More on Low Protein Prices

In the prior post, information and charts were used to show why milk protein values are low and will likely stay low.  Milk protein pricing is based on butterfat and Cheddar cheese prices.  Butterfat is high priced and cheese is low priced.  Based in the USDA formulas, milk protein was valued at only $1.13 per pound.  Readers asked many questions about where milk protein prices are going and what other factors are influencing them.  This post will cover some of the issues and questions.

• When could milk protein value become negative if the current trends continue?
• Are wholesale cheese and butter inventories influencing prices?
• What is the impact of increasing component levels?

PROTEIN LEVELS MAY HAVE NO VALUE IF THE TRENDS CONTINUE.

In the prior post the following statement was published. "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."  How long would it take for this to happen?  Currently, milk protein is at $1.13 per pound.  If cheese prices remained around their current price of $1.52 per pound, and butterfat continued its long-term trend and reached an average of $3.50 per pound, milk protein would be priced at $.58 per pound.  Butterfat was priced at $3.71 per pound in October 2023.  If butterfat reached $4.00 per pound, milk protein would be worthless.

By the current long-term trend lines, butterfat could reach an average of $3.50 per pound in five years and could reach an average price of $4.00 per pound in 10 years.

THE INFLUENCE OF WHOLESALE INVENTORIES ON BUTTERFAT AND PROTEIN PRICES.

Butterfat is priced based on the wholesale price of butter.  Are low inventories of butter causing high prices?  Butter reached a high level of production in 2020 and 2021 during the COVID years.  Since then, production has dropped and then recovered to a level of 176 million pounds per month (Chart I).

Chart I - Production of Butter

The increase in butter production did cause inventories to swell in 2020 and 2021 as shown in Chart II.  However, by the end of 2023, inventory levels had returned to reasonable levels around 287 million pounds.  This level of inventory should not be pushing butter prices higher.

Chart II - Butter Inventory

With the high inventory levels in 2020 and 2021, butter prices did fall to $1.51 per pound. In 2022 and 2023 inventory levels fell and butter prices went up (Chart III).  What is surprising is that the inventories never fell to the level of 2017 to 2019. but the price of butter hit record levels.  Butter inventories are not causing the record high butter prices.

Chart III - Wholesale Price of Butter

The wholesale cheese price is used by the Agricultural Marketing Service (AMS) to partially price milk protein and is based on Cheddar cheese only.   Inventory levels are not made public.  However, Cheddar makes up the majority of American cheese  and that data is available publicly and will be used in the charts below.  Over the course of the last three years, Cheddar production made up 70% of American cheese production with a range of 68% to 76% per month.

Chart IV shows the production of American cheese which has increased in 2021 and then leveled off in 2023.

Chart IV - Production of American Cheese

American cheese inventories (Chart V) have been flat for the last two years, meaning that cheese inventory prices should be stable, and they are.

Chart V - Inventory of American Cheese

With lower inventories in 2020, the wholesale price of Cheddar cheese did increase.  In 2022 and 2023 inventories were flat, and cheese prices returned to historic levels (Chart VI).  There was no correlation between the consistent level of cheese inventories and the fall in cheese prices.  There is minimal influences between cheese inventories and cheese prices.

Chart VI - Wholesale Price of Cheddar Cheese

THE IMPACT OF CHANGING COMPONENT LEVELS.

How are the U.S. milk producers surviving?  Charts VII and VIII show the difference between the AMS index price for butterfat and milk protein and the average price based on actual component levels.  In the last six years, the average revenue increased as components grew.  The higher component levels increased average producer revenue by $1.60 per cwt.

Chart VII - Values of Butterfat and Milk Protein using AMS
Index Component Levels vs. Actual Levels of Components

Chart VIII - The Difference per Cwt. Using Standard vs.
Actual Component Levels 

WHAT DOES THIS DATA SHOW?

The change in the prices of cheese and butter are only partially influenced by wholesale inventory levels of butter and cheese.  Regardless of the inventory levels, the escalation of butter prices and the stable prices of cheese are long-term.  The low protein prices result primarily from the protein formula as covered in the prior post.

Other factors also come into play that can influence butterfat pricing.  

• There is less fluid milk from which some butterfat is removed.  
• Cheese volumes have grown and now consume more than half of the U.S. milk produced and thereby consume more than half of the U.S. butterfat.  
• Per Capita Consumption of butter was lower in 2022 as retail prices escalated. 
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