Why is Class III Milk Priced so Low?

The statistics below are based on the Upper Midwest March 2024 payments for milk and their 12-month Averages.  They are taken from the USDA monthly reports.  Table I below lists the value of each class of milk and the percentage of each Class.  Class I cannot be de-pooled, and Class III would not be de-pooled as it is the second lowest priced Class.  How can Class II and IV have such high values?  Obviously, most of Classes II and IV are de-pooled. 

Table II lists the percent butterfat in each Class.  Class I is at 1.96% butterfat, which is a normal blend of 3.5% butterfat (whole milk), 2% butterfat milk, 1% butterfat milk, and nonfat milk.  Class II has 20.25% butterfat, Class III. the largest Class by far, is showing just 3.99% when the average delivered milk is 4.32%.  Class IV had 37.03% butterfat in March and a higher percent in 12-month moving averages. But where did they get the butterfat?  The Classes with the most butterfat are the highest priced and are largely de-pooled.

The data below represents the pooled milk in the Upper Midwest Federal Order.  Class I is designed to be the highest priced milk.  Obviously, that is not happening.

Table I - Cwt. Prices and Percent Pooled by Class

Table II - Percent Butter Fat by Class

Details on each Class are covered below in the order of Class II, Class I, Class IV, and Class III.

CLASS II MILK

Class II milk reached 196 million pounds in 2021 (Chart I) and is now at 27 million pounds after major de-pooling.  Data is based on 12-month moving averages. Butterfat prices are high and butterfat has been transferred primarily from Class I milk.  Butterfat is priced differently in Class I and Class II. but the prices are similar.

Chart I - Pounds of Class II Milk

The 12-month average butterfat percent for Class II reached 18.9% in March.   No cow gives a butterfat content that high.  Most of that butter is coming from Class I milk.  Most of the value in Class II that is not de-pooled is getting its value from the butterfat.  For the month of March 2024, 66% of the Class II value comes from butterfat.

Chart II - Class II Butterfat Percent

CLASS I MILK

Class I milk continues its long-term decrease (Chart III).  Over the five plus years in this chart, volume has dropped from 245 million pounds to 160 million pounds, a 35% decline.  Class I cannot be de-pooled.  

Chart III - Pounds of Class II Milk

The average percent butterfat used for Class I is about 2% which is a blend of the four fluid milk products (Chart IV).  The butterfat percent of the incoming milk is over 4%.  The unused butterfat is transferred primarily to Class II pooled milk.

Chart IV - Class I Butterfat Percent

CLASS IV MILK

Class IV milk volume is showing a very significant volume drop, as around 90% is being de-pooled since mid 2022.  Milk is de-pooled when it is above the estimated uniform price (Chart V).

Chart V - Pounds of Class IV Milk

The Class IV 12-month average of butterfat is at 50% (Chart VII)!  Class IV has the highest percent butterfat and gets 95% of its value from butterfat.  Obviously, most of the butterfat is coming from another Class.  In this case it is coming primarily from Class III pooled milk.

Chart VI - Class IV Butterfat Percent

CLASS III MILK

Class III milk took a big drop in 2021 as COVID protocols continued in place, driving higher prices and significant de-pooling.  Class III milk prices are now the second lowest and none is de-pooled.

Chart VII - Pounds of Class III Milk

The butterfat percent used in Class III milk increased with the overall growth of milk components.  When butterfat prices are high they provide a good Class III price.  Currently, the butterfat percent has dropped.  The incoming milk is 4.12% and currently the 12-month average butterfat percent has dropped to 3.9%.  With less high-priced butterfat, the Class III value has declined.

Chart IX - Class III Butterfat Percent

Chart X follows the protein/butterfat ratio.  Cheese making needs enough protein to coagulate and retain the butterfat.  Butterfat volume has been growing faster than protein volume.  Butterfat is expensive and a smaller amount has a cost advantage for processors.  Rather than increasing protein levels, butterfat is removed.  The amount of butterfat removed is now around 140 million pounds per month!  

Chart X - Class III Butterfat/Protein Ratio

So why is Class III milk so low priced?  There are a number of reasons:

1. The formula for calculating the price of milk protein in Class III reduces the value of milk protein when the butterfat price increases.  Due to the high butterfat pries, milk protein has lost value.  For details see this prior post.
2. De-pooling moves money around.  When a milk Class is de-pooled it is done to keep the milk value high but that means a lower Uniform price.  The Upper Midwest has very flexible rules for de-pooling, so it can be implemented month-by-month.   (California's rules for de-pooling are similar.)  The Northeast Federal Order rules for de-pooling make it more difficult to de-pool.  In the April 2, 2024 post to this blog, the Northeast Federal Order had the highest Uniform (average) price among the Federal Orders paid on the Class and Component system.  The Upper Midwest and California had the lowest Uniform prices.
3. With high-priced butterfat and low-priced cheese, the financial impact is to put the most effort and money behind higher butterfat levels and less effort and money behind protein levels.  But by the Federal Order guidelines, this forces butterfat to be removed from Class III and added to Class IV.  With less butterfat in Class III, the value will be lower.

The Federal Order pricing protocols developed before the year 2000 are now leading to moving milk processing out of Federal Order control by de-pooling.  De-pooling leads to lower Uniform prices.  Once de-pooled, the pricing is negotiated with the buyer, but not under the control of the Federal Order pricing.  

What should a producer do?  Higher protein and butterfat levels are key.  When reviewing revenue, remember that the Uniform Price and the Producer Price Differential are the real revenue.