Financial Impact of USDA Proposed Changes to Federal Order Pricing - Part II

In the prior post, the USDA proposed changes to milk pricing in the Federal Orders were reviewed with specific analysis of Class III pricing, the largest category.   This post will cover the changes in cheese pricing in more detail and will also cover the impact of pricing for Class I and Class IV skim milk.  

CHEESE PRICING

One of the changes proposed by the USDA is to base cheese prices exclusively on Block cheese prices.  The pricing used for decades had been based on an average of Block and Barrel pricing.   For perspective, the current cheese price is $2.00 per pound.  Chart I below shows the incremental change in cheese pricing if the USDA proposal is implemented.  Ignoring the 2020 price changes during the COVID policies, the lowest price difference between pricing alternatives was -$.11 per pound in December 2019 and the highest was $.17 per pound.  

The monthly difference in the calculation processes are minimal, but can alter protein prices.  In the last 18 months, the average was a positive price per pound of cheese of just $.03 per pound.

Chart I - Cheese Wholesale Price Spread between
Block Only Prices and Block and Barrel Averaged Prices

Table I below shows the number of months each year that the proposed change would increase cheese prices.  

Table I - Months of the Year That Block Only
Prices Were Higher than the Averages of
Block and Barrel Prices 

The changes proposed have an impact of Cheddar cheese prices used to price milk protein prices in Class III milk.

CLASS I SKIM MILK PRICING

Included in the USDA proposal are changes in pricing of Class I skim milk.  For most of the last 25 years of the Federal Order pricing, Class I skim milk prices were based on the higher of the Advanced Class III or Class IV skim milk prices.   It was changed in May 2019 to "The average of both Class III and Class IV skim milk prices plus $.74 per cwt."  The new USDA proposal recommends changing it back to the original higher of Class III or Class IV.

Chart I below shows the spread between the proposed pricing vs. the current pricing.  In 2020, during the COVID mandates, pricing significantly favored the "higher of" method by $1.75 per cwt. Over the last 18 months, the proposed change would have increased prices by $.59 per cwt.  The documents in the USDA analysis used only the years 2020 and 2021 which showed a $1.58 per cwt. advantage by using the "higher of" pricing methodology.  Their analysis also ignored the $.74 adjustment in the current pricing model.

Chart I - The Pricing Spread Between the
Federal Order Proposed Pricing and the
Current Pricing.

Table II lists the number of months per year that the Class III skim price was higher than the Class IV skim price, suggesting a benefit for using the "higher of" methodology.  In 2020 after the COVID mandates were implemented there were eight consistent months of higher Class III skim milk prices, ending the year with a skim price of $20.07 per cwt.

Table II - Months of the Year that the Proposed
Change is Higher than the Current Federal Order
 Pricing Formula

The proposed change will slightly increase the price of "base" Class I skim milk, partially offsetting the increased "Make Allowances."  The base Class I skim milk index price based on the current formula is $8.29 per cwt. and with the proposed formula it would be $8.80 per cwt.

Using the current 4.1% actual component levels of butterfat, Class I milk would be worth $22.48 per cwt. with the current formulas and $22.32 per cwt. with the proposed formulas, a $.16 per cwt lower price.

CLASS IV SKIM MILK PRICING

The calculation of the Class IV skim milk price is not changed in the USDA proposal (Table III).

Table III - Class IV Milk Price Formula

However, the formula for the value of Nonfat Solids changes drastically with an increased "Make Allowance" changing from $.1678 to $.2268 per pound.  The current price of NFDM is $1 per pound.  That would lower the price of NFDM to $.94 per pound, 7%  lower (Chart IV).

Table IV - Nonfat Solids Price Formula

Using the Federal Order Index value formulas which use component levels at 3.5% butterfat, that would make Class IV milk worth $21.08 per cwt. with the current formulas and $20.33 per cwt. with the proposed formulas, a $.75 per cwt. lower price.

With the current component levels of butterfat at 4.1% butterfat, Class IV milk would be worth $23.16 per cwt. and $22.36 per cwt. with the proposed formulas, an $.80 per cwt lower price.

SUMMARY

Table V below is a summary of the impact of the proposed USDA changes to Federal Order pricing.  Class II is omitted because the size in minimal.

All three milk classes will decline in value.  The largest decrease is also the largest category.  Class III milk for cheese uses over 50% of the U.S. milk.  The main reason for the decline in the value of milk protein.  

The prices used in Table V are based on June 2024 data.  Month to month, the values can vary, but the numbers do represent the impact on producer prices as listed in the USDA proposal.

Table V - Summary of Proposed Changes on
Producer Milk Prices