What Controls the Class III Price? Butter, Cheese, or Dry Whey?

In the prior two posts, ( Butter, Butter, Butter and Cheese, Cheese, Cheese) the pricing, the fundamentals, and the impact on producer milk prices for butter and cheese were analyzed.   In the last 10 years, the Agricultural Marketing Service (AMS) prices of wholesale butter and cheese have varied significantly.  Butter had a low of $1.26 per pound and a high of $2.85, a variation of 126 percent (Table I).   Cheese had a low price of $1.30 per pound and a high of $2.59, a variation of 100 percent.  In April 2022, butter was valued at $2.79 per pound, near the record for the last 10 years.  Cheese in April 2022 was valued at $2.29 per pound, well above the average and close to the 10-year high.  The Class III price for April 2022 was $24.42 per CWT.

Table I - Butter and Cheese Highs and Lows

Chart I below shows the breakdown of the Class III price.  Based on the April 2022 prices of butter and cheese in Table I, butterfat made up $11.01 of the Class III price and protein made up $10.24.  Other solids contributed $3.17 to the Class III price.

Chart I - April 2022 Breakdown of the Class III Price

What happens when butter and cheese prices rise and fall?  Below are four tables illustrating what happens when butter and cheese prices vary. The prices used are the highs, lows, and midpoints for butter and cheese over the last ten years.

In Table II, cheese prices are low and butter prices range from a low of $1.30 per pound to $2.80 per pound.  Even with the high prices for butter in Table II, the Class III price stays in the $14 per CWT range.  The price for milk protein drops to a very low value of $.58 per CWT of milk.  This example is used to illustrate the movement of butter and cheese prices and their impact on the Class III milk price.  In the last 10 years, cheese has been that low and butter has been that high.  But those highs and lows did not occur simultaneously.  The lowest price for milk protein in the last ten years is $1.14 per pound and that contributed $3.42 to the Class III price.

Table II - Butter Prices Increasing and Cheese Prices Low

Table III uses the same range of butter prices as Table II but has the price of cheese at a high of $2.60 per pound.  In this case, milk protein has risen significantly, and the Class III price is in the range of $26 and $27 per CWT of milk.  The higher price of cheese nearly doubles the price of Class III milk.

Table III - Butter Prices Increasing and Cheese Prices High

Table IV keeps the price of butter low and has an escalating price for cheese.  As the price of cheese increases, even with a low price for butter, the Class III milk prices rise above $20 per CWT of milk.

Table IV - Cheese Priding Increasing and Butter Prices Low

Chart V has a high price for butter and an escalating price for cheese.  The difference between Table IV (butter at $1.30 per pound) and Table V (butter at $2.80 per pound) is a change of less than $1 per CWT in all cases.  Butter prices have a very minimal impact

Table V - Cheese Prices Increasing and Butter Prices High

In the prior posts, the fundamentals favored a further increase in butter prices and a drop in cheese prices.  In the comparison in Table VI, butter prices were increased by $.20 per pound and cheese price reduced by $.20 per pound.  If this occurs, the price of Class III milk will drop by nearly $2.00 per CWT.  (For the first two weeks of May, the weekly AMS prices show a small decrease in butter prices and steady cheese prices.)

Table VI - Possible Changes From Current Prices

Clearly, the price of Class III milk is controlled by the price of cheese.  See this prior post for more details on the pricing formulas for Federal Order pricing.  The vast majority of producers are paid on the Class and Component system which pay only for components.

The next post will quantify the importance of component levels in a time of high inflation.  If the prices of cheese and butter fall, which is likely, and feed and labor costs continue to escalate, higher component levels can help maintain cash flow.