August Class I Price Takes a Hit.

The August Class I Milk price was announced on July 22.  The Class I base skim milk price moved up to $13.34 per cwt.  The Advanced Class III skim price was $18.08 per cwt. and the Advanced Class IV skim price was $7.12/cwt.  The combination of the Class III and Class IV milk prices are the basis of the Class I price.  The spread between the Class III price and the Class IV price was record setting.  The cheese price used to calculate the Advance Class III skim price was also a record at $2.57 per pound.

Chart I below shows the extreme volatility in the pricing of cheese.  In a matter of just two months, the price of cheese used to partially calculate the Class I price in the Advanced system has jumped from $1.19 per pound in June to a record price of $2.57 per pound in August.  The June cheese price as shown on the chart is a 15-year low and the August price is an all-time high.  The volatility in cheese pricing which was covered in the prior post is making market moves that are unprecedented. 

Chart I - Advance Price of Cheese

In May 2019, a new price formula for Class I was implemented.  This change was covered in a January 2020 post to this blog.  In that post, the impact of the change was for more negative Producer Price Differentials (PPDs) leading to more de-pooling which in turn further exaggerates a negative PPD.  In August 2020, the new formula compared to the old formula decreased the base price of Class I skim milk by $4.74 per cwt. as shown in Chart II.  Chart II was developed based on the Advanced pricing of Class III and IV using the new and old formulas for Class I pricing.  Until June of 2020, the pricing differentials were relatively minor.  In August, the pricing impact on Class I skim milk is huge.

Chart II - Impact of the Formula Change for Class I Skim Milk

Why is this important?  The PPD is basically the difference between the "Uniform" or average price of producer milk and the Class III price established by the Class and Component pricing formulas.  When the Class I is lower, it will lower the "Uniform" price and cause the PPD to be negative.

The new formula uses the combined skim milk values for Class III and IV to determine the Class I base price.  When the prices of Class III and IV are close, this does not present a major impact.  However, beginning in July and growing further in August, the price differential between Class III and IV grew significantly reaching a record $10.96 per cwt. (Chart III).

Chart III - Class III/Class IV Price Spread

Going further down the chain of pricing, Charts IV and V below show the Advanced prices of Class III and IV skim milk.  For the past six years the price of Class IV milk has ranged between $5 per cwt. and $10 per cwt. The current price of $7.12 per cwt. is near the average of these prices.  The price of Class IV skim should not therefore create extreme volatility in pricing.

Chart IV - Advanced Price of Class IV Skim

Chart V shows the Advanced price of Class III.  The price of Advanced Class III has nearly tripled in just two months.  In June it was $6.68 per cwt. and in August it reached $18.08 per cwt.  That is real volatility.  The prior post covered the inventories levels of cold storage cheese to see if this was causing the volatility in cheese prices.  It is not.  The huge change in cheese prices is a bit of a mystery as the industry goes through the changes inflicted by quarantining and the Coronavirus Food Assistance Program (CFAP). 

Chart V - Advanced Price of Class III Skim

The final Class III prices for August will not be announced until the end of August.  Only then will the impact on de-pooling and the PPD for August be known.  On July 29, data for the fourth week of the NASS pricing period for June was announced.    Chart VI shows the progression of cheese prices for June.  There are five weeks in the June calculation so there is one more week to come.  However, based on the first four weeks, the cheese prices will be well into a very high record cheese price. 

Chart VI - Weekly NASS Survey Prices for 2020

The extreme volatility inflicted on producer milk prices is unprecedented.  It is difficult to predict when prices will normalize, but with a probably negative PPD again in August, any return to more normal market movements will not happen until later in 2020.

Cheese Prices Continue to Climb! Why are They Climbing? Where are They Going?

July cheese prices published in the NASS weekly surveys continue to climb ito record highs.  However, cheese inventories as of the end of June do not show any shortages or low inventories.  This is a very unusual pattern. In this post the newest analytics influencing cheese and milk prices will be examined.  Cheese cold storage inventories are available through June.  Other data relating to inventory movements are available only through May.

• NASS cheese prices for the first three week of July are averaging $2.53 per pound.   This is record high, well above all 21-year historical levels.

• If the July cheese and butter prices remain at the levels of the first three weeks, milk protein will reach a historical high of over $5.50 per pound.

• End of June cheese inventories are still above averages.

• Cheddar cheese is the benchmark for cheese pricing.  Cheddar cheese production is "normal." 

• Cheddar cheese inventory levels are not publicly available.  However, Cheddar cheese makes up most of the category known as "American" cheese.  In June, "American" cheese inventories are still above average.  There is no apparent shortage of Cheddar cheese as of June 30.

• "American" cheese disappearance from inventories did strengthen in May.  It has helped lower "American" cheese inventories some, but they are still above average.  

Cheese prices are the most significant parameter for dairy producer pricing.  The data for NASS cheese pricing is collected and published weekly.  The cheese prices used for Class and Component Pricing are collected for four-or-five-week periods and averaged.  July Class and Component prices will be based on five weeks of data.  There are currently three weeks of the five weeks period published.  The three weeks suggest that the July Class and Component cheese price will rise to new historical highs.  Chart I shows the current three weeks of July cheese prices and the pricing trends for 2019.  The first three weeks cheese prices average $2.53 per pound.  The cheese price used for the July Advanced pricing was $2.02 per pound.  This continuing escalation of cheese prices as well as continuing low Class IV prices will keep the PPD strongly negative in July.

Chart I - 2019 NASS Weekly Cheese Prices

How high would a cheese price of $2.53 per pound be?  Chart II below shows the history of NASS cheese prices for the last 21 years.  The June Class and Component price for cheese was $2.22 per pound.  The highest ever cheese price was $2.35 per pound in 2014.  If the current three-week average for July of $2.53 per pound holds up, July would be up 14 percent higher from the prior month and eight percent higher than the all-time high.  The July price of cheese will likely be at a record well above anything in the past 21 years.

Chart II - NASS cheese prices since 2000

 

Chart III shows the level of total cheese inventories.  While May and June inventory levels are down from the April highs, the inventories are still substantial and higher than the two-and-a-half-year average.  The two-and-a-half-year average amount of cheese in cold storage is 1,369 million pounds.  As of the end of June 2020, the level of cheese inventory in cold storage is 1,416 million pounds, three percent higher than the average.

Table III - Total Cheese Inventory

Cheese prices as announced are really based on Cheddar cheese prices which is the chosen benchmark for all cheeses.  Cheese prices are typically dependent on the level of cheese inventories.  When inventories are high, prices are low, and when product is scarce, prices are high.  Cold storage inventories of Cheddar cheese are not publicly available, however "American" cheese inventories are available and Cheddar cheese makes up 72 percent of "American" cheese production. 

By the end of June, "American" cheese inventories were down considerably to 793 million pounds (Chart IV).  That is only slightly higher than the prior three years of June inventory levels which averaged 798 million pounds.  Cheddar cheese is not a growth product and therefore "American" cheese inventories fluctuate, but do not grow over time as Chart IV shows.  The total average of "American" cheese inventory during the last three and a half years was 782 million pounds.  The current inventory level of 793 million pounds is just slightly higher than the average for the last three and a half years.  There does not appear to be a shortage.

The June 30 cheese inventory level of 793 million pounds does not even come close to a record low inventory level that would support a record 21-year high cheese price as described above. In late 2019 "American" cheese inventory levels went to 740 million pounds, which resulted in a high cheese price of $2.17 per pound, which is not even close the pending $2.53 per pound cheese price discussed above. 

The CFAP plan which has been in place since May 15 may be having some impact on lowering "American" cheese inventories, but it has not yet lowered cheese inventory levels to the point of having a shortage which would normally trigger high prices.  The inventory data in Chart IV represents June 30 levels which is 45 days since the CFAP plan was implemented.

Chart IV - American Cheese Inventory

Production of Cheddar cheese also remains robust through May 2020.  Chart V shows the production of Cheddar cheese in May at 319 million pounds, 3 percent higher than the average of the last three-and-a-half-years.  This level of production should keep Cheddar cheese inventories adequate.

Chart V - Production of Cheddar Cheese

One of the other important parameters is cheese disappearance from cold storage.  In May "American" cheese disappearance reached above average levels, an encouraging sign.  April disappearance was unusually low as the U.S. adjusted to more in-home dining and less eating out. The supply chain therefore had to adjust supplies from food service to retail sales of cheese.  The Coronavirus Food Assistance Program (CFAP) had been in effect for only two weeks at end of May but may have also had an impact. More will be known in a few weeks when June detail is available.

Chart VI - American Cheese Disappearance

SUMMARY

The data in the charts above do not show the typical relationships.  When cheese inventories are above normal, it is very unusual to see high cheese prices typically associated with inventory shortages.  One of two things will have to happen.  Either the disappearance of cheese will need to jump drastically by the demands of the CFAP plan or other means, or the Cheddar cheese price will have to fall.

As the Covid-19 pandemic continues to upset normal dairy pricing relationships.  The continuing impact will be reviewed regularly in this blog.

June Pricing Made Record High Revenue for Many Producers

June dairy pricing provided amazing highs for many dairy producers.  The press has primarily focused on the huge negative Producer Price Differentials (PPD).  One of the reasons for the huge negative PPDs was that de-pooling went to record extremes.  As shown in the prior post, de-pooling does not make more money available, it only spreads the money around differently. This post will provide all the important data on June pricing factors and will focus on the dairy prices that provided many producers with amazing revenue.

• June PPDs were at record negative values.  This is a fact, but many producers were not included in the pools for PPD adjustments to pay.

• The Class III price was $21.04 per cwt., which blunted the pain of the negative PPD for those in the FMMO pools.

• Milk not pooled in the FMMOs hit near record highs.  Only Class I must be pooled.  Other Classes can de-pool by the rules of their Federal Order.

• The June "Uniform" milk price was higher than the May "Uniform" milk price in all FMMOs except Florida which is nearly all Class I milk and had a small decrease.

• Milk protein prices at $4.53 per pound were near record highs for the 21-year history of protein pricing.

• The Class III price was near record highs. The Class III price was only higher during two other periods during the 21 years of the program.  

First, the facts

Table I shows the "Uniform" milk price and the PPD in each of the Federal Orders paid on the component system.  The PPDs were hugely negative.  However, the "Uniform" or average milk prices were better than the previous month in every FMMO paid on components.  The Upper Midwest producers that were in the pool achieved a "Uniform" price of $17.23 per cwt. in June up from $12.31 per cwt. in May.   Producers with high component levels of course exceeded this price.

Table I - Uniform Price and PPD

Class I milk cannot be de-pooled.  All other classes of milk can be de-pooled with limitations.  Table II shows the May to June drop in total pooled milk in each of the FMMOs.  In the Upper Midwest, the largest Federal Order, pooled milk dropped by 61 percent.

Table II - Total Pooled Milk in the FMMOs

Class III milk was at an extreme high price in June, near record levels.  The June Class III price was $21.04 per cwt.  The Class III producers that de-pooled likely got this price for their milk.  With higher components levels, they got more per cwt.

Chart I - Class III Milk Prices

Class III milk volume that was pooled fell drastically in June.  Table III shows the comparison between May and June of the Class III milk that was pooled.  The average amount of Class III milk pooled dropped by 71 percent overall.  In some Federal Orders, Class III milk dropped by 90 percent.

The Class III milk that was not pooled in Table III understates the amount of de-pooling as May also had some de-pooling.  This will be further discussed later in this post.

Table III - Class III Milk Pooled in May and June 2020

Many producers have been increasing components through genetics and feed.  One item that has not had much press is that the milk protein price has reached levels rivaling historic highs.  Chart II reflects this.  Milk protein prices for June reached $4.53 per pound.  Producers emphasizing protein development through techniques like amino acid balancing had a great payday in June!

Chart II - Milk Protein Pricing since 2000

Milk volume not being pooled reached historical highs in the Upper Midwest, California, and other FMMOs.  The Upper Midwest and California will be reviewed in detail below.

Upper Midwest

Chart III shows the estimated milk not in the pool in the Upper Midwest.  The June amount of Class III milk pooled in the Upper Midwest was 542 million pounds (Table III).  By comparison, the amount not pooled, which was primarily Class III, was estimated at 2,800 million pounds.

Chart III - Estimated milk not pooled in the Upper Midwest

California

In California, de-pooling became a way of life immediately when California became a Federal Order.  Chart IV shows the estimated amount of California milk that is not pooled.  While the June 2020 amount is huge, it is well below the January 2019 amount not pooled.  Charts V and VI show the pooled Class III and Class IV milk in California.  Prior to becoming a Federal Order, no California milk could be de-pooled.  It appears that one of the major reasons for becoming a Federal Order was the ability to not pool.  Milk not pooled is estimated at 1,793 million pounds in June.

Chart IV - Estimated California Milk Not Pooled

The milk not pooled is primarily Class III.  The amount as shown in Chart V for pooled Class III was just 12 million pounds in June, a record low.  By comparison, in December of 2018, 1,411 million pounds of Class III milk were pooled.

Chart V - California Pooled Class III Milk

Chart VI shows the volume of Class IV pooled.  In the very first months of the program, almost all Class IV was de-pooled.  In June there was some Class IV milk de-pooled, but the majority was pooled.

Chart VI - California Pooled Class IV Milk

As a side point, the only area where all California milk must now be pooled is in the Quota program rebalancing.  All milk not covered by quota must contribute to a fund to pay a premium for milk covered by quota.  This program is managed by California, not the Federal Orders.

Where is this going?

The upheaval in diary pricing was caused by the extreme drop followed by a very extreme increase in cheese prices.  Chart VII shows the weekly NASS prices for cheese that are the basis for milk pricing.

The Advanced price for June Class I was done at the lower cheese prices valued at $1.19 per pound.  The Class and Component prices used later June cheese prices valued at $2.22 per pound, an increase of $1.03 per pound.  See the prior post for details on Advanced Pricing compared to Class and Component pricing.

The two circled numbers on Chart VII are the most recent NASS cheese prices that will be used for setting July Class and Component prices.  Advanced pricing for July was announced on June 17 and used cheese at $2.03 per pound.  The first two weeks average of the weeks that will be used for the component system values cheese at $2.52 per pound, an increase of $.49 per pound from when the Advanced prices were calculated.  July is a five-week month for component pricing calculations and only the first two weeks of data are currently available.  However, the available two weeks of data for July are showing further increases in the cheese price.  The July increases to date are more moderate than the June increases but nevertheless, they are significant increases.  If this continues for the next three weeks, there will be another negative PPD for July although it should be more moderate than the June negative PPD.

Chart VII - NASS Cheese Prices for 2020 YTD

Everything surrounding the impact of COVID-19 is uncharted territory and subject to quick changes.  Changes will continue to be followed in this blog.

What is Covid-19 Doing to Milk Pricing?

The COVID-19 pandemic and quarantine measures implemented to reduce the pandemic impact have turned the entire world into something different from normal operations.  Because everything is different now than it has ever been, it is sometimes hard to understand where the dairy industry is and where it is going.  This post will cover a few of the impacts that are turning dairy pricing into a mystery.  The following items will be discussed:

• The impact on Class I milk sales:  Some recent articles have suggested that consumption of fluid milk has increased.  This is not true.
• The impact on the pricing of the different Classes of milk:  Why is Class I down, Class III up, and Class IV much lower than Class III.
• The impact on the June Producer Price Differential (PPD):  There is a perfect storm of events to make the PPD go negative.  The price of cheese was at a low point when the Class I price was calculated for June and it was at a high point when the Class III price was calculated.  The new Class I formula is also playing a part in making the PPD negative 
• The impact on de-pooling:  As the PPD goes negative, de-pooling occurs.  De-pooling at this time of volatility is potentially greater than ever before.

Some of the COVID-19 impacts were covered in the prior two posts.

One June 1, the post "Key Cold Storage Cheese Inventories Swell - When Will Inventory Levels Normalize?"  reviewed the impact of losing food service to restaurants.

On June 22, the post "Cheese and Butter Prices Skyrocket. Is it Realistic? Maybe not!" covered cheese inventories, production, disappearance, imports, and exports.

CLASS I FLUID MILK PRODUCTION

There have been numerous reports in the press that fluid milk consumption has increased during the pandemic.  Unfortunately, that is "fake news."  Chart III shows the Class I milk produced in 2018, 2019, and through May of 2020.  In 2019, the amount of Class I milk was lower than the prior year for every month.  Overall, the 2019 Class I milk was four percent lower than the prior year.

In 2020 there was a significant spike in March, however, Class I volume fell too much lower levels in April and May.  The high of March can be contributed to increasing consumer stockpiling and hoarding.  Fluid milk has a very short shelf life, so much of what was probably hoarded was probably wasted.  Some of the March excess may also have contributed to lows of April and May. This pattern was the same for each Federal Order.  Class I milk cannot be de-pooled, so the accuracy of the data from the Federal Orders is very accurate.

Chart III - Class I Fluid Milk for Drinking.

PRICING of MILK CLASSES I, III, and IV

Chart I illustrates the timing of Class I and Class III pricing.    The June Class I pricing was determined by the Advanced pricing method based on data for the weeks of May 9 and 16 when cheese prices were low.  The Class III price is based on the Class and Component method for the weeks of June 6, 13, 20. and 27 when cheese prices were high.

Chart I - Advanced Pricing vs. Class and component Pricing

During April and early May, the NASS cheese price dropped to a low of $1.12 per pound.  However, in the following weeks it increased by over 100 percent as shown in Chart II.  Because the Class I price is announced before the month starts, the Advanced price for Base Class I was very low at $11.42 per cwt.  The Class I Advanced price is based on the Class III and IV advanced skim prices and The Class III portion is primarily based on the cheese price.  For the Advanced pricing cheese was valued at $1.19 per pound. 

By the end of the month, the cheese price used in the Class III Class and Component pricing had jumped to $2.22 per pound, nearly double that used for calculation of the Class I milk.  The Class and Component pricing model is based on four weeks of NASS statistics shown below in Chart II..

Chart II - NASS Cheese Price by Week

The PPD

The PPD was designed to ensure that all producers were paid equally regardless of the usage of their milk.  It is calculated as the difference between the Class III price which is the initial milk payment to processors and the weighted average of the four Classes of milk call the Uniform price.  Historically, significant increases in the cheese price have resulted in a negative PPDs due to the timing of the Class I pricing and the Class III pricing as explained above.  In June, the price increases for cheese were extreme.

As of May 2019, the formula for Class I pricing was changed to included Class IV pricing in the formula.  The old and new formulas are shown below.  The change was made to allow processors to more precisely hedge pricing by eliminating the uncertainty in the old formula which could use Class III or IV.  (See the January 12, 2020 post to this blog for an analysis of this change.)

OLD FORMULA

Base Skim Milk Price for Class I = 

Higher of Advanced Class III or Advanced Class IV Skim Milk Pricing Factors 

NEW FORMULA

Base Skim Milk Price for Class I = 

((Advanced Class III Skim Milk Pricing Factor + Advanced Class IV Skim Milk Pricing Factor) / 2) + $0.74 

This formula change brought more certainty to the milk processors but brought another factor into milk pricing for producers.

Class IV Skim pricing is based the price of Nonfat Dry Milk (NDM).  The price of NDM is shown in Chart III.  NDM is primarily an export product and prices are set based on global markets.

Chart III - NASS weekly prices for NDM

There has been significant press about a potentially large negative PPD for June.  The amount of the PPD varies significantly from one Federal Order to another as shown in Table I below.  PPDs for June 2020 are not yet available, but when they are, they will be reported here.  Table I shows the negative PPDs that occurred in November 2019.  They ranged from -$.94 in the Upper Midwest to -$3.30 in California.  In November of 2019, cheese increased in price by $.23 per pound from the Advanced pricing timing to the Component pricing timing. This June, the cheese price increased by $1.03 per pound from the Advanced pricing to the Component pricing.  The June PPDs will therefore be significantly larger than those shown below for November 2019.

Table I - PPD in November 2019

Comparing this June to November 2019, the following PPD issues shown in Table II come into play.  The arrows show the upward increases to higher PPDs and the downward arrow shows the downward impact to a lower PPD.

Table II - Changes in parameters effecting PPDs and De-pooling

The individual June PPDs for each FMMO will be announced within the next ten days and will be covered in the blog.

DE-POOLING

When the PPD becomes negative, there is an advantage to de-pooling for those who can de-pool.  De-pooling does not really create more producer money, but it does spread it around differently,  Those who de-pool make more and those who are left in the pool make less.  The total does not significantly change.  Below in Table II is a very simplified example.  Note that with de-pooling, the PPD becomes increasingly negative.

Table II - Payments Change with De-Pooling

With the expected very large negative PPD in June, maximum de-pooling will take place.  In the Upper Midwest in November 2019, Class III milk usage dropped from 90% of total milk in the pool to 68% of milk in the pool as a lot of Class III milk was de-pooled.   In June at least this amount of de-pooling will probably occur.

SUMMARY and FORECAST

Exactly how June PPDs and de-pooling analytics result for each Order will be known soon.  Clearly June PPDs and de-pooling will be greater than the negative PPDs and de-pooling of November 2019 cited above.  For instance, one economist pegged the negative Upper Midwest PPD at between a negative $1.30 per cwt and negative $8.11 per cwt., a very broad range.  

Class and Component prices for June were announced today, July 1, 2020.  The Class III standardized price was $21.04 per cwt. and the cheese price was $2.21 per pound.  It should be noted that the most current NASS weekly cheese price is $2.45 per pound suggesting that cheese and Class III prices could still be increasing.  July Advanced pricing was based on prior weeks and used average cheese prices at $2.02 per pound.  This could mean that July will likely be another month of negative PPDs and de-pooling.

The pandemic and all the changes surrounding the pandemic have thrown the world into uncharted territory.  The U.S. dairy industry is no exception.