LAYER TWO - THE PRICES OF COMPONENTS USED TO PRICE MILK CLASSES
This post will cover the component pricing in 2022, the second layer of peeling the milk pricing onion. There are four components that are responsible for the milk Class prices discussed in the previous post. The four components are butterfat, milk protein, other solids, and nonfat solids. The amount of these components and their prices are used for the first payment to all producers in the Federal Milk Marketing Orders.
COMPONENT PRICEING IN 2022
Butterfat is having a huge surge. It set new record highs every month of 2022 until November. The price dropped in November and December, but it is still high. The current butterfat price is higher than any other butterfat price prior to June 2022.
Is this the start of a major decline in butterfat prices? In the December 2022 post to this blog, inventories and butter production data indicated that the high butterfat prices are not ready for a major decline. That data will be updated and reviewed in the next post with the most recent data.
Butterfat prices, which are based on the wholesale butter price, are the only component supporting strong producer milk prices.
Milk protein prices are in a slight decline pattern. When butterfat goes up in price, milk protein prices go down based on the Agricultural Marketing Service (AMS) formulas. Below are the formulas for pricing milk protein. The first formula is the AMS formula for pricing milk protein. The lower protein formulas are simplified to make them clearer but they have all the elements of the AMS formula. The simplified formulas clearly show why milk protein prices decline when butterfat prices increase.
Protein Price = ((Cheese Price - .2003) x 1.383) +
((((Cheese Price - .2003) x 1.572) - Butterfat Price x .09) x 1.17)
Milk Protein = 3.22 x Cheese Price - 1.27 x Butter price - $.43
Milk Protein = 3.22 X Cheese price - 1.05 x Butterfat price - $.65
Protein peaked at $3.87 per pound in May 2022 and fell to $1.88 per pound in October 2022.
The year 2022 stared with a butterfat price of $2.29 per pound and peaked at $3.66 per pound in October. That is an increase of $1.37 per pound of butterfat. That butterfat increase lowered the milk protein value by $2 per pound. Cheese prices increased during that time and largely offset the impact of higher butterfat prices.
Other solids are priced based on the dry whey price. It is also down in price falling from $.61 per pound at its 2022 peak to $.27 per pound at the end of 2022. That is a decrease of over 56 percent. It is a small contributor to the overall pricing of milk.
Other Solids Price = (Dry Whey Price-0.1991) x 1.03
Nonfat solids are used to price Class IV skim milk. Nonfat solids are primarily used for production of nonfat dry milk. Nonfat solids started the year at $1.37 per pound, and closed 2022 at $1.28 per pound, a small loss. During 2022, nonfat solids peaked at $1.65 per pound.
During 2022 the prices of milk protein, other solids, and nonfat dry milk all peaked and then fell. This is a coincidence as they are not all controlled by the same commodities that are used to price components. Butter prices held up well but did begin a small decline starting in November.
The final layer of the milk pricing onion will cover the commodities that influence the price of components.
WHAT DOES THIS MEAN TO A PRODUCER'S REVENUE?
This section will briefly analyze a simulation that will cover changes in producer payments as component prices change and as component levels change.
The simulation will begin with a base case for a producer with 1000 cows, each producing 80 pounds per day with butterfat at four percent, protein at 3.25 percent, and other solids at 5.7 percent. The prices used for these components is based on a five-year average price. Butterfat is priced at $2.38 per pound, protein is priced at $2.66 per pound, and other solids are priced at $.26 per pound
The simulation will use the following cases:
The base case is calculated from the data above.
The butterfat cases change only the price of butterfat changing it up and down by $.40 per pound.
The protein cases change only the price of protein changing it up and down by $.40 per pound.
Increased butterfat levels change only butterfat levels increasing butterfat from four percent to 4.2 percent.
Increased protein levels change only protein levels increasing protein from 3.25 percent to 3.4 percent.
The final simulation increases butterfat and protein as this is a typical pattern when applying techniques like amino acid balancing. Incremental increases in butterfat and protein are strong factors in improving revenue.
Here are the results.
As butterfat prices increase and decrease, the impact is minimal because when butterfat go up in price, protein prices go down and when butterfat prices go down, protein prices go up. When protein prices go up or down, the impact is over five times greater than butterfat price changes. A producer has no control over these prices and they will vary.
When butterfat and protein levels increase, there is a significant revenue increase. Increasing component levels can have a major and lasting value and is under the control of a producer and his nutritionist. The calculations used in this simulation were made using the app milkpay.com
By John Geuss
Wednesday, January 11, 2023