Tuesday, February 13, 2024

Butterfat Prices are High and Protein Prices are Low. When Will it Change?


Butterfat has become the most important component in milk pricing.  In January 2024, the value of butterfat made up nearly 70% of the FMMO Class III price.  Is this a short-term event or will this pricing pattern continue?  This post will review long-term component pricing trends and other factors impacting the current pricing.

Chart I below shows the breakdown of Class III pricing between butterfat and skim Class III milk.  The pricing during 2020 and 2022 are very different as the COVID "stay at home" policies were implemented and this period should be ignored in analyzing long-term trends.  Will butterfat continue to dominate producer milk pricing?  If so, producers should concentrate heavily on maximizing butterfat.
Chart I - Class II Price Split Between
Butterfat and Skim Milk

BUTTERFAT AND PROTEIN PRICES

The long-term prices of butterfat and milk protein are shown in Charts II and III.  The butterfat price (Chart II) shows a steady increase over the last 24 years.  In analyzing the trend, the 2020 to 2022 prices influenced by COVID should be ignored.  With that in mind, the current high butterfat prices are just a continuance of the long-term pricing trends.  With an established 24-year trend, it is likely that the same trend will continue.  Therefore, increasingly high butterfat prices will likely continue.
Chart II - Butterfat Price Long-Term
Protein prices (Chart III) have fallen to a near record low of $1.05 per pound in October 2023.  The only time protein was priced that low was in late 2000.  In January 2024 protein was $1.13 per pound.  The trend line shows a rising price from 2000 to 2015 and then lower prices (ignoring the COVID years).  The current trend for protein prices is an eight year pattern of low prices.

Chart III Protein Price Long-Term

THE FMMO FORMULA FOR MILK PROTEIN AND THE PRICES FOR CHEESE AND BUTTER

One of the reasons for the low protein prices is the FMMO formula for protein.  Milk protein is priced based on the AMS wholesale cheese price minus the wholesale butter price.  The protein formula is shown below in its full format, and then simplified in the second formula below.  Milk protein pricing is based on the wholesale prices of only two commodities, cheese and butter.  When the cheese prices go up, the value of milk protein goes up.  When the butter prices go up, the value of milk protein goes down.

The formula below represents the formula used by the FMMO. The formula listed in the FMMO statement shows that for January 2024 the protein price would be $1.83 if it was based only on the cheese price.  However, the second part of the formula is the adjustment for butterfat which is a negative $.70 resulting in the published protein price of $1.13

Protein Price = ((Cheese Price – 0.2003) x 1.383) 
+ ((((Cheese Price – 0.2003) x 1.572) – Butterfat Price x 0.9) x 1.17) 

Protein Price for January = $1.83 - $.70 = $1.13
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The FMMO formula can be simplified and maintains the identical price.

Milk Protein = 3.2 x Cheese Price - 1.1 x Butterfat Price - $.65

Milk Protein for January 2024 = $3.22 - $3.13 - $.65 = $1.13

The long-term AMS cheese prices show a leveling trend (Chart IV).  While there was growth from 2000 to 2015, after that cheese prices leveled off.  In January 2024, the price was at $1.52 per pound.
Chart IV - Wholesale Cheese Price Long-Term 
The AMS wholesale butterfat price used in the protein formula is shown in Chart II above.  The current January 2024 price per pound is very close to the long-term trend line.  As mentioned above, the butterfat price has consistently escalated over 24 years and is currently very close to its long-term trend line at $2.98 per pound, almost twice the cheese value.

WHAT WILL THE FUTURE BRING?

Based on the long-term trends for cheese and butter. it is likely that the cheese prices will remain low and butter prices will continue to increase.  That would create a lower protein price based on the current FMMO formulas.

Is the milk protein price formula out-of-date?  While there is nothing included in the IDFA recommended changes, this formula should be re-evaluated.  It was originally developed to show that butterfat is worth more in cheese than in butter, but that situation has drastically changed.  Butterfat is now worth more in butter than in cheese.  

It is possible that with an increasing price for butter and a stable price for cheese, the value of milk protein could go negative based on the current FMMO formula for protein.  As a side note, while the price of butterfat is based on the price of butter, which made sense in 2000, but most of the butterfat today goes to cheese, not butter.

THE IMPACT ON CLASS III vs. CLASS IV PRICES

In January 2024, Class IV milk was priced at $19.39 per cwt. while Class III milk was priced at $14.71 per cwt., a $3.68  per cwt. spread.  Both have the same value for butterfat, but Class IV skim was at a much higher price than Class III skim.  Class III skim was at $4.92 per cwt., while Class IV skim was at $9.30 per cwt.

Is this because the NDM, an export product, was increasing in value?  No, the NDM price used to price Class IV skim milk is at a very normal level of $1.21 per pound (Chart VI).  The cheese/butterfat adjustment part of the FMMO Class III protein price formula shown above is the cause of the huge difference in skim milk prices.  
Chart VI - Wholesale NDM Price Long-Term

With the current FMMO formulas, butterfat will continue to be high priced and milk protein will be low priced.  The "make allow" recommended by the IDFA will only make this spread greater.