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.