to decrease to negative levels in 2023.  Most months in 2023 had lower milk production vs. the prior year.  This is a drastic change as Texas was the fasting growing milk producing state through 2022.

Chart IV - Percent Changes in Texas Milk Production
vs. the Prior Year

Michigan has maintained growth of milk production although there was a slowdown in 2022.  In 2023, most every month showed an increase in milk production vs. the prior year.  As will be covered in the second part of this post, Michigan has also showed a steady growth in milk production per cow which brings lower cost to milk production.

Chart V - Percent Changes in Michigan Milk Production
vs. the Prior Year

The charts above show a mixed impact of growth in milk production.  Michigan and Wisconsin have maintained growth but at a slower rate.  California has the fastest decline in milk production.

MILK PER COW

Milk per cow is an important parameter to follow as more milk per cow increases revenue per cow.  The U.S. enjoyed steady growth in milk per cow through 2022.  In 2023, that increase in milk per cow slowed (Chart VI).

Chart VI - U.S. Milk per Cow per Month

Michigan (Chart VII) remains the leader in milk per cow.  While the growth has slowed, it is sill mostly positive with an average of 2284 pounds per cow in January 2024.  Milk per cow peaked at 2295 pounds per month in March of 2023, well above any other state.

Chart VII - Michigan Milk per Cow per Month

Texas is also growing in milk per cow.  It is now ranked second with 2133 pounds per month average.  It also peaked in March 2023 with 2141 pounds per month.

Chart VI - Texas Milk per Cow per Month

Wisconsin has had continuous growth in milk per cow with an average of 2104 pounds per month in January 2024.  The Wisconsin gain in milk per cow is the most consistent of any state.

Chart VI I- Wisconsin Milk per Cow per Month

Idaho has had a very erratic path with milk per cow.  After peaking at 2115 pounds per month in March 2023, it has now fallen to 2082 pounds per month.  At its present level it is still the fourth best in milk per cow.  

Chart VIII- Idaho Milk per Cow per Month

California has also dropped milk per cow by 2% in the last year.  Its current milk per cow is 1983 pounds, 14% lower than Michigan.

Chart IX - California Milk per Cow per Month

Overall, U.S. milk production in the U.S has slowed to no growth or negative growth.  Growth in milk per cow continues in the U.S. but at slower gains.

Wisconsin has maintained the steadiest gain in milk per cow.  This is also consistent with their growth in milk volume.  Michigan has continued to lead the country in milk per cow.