John Geuss
March 6, 2022
In the prior post, producer components and milk prices were reviewed. This post will look at the underlaying factors that determine the price of the commodities that are used to price components and in turn price producer milk. The production and inventories of these commodities are key.
There are four commodities that are used to price producer milk. They are Cheddar cheese, butter, dry whey, and nonfat dry milk (NDM). Cheese and whey (and therefore dry whey) are strongly related as whey is a byproduct of cheese production. Butter and NDM are similarly related as NDM is a byproduct of butter production.
BUTTER
Butter has seen tremendous price increases that are reaching near historical highs. Production is down and inventories are scarce.
Chart I shows the Agricultural Marketing Service (AMS) price for butter since 2014. This is the commodity price used for calculating butterfat prices. The February 2022 price of $2.67 per pound is a near record price and is an 84 percent increase from January 2021 (Chart II).
Butter production (the blue line in Chart III) has taken a significant drop starting in mid 2021. However, butter domestic disappearance (the red line in Chart III) has not declined. There is very little disappearance from exports, so the domestic disappearance really represents the total disappearance.
This has caused a drop in inventories as shown in Chart IV. When inventories decline, prices increase as shown in Chart I.
For more information on butter production and inventories see the January 2022 post and November 2021 post to this blog.
NDM
Nonfat dry milk (NDM) and skim milk powder (SMP) come primarily from Class IV milk for butter and in a sense are the byproducts of butter churning. Therefore, it is no surprise that when butter production drops, so does NDM production (Chart V).
Therefore, as inventories drop, prices increase as shown in Chart VI.
The price increase in 2021 and early 2022 has been extreme, increasing NDM prices by 53 percent. The February 2022 price is $1.65 per pound compared to $1.13 per pound at the start of 2021.
NDM is an export item, and year by year less is used domestically and more is exported.
Current international prices are in line with the AMS NDM prices.
NDM prices are important as they are used to price Class II and Class IV skim milk and are partially used to price Class I skim milk.
CHEESE
Cheese pricing is based on the wholesale price of young Cheddar cheese. Production of Cheddar has plateaued in 2021 as shown in Chart IX.
Inventories of Cheddar cheese or specifically young Cheddar cheese are not available publicly. However,I Cheddar cheese makes up about 70 percent of the American cheese category. Chart X shows the relationship between American cheese inventories and the AMS price of cheese. As inventories go up, prices go down.
In 2021 and early 2022, the cheese price has increased by 16 percent, much less than the butter price increase of 84 percent or the NDM price increase of 53 percent. In the first two months of 2022, the prices have increased by nine percent.
Exports are not a factor in cheese inventories and prices. Chart XII shows the relationship between net exports of American cheese and domestic disappearance.
The AMS price of cheese is used to partially price milk protein and Class III milk. The changes in the cheese price are very small compared to increases in the other commodities used to price milk components.
DRY WHEY
Whey is the byproduct of cheese production. Overall cheese production has continued its longterm growth pattern.
Most of the whey is dried thereby creating a more salable product that can be shipped at a low cost. The decline in dry whey production (Chart XIV) is not caused by a decrease in cheese production (Chart XIII). Dry whey production has been declining since mid 2020. Over that time the 12-month averages of dry whey production have declined by six percent (Chart XIV) while cheese production has been increasing (Chart XIII).
Disappearance has also slowed down, but not as fast as production has slowed down (Chart XV). This is decreasing inventories of dry whey (Chart XVI) and increasing dry whey prices.
With lower inventories, prices have increased, reaching $.78 per pound in February 2022, which is an all time record high price (Chart XVII).
The reason for a decrease in dry whey production is not clear. However, the conversion of whey to other products like whey permeate and whey proteins may have an influence.
SUMMARY
There are a few changes occurring in the commodity prices that are somewhat difficult to explain. Butter production is down significantly, and this is often explained as a lack of available milk, logistics, and labor shortages. However, cheese production has continued to grow with almost no interruptions.
While cheese has continued to grow, production of dry whey has slowed. Since the two are typically linked, the reason for the change is not clear. Dry whey fractions and their higher values may be in play. If fractions can command a higher price, that is a trend that will not reverse.
If butter production does not increase, prices will remain high and supply and demand will increase retail butter prices. This appears to be happening. With higher retail butter prices, butter alternatives based on vegetable oils, may increase market shares slowing the consumption of butter. That could be difficult to reverse once more butter is produced and is available at lower prices.
milkprice.blogspot.com
