• ZISK

De-pooling in the Upper Midwest has Shot Up!

The May 2009, post to this blog covered de-pooling in the Upper Midwest. A lot has changed in 13 years. Charts I and II below show the comparison of 2009 and 2022 (the last 12 months ending in September 2022). The Upper Midwest is still primarily a Class III milk for cheese Federal Order. However, the swings in Class I milk and de-pooling are huge.


Class I milk cannot be de-pooled, but all other milk can be de-pooled from the Order


In 2009, Chart I, the Upper Midwest produced over 34 billion pounds of milk. Of that total, two billion pounds were de-pooled. Class I milk was in second place making up 15 percent of the pooled milk or 13 percent of the total milk. Class III milk made up 77 percent of the pooled milk.


By 2022 (Chart II), 47 billion pounds of milk were produced and 19 billion pounds of milk was de-pooled. Class I made up only eight percent of the pooled milk or just five percent of the total milk produced. Class III milk made up 88 percent of the pooled milk.

From 2005 to 2009, nine percent of the milk was de-pooled (Chart III). In many months, no milk was de-pooled.


From 2018 to 2022, 40 percent of the milk was de-pooled. In some months nearly 80 percent of the milk was de-pooled. There were no months where no milk was de-pooled.


Why has the percent of de-pooled milk increased so much? De-pooling typically occurs when the value of Class III or Class IV milk is higher priced than the "Uniform" or average price of the four classes of milk. The de-pooling causes a lower or negative Producer Price Differential (PPD). Below are some of the reasons that there is more de-pooling.


Less Class I milk lowers the Uniform price.

The current payment system was developed in the late 1900s and implemented January 2000. At that time Class I milk was the largest category of milk and the system was designed to keep Class I milk priced above the other classes. With less high priced Class I milk, the Uniform price will be lower.


Chart V shows the percent of Class I milk in the Upper Midwest Federal Order. It is well known that consumption of fluid milk is declining. From 2005 to 2022 the percent of Class I milk in Upper Midwest declined very significantly from an average of 17 percent to just 5 percent. The decrease is a result of two factors, less Class I milk is being produced and more Class III milk for cheese is being produced. It is a trend that is long-term, and it will continue and therefore, its impact on lowering the Uniform price is definite and will continue.


With less Class I milk, the average PPD has decreased by over $.10 per cwt. Chart VI below lists the PPD from 2005 to the present. PPDs that occurred during COVID are not shown as they were very abnormal.


De-Pooling Rules


De-pooling rules have not changed much. De-pooling rules are unique to each Federal Order. The Upper Midwest can divert 90 percent of the milk delivered to a non pool plant and include it in the Federal Order pool. This provides a lot of flexibility in de-pooling decisions


Today, de-pooling is consistent monthly. Some appears to be a routine process.

WHAT DOES THIS MEAN TO DAIRY PRODUCERS?


What happens to producer prices when there is de-pooling. De-pooling does not create more funds for producers. It only shifts the money around. A simulation was made using data from January 2021. There was a lot of Class III de-pooling in that month. The PPD for the pooled milk was a negative -$.92 per cwt. Those that de-pooled were paid more because they could avoid the negative PPD. If the total volume of milk was pooled, assuming that those that de-pooled milk were paid at Federal Order rates, the negative PPD would be much lower. If all the milk was pooled, the PPD would have been a negative -$.21 per cwt.


By de-pooling, the additional money that moved to the pockets of those that de-pooled amounted to over $7 million in one month. Those that remained in the pool, paid the $7 million due to the high negative PPD of -$.92 per cwt.


John Geuss

November 15, 2022


milkprice.blogspot.com