How are Cheese and Butter Different?

     

Current Class III milk prices have fallen as high butterfat prices and low protein prices have evolved (Click here for details). This post will review the trends in pricing of cheese and butter used to price Class III milk.

CHEESE

Chart I below covers the retail and wholesale prices of Cheddar cheese used to price milk protein.  Retail prices have remained stable for over five years.  In May 2024, the retail price was $5.37 per pound and over the five plus years in the chart below it averaged $5.57 per pound. Wholesale prices are only slightly different, with a May 2024 price of $1.87 and a five-year average of $1.83.  Overall, prices of cheese at the retail and wholesale levels are very stable in spite of inflationary pressure.

Chart I - Retail and Wholesale Prices of
Cheddar Cheese

Wholesale prices are significantly influenced by wholesale inventory levels.  Chart II shows that a very consistent wholesale supply of American cheese, which is mostly Cheddar cheese.  With the exception of the COVID period, days' supply of inventory has remained very consistent.  The five plus years average is 56 million pounds and the current supply is also 56 million pounds

By using the days' supply of inventory as a measurement, both production, removal from inventory, and inventory levels are used to calculate a supply level that should be stable.  The 12-month moving averages are used to be consistent with butter days' supply covered below which has a very volatile annual pattern. 

Chart II - Wholesale Days' Supply of
American Cheese

The above analysis shows very consistent statistics, resulting from well managed processes of Class  III milk production, cheese production, and management of consumer changes .  The consistent pricing is amazing in a time of significant inflation.

BUTTER

The butter data below shows a much different pattern than cheese data above.  The retail and wholesale prices started a significant price increase in 2022.  Over the span of the charts below, retail prices have increased by 13% and wholesale prices have increase by 36%.

Chart III - Retail and Wholesale price prices

Chart IV below covers the day's supply of butter from 2019 to the present.  During the COVID period, the supply of butter went very high as eating habits changed from eating out to eating in the home.  Comparing the beginning and ending sections of Chart IV, the day's supply has been very consistent.  That should correlate to a consistent price, but the retail and wholesale prices have changed significantly as shown in Chart III.

Chart IV - Wholesale Days' Supply of Butter

The growth over the span for the period in Chart V shows a growth in inventory of 9%, close to the growth in retail sales and production. 

The inventory levels do not show tightened supplies that would increase butter prices.

Chart V - Total Wholesale Butter Inventories

What is causing the significant increase in butter and butterfat prices?  USDA butter pricing is complicated.  Butter has a 25-year record of continuous price increases.  Butter exports have always been minimal ranging from 4% to 5% production.  Imports have increased more than exports resulting in net imports, not net exports.  Both butter exports and imports are minimal.  

The packaging of butter for homes and restaurants are different and have resulted in major swings when purchases for restaurants fell quickly and home purchases increased during COVID.   When butterfat is removed from Class IV milk, skimmed milk and nonfat dry milk (NDM) are left.  Skimmed milk has almost totally disappeared as a consumer product and wholesale NDM have not gained in value.  The 25-year value of NDM is $1.14 per pound, the same as the current price.

Any or all of the above could be impacting butter prices.

Class III Prices are Low. What Can be Done?

Class III milk for cheese makes up more than 50% of the total U.S. milk usage and the price is low.  The current Class III milk price index published by the Agricultural Marketing Service (AMS) is at the same price as the average over the last 25 years. Why has that happened?  What can be done?  

Table I below shows the comparative pricing of the three components that make up the price of Class III milk.   Compared to the 25 year averages butterfat prices are up by 76% while milk protein is down 32%.  Other Solids are at the average price paid over the last 25 years. Other Solids contribute very little to the Class III price.  While butterfat prices are up significantly, the disappointment is the price of milk protein which has collapsed (Table I). 

Table I - Component and Class III Price Comparisons

Table II lists the three commodities that make up the price of milk protein.  Butter is up 70%.  Cheese prices are up sightly.  Dry whey is showing no change from the 25 year historical prices.

Table II - Commodity Price Comparisons

One of the big issues is the USDA formula for milk protein.  There are two pieces.  One piece is based on the cheese price and the other piece is based on the value of butterfat in cheese vs. butter.

Protein Price = ((Cheese Price – 0.2003) x 1.383) 

+ ((((Cheese Price – 0.2003) x 1.572) – Butterfat Price x 0.9) x 1.17)

Chart I below shows the value added by the first part based on the cheese price and the second  part is the value of butterfat in cheese vs. butter.   The third part is the combination which makes up the value of milk protein.  For most of this chart, the value of butterfat is worth more in butter than in cheese and the downward trend is continuing.

When designed, butterfat was worth more in cheese than butter.  Currently that is not true.  There are no planned changes to this USDA formula.

Chart I - Protein Prices Based on Cheese
and the Butterfat Adjustment

When the formulas were developed prior to 2000, it was assumed that cheese was worth more than butterfat and therefore the formula would add value to milk protein.  Currently, due to increased consumption of tight supplies of butter and butterfat, the opposite is true.

What is causing the stagnant pricing?  Over the last 25 years, inflation has increased tremendously.  How have Class III milk producers survived and thrived?  Here's some of the key factors.

• Larger herds
• More milk per cow
• Automation
• Higher solids

Following the key factors are important to producer survival.  The keys to get back to more normal pricing are as follows.

1. Increasing butterfat levels for all Classes of milk.  More volume to fill the demand for butterfat will increase wholesale inventories and lower butterfat prices.  For instance, fluid milk averages about 2% butterfat when averaged with 3.5% butterfat, 2% milk, 1% milk, and nonfat milk.  Federal Orders like the Upper Midwest produced 4.32% butterfat compared to the Florida Federal Order that produced 3.91% butterfat, a 10% difference.  Increasing butterfat in the low butterfat producing Federal Orders would help balance the supply and demand.
2. Increasing protein levels for Class III milk would also help.  Balancing protein and butterfat ratios in Class III milk combined with increased levels of both protein and butterfat will improve cheese manufacturing by requiring less milk for the equivalent amount of cheese.  Tighter management of cheese inventories can also increase the wholesale value of cheese. 

What organizations or suppliers can help manage these changes?  There are advantages for both producers and processors.

The Impact of Higher Milk Protein

The prior post detailed the real pricing of milk in the Upper Midwest.  There is significant de-pooling and movement of butterfat between classes.  The movement of butterfat from Class I milk to Class II milk has continued for many years as the blend of butterfat in fluid milk averages only about approximately 2% while butterfat as delivered is over 4%.  More recently a lot of butterfat has been moved from Class III milk to Class IV milk.  Milk protein production has not increased as much as butterfat production.  To maintain the balance of milk protein to butterfat, significant butterfat has been removed from Class III.  That lowers the components per cwt. in the largest Class of milk in the Upper Midwest.

This post will examine the potential impact of increasing milk protein in Class III milk and therefore using more butterfat in Class III milk.  By increasing the protein levels in Class III and retaining the butterfat in Class III it will increase the component levels and therefore reduce the amount of milk needed to make the equivalent amount of cheese.  In turn, the price per cwt. of Class III increases.  Class III milk is by far the largest class and higher component levels will increase the value of Class III milk per cwt. from $18.31 per cwt to $19.71 per cwt.

Increasing protein levels can be accomplished in many ways.  Increasing amino acid balancing is well known and effective.  Increasing protein levels by adding protein powders, adding nonfat dry milk, breeding, and other means.  The economics of using these must be considered.  

The principal benefit of higher proteins is for Class III milk producers.  However, it can benefit nonfat dry milk (NDM) and skimmed milk powder (SMP).  NDM is mostly exported to Mexico.  SMP is used in all international markets and requires a minimal protein level.  In turn, the value of Class IV skim influences the pricing of Class I and Class II. 

By making cheese from milk with higher component levels requires less milk benefiting cheese producers.  This also reduces the volume of milk needed in the U.S. as many producers are exiting due to the current low prices. 

Pricing in the USDA system is not as simple as only looking at cheese and butterfat prices.  The pricing system is complex and can be manipulated impacting Federal Milk Marketing Order pricing.   Some of the major pricing calculations require changes to an entire Federal Order.  Other changes can be impactful by individual herds.  Another factor influencing economics is herd health which is also difficult to include in decisions.

The calculations in this review are based on March 2024 statistics for the Upper Midwest.  The only real change was increasing the protein level from 3.29% to 3.60%.  This kept more butterfat in Class III as opposed to moving it to Class IV for butterfat.  The total amount of butterfat did not change