Producer Milk Prices are High! How Long Will they Continue?

Dairy is a business.  Like any business, cash flow, revenue, and profits are what keeps a business humming.  Producer milk prices are currently high. This post will look in the rear-view mirror, comparing the current high producer milk prices to the historical prices since 2000.  This is a 23-year review tracking back to the beginning of the current FMMO pricing system.

Most milk in the U.S. is paid by the Class and Component system.  On the initial payment, producers are paid based on the delivered pounds of butterfat, milk protein, and "Other Solids."  The amount of the initial payment is based on these pounds and the current price for these three components.  The pounds of these three components are under the control of the producer and his team.  Prices for these components are based on three commodities and will be covered in this post.

The two tables below show the growth of the prices of these components.  Table I compares the year 2000 to the year 2021, and Table II compares the year 2000 to the 12-month average through March 2022.  These two tables show the impact of low and high butterfat prices.  In February 2021, butterfat prices were low at $1.44 per pound.  By February 2022, butterfat prices had more than doubled to $3.02 per pound. 

The comparison from 2000 to 2021 shows the 22-year growth of butterfat prices at 52 percent and milk protein at 63 percent.  In 2022, butterfat prices shot up, and that comparison now shows butterfat growing at 80 percent and milk protein growing at 57 percent.  The conclusion to this is that both butterfat and milk protein prices are growing at about the same rate, but at different times one can grow faster than the other.  The best strategy for a producer is to maximize both butterfat and milk protein pounds.

The growth of "Other Solids" pricing is huge.  Comparing the two tables below, the price increases ranges from 659 percent to 788 percent.  The reason for this growth will be discussed later in the blog post. 

Table I - Growth of Component Prices from 2000 to 2021

Table II - Growth of Component Prices from 2000
and Current 12 Months

COMPONENT PRICES

Charts I through III below cover the movement of the component prices since January 2020. 

Chart I covers the movement of butterfat prices.  The March 2022 price is $3.09 per pound, which is not a record price, but it is the third highest price ever for butterfat.  

What happened right after the two previous highest prices in 2014 and 2015?  The price dropped quickly by more than one dollar per pound within two months.  Will history repeat itself?  

Butterfat Price = 1.211 x Butter Price - $.21

Chart I - Butterfat Prices since January 2000

Milk protein prices (Chart II) are not near any record highs.  In 2020, there were two price spikes as the U.S. economy reacted to the "stay at home" policies enacted to slow down the spread of COVID.  Those spikes quickly disappeared.

The milk protein price is influenced by the price of cheese and the price of butter.  When cheese prices go up, milk protein prices go up.  When butter prices go up, milk protein prices go down.

Protein price = 3.222 x Cheese Price - 1.275 x Butter Price - $.43

See this prior post for details.

Chart II - Milk Protein Prices since 2000

The price of "Other Solids" is based on the price of dry whey.  A lot of dry whey is exported, so the price is based on both international and domestic events.   The current price is a record at $.61 per pound.  Dry whey and its derivatives like whey permeate and whey proteins have found new value.  Over the 23 years covered in Chart III below, dry whey initially had little value and in 2009 carried a negative value as it cost more to dry than could be recouped in the wholesale price.  Today's market appears to be very different as real value has been found in dry whey.  

Unfortunately, "Other Solids" still adds very little to the overall price of Class III milk.  Its value at $.61 per pound pales in comparison to the price of butterfat at $3.09 per pound and milk protein at $2.72 per pound.

Other Solids Price = 1.03 x Dry Whey Price - $.21

Chart III - Other Solids Prices since 2000

COMMODITY PRICES

There are three commodities that are used to price milk components.  They are butter, cheese, and dry whey.  Nonfat dry milk (NDM) is used as the basis for pricing nonfat solids for Class IV milk.  Their prices are wholesale prices which are largely influenced by supply and demand.  The movement of the inventories of these commodities will be covered in an upcoming post.

Butter prices are used to calculate butterfat prices per the formula above Chart I.  Therefore, Chart IV on butter below moves with Chart I on butterfat.  The weekly AMS survey is showing a small further increase for April.  Butter prices may be peaking.  If history repeats, the price of butter may soon be taking a significant drop.

Chart IV - Butter Prices since 2000

Cheese prices are more difficult to follow.  While the name "Cheese Price" implies that this is the overall price of cheese, that is not true.  The Agricultural Marketing Service (AMS) calculates the price used to represent cheese as the wholesale price of one type of cheese, young Cheddar cheese.  While production data for Cheddar is available publicly, the inventory of young Cheddar cheese is not publicly disclosed.

Chart V that tracks the AMS price of cheese that has a current price of $2.05 per pound which is not near any records for high or low pricing.  

Chart V - Cheese Prices since 2000

Dry whey directly influences the price of "Other Solids."  As goes dry whey prices, so goes the price of "Other Solids."   While dry whey prices are high and will likely stay high, they still contribute very little to the Class III price of milk.

Chart VI - Dry Whey Prices since 2000

NDM prices are not at record levels, but at $1.80 per pound they are the highest since 2014.  Compared to the price growth shown in the above three charts, the price growth of NDM has been minimal.  This is an export product and is therefore subject to changing international events.  

Chart VII - NDM Prices since 2000

MILK CLASS PRICES

After the first payment to a producer is made based on component pounds and prices as discussed above, the final payment will be based on the difference between the first payment and the average or "Uniform" price for the four classes of milk.  The pricing of Classes III and IV milk and skim milk are covered below in Charts VIII through Chart XI.  While the initial payment for producer milk is based on component levels which are under the control of the milk producer, the second payment is based on the average pricing of all four milk Classes and is not under a producer's control.  The average or "Uniform" price will be used to determine the Producer Price Differential which is the basis for final payment for delivered milk.

Class III milk prices are above the long-term trends but have not reached record levels (Chart VIII).  The Class III skim milk price (Chart IX) shows a very average or normal price.  Obviously, the high butterfat price is responsible for the relatively high Class III price.

The Class IV milk price (Chart X) is at record highs.  That makes the Class IV price of $24.82 per cwt $2.37 higher than the Class III price.  Because the Class I and II skim milk prices are based at least partially on the Class IV skim milk price, the Class III initial payment will be lower than the "Uniform" price.  This should ensure that Producer Price Differentials will be positive and provide a positive second payment to producers.

Chart VIII - Class III Milk Prices

Chart IX - Class III Skim Milk Price

Chart X - Class IV Milk Prices

Chart XI - Class IV Skim Milk Prices

SUMMARY

The four commodity prices used to price producer milk are all positive compared to historical prices.  

• Cheese is only slightly above the norms.  

• Dry whey is at a record level, and it may be sustainable as new uses are influencing demand.  However, dry whey has a very small influence on milk pricing. 

• NDM prices are high but not at record levels.  Because NDM prices are primarily based on international factors, the price can change rapidly.  There are no elements that should make the higher NDM prices sustainable so there will likely be a drop.

• Butter prices are not at record levels, but they are near record levels.  Butter prices influence the price of all Classes of milk in all 11 Federal Orders. Historically, high butterfat prices don't last long.  Once the peak has been reached, prices may quickly fall by one dollar per pound or more.  However, the most recent weekly AMS prices do not yet show any sign of a reduction in butter prices, but they do show a leveling out of the current price.  

Is Dairy Productivity Increasing?

This post will cover how dairy productivity is increasing.  It will cover milk per cow, butterfat component levels, protein component levels, and somatic cell counts (SCC).  Much of this data is based on Federal Milk Marketing Order (FMMO) data and some is based on data from the USDA.  The data below compares the various states and FMMOs.

Milk per cow has plateaued in the last year after many years of growth.  Butterfat and milk protein levels are seeing tremendous gains. The decrease in SCC levels has slowed.

In the prior post, milk production was reviewed.  Milk production is down overall, but some states are still seeing significant gains.  Milk per cow is following a similar pattern.  Overall milk per cow is plateauing with some states seeing significant gains.

MILK PER COW

Milk per cow has been increasing by about one percent per year for a long time.  Starting in mid 2021, the increases slowed down and milk per cow has stayed just under 2000 pounds per month for the last year (Chart I).

Chart I - Milk per Cow

Chart II shows the incremental changes vs. the prior year in milk per cow.  In 2020, milk per cow increased around 30 pounds per month or about 1.5 percent annually. The current growth is now around 14 pounds per month, less than one percent increase from the prior year

Chart II - Changes in Milk per Cow

Chart III shows the changes in milk per cow by the largest dairy states.  Michigan has by far the highest milk producing cows with milk around 2250 pounds per month.  However, starting in early 2021, Michigan milk per cow leveled off and began a slight decline.  The state with the fastest growth rate in milk per cow is Texas with an increase of 4.6 percent over the years shown in Chart III.  California had the next fastest growth rate in milk per cow with 4.2 percent gain.  However, California also has the lowest milk per cow of the six states shown below.

Chart III - Milk per Cow by Federal Order

BUTTERFAT AND MILK PROTEIN

Chart IV shows the growth in butterfat (the blue line) and milk protein (the purple line).  The left vertical axis is percent butterfat, and the right vertical axis is the percent milk protein.  Both have seen tremendous growth starting in 2020.  The growth is still increasing with butterfat averages closing in on four percent and protein nearing 3.25 percent.  Butterfat is paid in all 11 Federal Orders, but milk protein is paid for specifically in only the seven Federal Orders paid by the "Class and Component" system.

Chart IV - Percent Butterfat and Protein

BUTTERFAT

Chart V illustrates the change in butterfat components vs. the prior year.  In early 2020, butterfat percent increased very slowly, but it never went negative.  It was always greater than the prior year.  Beginning in mid 2020, the rate of increase began to accelerate.   Currently butterfat, based on 12-month moving averages is increasing at .06 percent annually.  At this rate, butterfat percent will easily pass four percent in 2022.

Chart V - Percentage Increases in Butterfat Percent

Based on 12-month moving averages, the Southwest Federal Order (Texas and New Mexico), has increased butterfat from 3.93 percent to 4.14 percent, a .21 percent increase since the beginning of 2018.  The Southwest has by far the highest butterfat component levels.  The Upper Midwest has also increased butterfat significantly and in February 2022 it reached 4.23 percent.  The 12-month moving averages for the Upper Midwest is over four percent.  Butterfat prices are at current record highs and could be described as "dairyman's gold."

Chart VI - Butterfat Percent by Federal Order

MILK PROTEIN

Milk protein percent is paid specifically for the FMMOs paid by the Class and Component system.  As shown in Chart VII, milk protein's moving average is currently at 3.23 percent.

Chart VII - Protein Percent

Chart VIII shows the annual incremental increases in milk protein percent.  Currently, the rate of increase is an additional .06 percent per year, similar to the butterfat incremental increase shown in Chart V.  In late 2019 and early 2020, milk protein percent decreased, unlike butterfat shown in Chart V.  

Chart VIII - Increases in Protein Percent

The individual Federal Order protein changes are shown in Chart IX below.  The Southwest has had steady increases and now has the highest percent protein of any Federal Order.  The 12-month moving average for the Southwest is now 3.34 percent and the highest single monthly percent is 3.48 percent.

Chart IX - Protein Percent by Federal Order

SOMATIC CELL COUNT

Somatic cell counts have been dropping for a long time.  There are four Federal Orders that get paid for a cell count under 350,000 cells per milliliter.  The lowest recorded monthly cell count for a Federal Order is 159,000 cells per milliliter.  There are individual records lower than that.  Some scientists estimate that the lowest possible would be around 120,000 cells per milliliter.  

Unfortunately, in the last half of 2021, the somatic cell count increased a little (Chart X).  

Chart X - Somatic Cell Counts

Chart XI shows the change in the 12-month moving averages from the prior year.  Negative numbers are good meaning the SCC is decreasing.  However, in 2021 the change was positive meaning that the SCC is increasing.

Chart XI - Changes in SCCs

Chart XII shows the individual SCCs for the four Federal Orders that are paid for lower SCCs.  Lower SCCs are important for efficient cheese production, and some cheese producers offer additional bonuses for low SCCs.  That may be why the Upper Midwest has a very low SCC.  The Southwest and Central Federal Orders have SCCs well above the Mideast and Upper Midwest.

Chart XII - SCCs by Federal Order

SUMMARY

In summary, some productivity analytics are positive, showing great growth, and others are flat to declining.  Milk per cow has slowed down to almost no growth after years of steady increases.  Component levels of butterfat and milk protein continue to increase.  The Southwest (Texas and New Mexico) has shown steady growth in both butterfat and milk protein levels and now have the highest levels of any Federal Order.

Somatic cell counts had an upward "blip" in 2021 but have started to decline in 2022.  This is the one statistic that the Southwest Federal Order has not shown improvement in.  The Southwest has the highest level of SSCs of the four FMMOs that are paid for lower SCCs.