How do the Producers Maintain Class III Revenue?

The Upper Midwest Federal Milk Order used 30.5 trillion pounds of Class III milk for cheese in 2023.  This is far above the volume of any other Federal Order.  The Upper Midwest is and has been "all about cheese" for a very long time.  There is a lot of press about the current low Class III prices, usually using the Agricultural Marketing Service (AMS) Class III index parameters.  The index is based on 3% milk protein and 3.5% butterfat.  The Upper Midwest Class III milk in March is at 3.31% milk protein and 3.99% butterfat.  It makes a big difference.

Data used below is based on 12-month moving averages to reduce monthly volatility.  The raw data is from the USDA monthly statistics for the Upper Midwest.

Chart I shows the Class III protein revenue by month in the Upper Midwest Federal Order.  With the current low price for protein the contribution to revenue has declined by more than 50% in the last three years.  The reason for the decline is a low price for cheese and a very high price for butterfat.  For an explanation of the impact of high butterfat prices on protein prices, click here.

Chart I - Upper Midwest Revenue per Cwt. of Milk
From Protein

Chart II shows the Upper Midwest butterfat revenue by month.  The recent butterfat prices have escalated as high as double the lowest prior price on the Chart.  Butterfat revenue per cwt. reached a high in October 2022.  Can butterfat revenue offset the low protein prices?

Chart II - Upper Midwest Revenue per Cwt. of Milk
From Butterfat

Chart III show the combined revenue per cwt. for both protein and butterfat.  The range from high to low is 19%.  If the total value included Other Solids, the Class III value would be $18.31 per cwt.  Not a great price, but not a horrible price.

Chart III - Upper Midwest Revenue per Cwt. of Milk
From Protein and Butterfat

How were producers in the Upper Midwest able to get this decent price per cwt.?  A lot has to do with increasing component levels.  Protein percent (Chart IV) has increased from 3.13% to $3.25 in the last five years.  This is contributing an additional $.35 per cwt. of milk.

Chart IV - Protein Percent by Month

Butterfat component levels (Chart V) have increased from 3.71% to a 3.90% high in December 2022.  The current $3.90 price is contributing $.57 per cwt. more than in the beginning of 2019.   Combined, the protein and butterfat component increases are adding $.92 per cwt. of milk compared to five years ago.

In the last 12 months, the butterfat percent in Class III has slightly dropped (Chart V) and as a result, the butterfat revenue in Chart II above has also fallen.  This is unusual as butterfat prices are currently reaching new highs.  If the butterfat percent in Class III had continued to increase, the impact would be significantly more.

(The butterfat delivery in the Upper Midwest is greater than that reported in their monthly USDA statistical statements.  The butterfat test as delivered by the handlers for the Upper Midwest is 4.3%.  Class I and Class III make up 99% of the milk used in the USDA monthly Federal Order report for the Upper Midwest.  Class I is reported to have 2% butterfat and Class III is reported to have 4%.  Where is the rest of the butterfat that was delivered?  Who gets paid for the butterfat delivered to the Federal Order and that is not included in the monthly reports and what is the price?  More on this will be covered in the next post to this blog.)

Chart V - Butterfat Percent by Month

Compared to the index prices using 3% protein and 3.5% butterfat, the current revenue is $1.62 per cwt. of milk greater.   The index prices used by the USDA formulas for Class III milk are based on the protein and butterfat levels in 1999.

Current prices for milk protein are very low.  This is largely impacted by the out-of-date USDA price formula for milk protein.  The is no current effort to change this formula.   

Producers in the Upper Midwest have worked to maintain decent prices through the tough times.

Are Commodity Inventories Impacting Producer Milk Prices?

The most important commodities for pricing producer milk are butter and cheese.  Butter prices are very high.  Cheese prices are stable, trading within a close range.  Butter prices since the start of 2018 have ranged from $1.51 to $2.87 per pound, a 90% difference.  Cheese prices have ranged from $1.51 to $2.12 per pound, a 40% difference.  Wholesale inventory levels are key to the Agricultural Marketing Service (AMS) prices used to value producer milk.  (See this post for information on the pricing formulas).

This post will review the impact of inventory levels on pricing.  All data used in this post is based on 12-month moving averages to reduce monthly volatility.

BUTTER

The wholesale price of butter has varied tremendously (Chart I). The prices in 2018 and 2019 were very stable around $2.30 per pound.  In 2020 and 2021, with COVID protocols in place, prices dropped by one third.  In 2022, prices rose peaking at $2.87 per pound.  Retail sales dropped with these high prices and inventories increased. Sales recovered in 2023 as prices declined but remained relatively high.  In 2023 and 2024 YTD, butter prices dropped by about 8% and remained at near historical highs.

Chart II shows the wholesale inventories expressed in days of supply.  Chart II is the mirror image of Chart I on butter prices.   As inventory levels increase, prices go down and as inventory levels decrease, prices go up.  The current inventory levels are in the range of 2019 levels, but the prices are significantly higher. 

Chart I - AMS Butter Price per Pound

Chart II - Wholesale Inventory Levels

Chart III below shows the total inventory levels.   They follow the pattern of Chart II but show increasing inventory levels in 2023 and YTD 2024, higher than those in 2018 and 2019.  

The higher inventory levels have not reduced prices because as shown in Chart IV below, domestic disappearance has increased significantly as consumption of butter has recovered.  Domestic disappearance has increased by 18% compared to 2018 and retail consumption has increased by 15%.

Butter inventory levels and domestic disappearance have very strong annual fluctuations with inventories building during the Spring and Summer months and demand increases in November and December due to the year-end holidays.  To minimize monthly volatility, this data is presented in 12-month moving averages.

Chart III - Butter Inventory Stocks

Chart IV - Domestic Disappearance

Exports and imports are a small factor compared to domestic demand.  The lack of domestic inventories keeps exports low, and a combination of competitive brands and domestic needs has increased imports to 6% of domestic production.   The net of imports and exports is shown in Chart V and current amount of imports exceeds imports by  5.2 million pounds.

Chart V - Net Exports of Butter

CHEESE

The prices and supply of Cheddar cheese are shown below in Charts VI and VII.  Analyzing changes in cheese prices in more complicated than butter because cheese is composed of both butterfat and milk protein.  The AMS price of cheese is based on Cheddar cheese only but wholesale inventories levels are not publicly available for Cheddar cheese.  This section is partially based on American cheese inventory data as it are consistently composed of about 70% Cheddar cheese. 

The charts below on cheese prices and inventories are not the exact mirror of each other as the butter charts above are.  Currently the days of supply is in a midrange position and the price of cheese is also in a midrange.

Chart VI - Wholesale Cheddar Cheese Price per Pound

Chart VII - Days Inventory of Wholesale American Cheese

Production of American cheese has grown nicely over the span of these charts to meet demand, but the growth has recently slowed as shown in Chart VIII.  Cheese consumption fell by 6% in 2022 causing a pause in the growth of American cheese production.

Chart VIII - Production of American Cheese 

With the reduction in production in 2022, American cheese inventories fell (Chart IX) causing AMS cheese prices to escalate (Chart VI above).  The lower production is keeping inventories beneath their peak in 2022 (Chart IX).

Chart IX - Wholesale Inventories of American Cheese

American cheese domestic disappearance (Chart X) has flattened out to compensate for the drop in consumption in 2022 and bring the days of supply (Chart VII above) in balance.

Chart X - American Cheese Wholesale
Domestic Disappearance

As with butter above, American cheese exports are minimal.  Exports are currently just 4% of domestic disappearance and imports are less than 1% of domestic disappearance.

Chart XI - American Cheese Net Exports

WHAT DOES IT ALL MEAN?

It's very clear that wholesale butter prices move with the wholesale supply of butter.  Butter domestic consumption is growing and the dependence on imports indicate that domestic inventories will remain tight.  Therefore, butter and butterfat prices will remain high and will likely continue to grow.

Cheese prices fluctuate with changes in butterfat prices and milk protein prices.  As has been covered in prior posts to this blog, as butterfat price rise, milk protein prices decline.  The days of supply of American cheese is not high or low and prices of cheese should remain stable.