Producer Milk Prices are High! How Long Will they Continue?
April 29, 2022
Dairy is a business. Like any business, cash flow, revenue, and profits are what keeps a business humming. Producer milk prices are currently high. This post will look in the rear-view mirror, comparing the current high producer milk prices to the historical prices since 2000. This is a 23-year review tracking back to the beginning of the current FMMO pricing system.
Most milk in the U.S. is paid by the Class and Component system. On the initial payment, producers are paid based on the delivered pounds of butterfat, milk protein, and “Other Solids.” The amount of the initial payment is based on these pounds and the current price for these three components. The pounds of these three components are under the control of the producer and his team. Prices for these components are based on three commodities and will be covered in this post.
The two tables below show the growth of the prices of these components. Table I compares the year 2000 to the year 2021, and Table II compares the year 2000 to the 12-month average through March 2022. These two tables show the impact of low and high butterfat prices. In February 2021, butterfat prices were low at $1.44 per pound. By February 2022, butterfat prices had more than doubled to $3.02 per pound.
The comparison from 2000 to 2021 shows the 22-year growth of butterfat prices at 52 percent and milk protein at 63 percent. In 2022, butterfat prices shot up, and that comparison now shows butterfat growing at 80 percent and milk protein growing at 57 percent. The conclusion to this is that both butterfat and milk protein prices are growing at about the same rate, but at different times one can grow faster than the other. The best strategy for a producer is to maximize both butterfat and milk protein pounds.
The growth of “Other Solids” pricing is huge. Comparing the two tables below, the price increases ranges from 659 percent to 788 percent. The reason for this growth will be discussed later in the blog post.
Table I – Growth of Component Prices from 2000 to 2021
Table II – Growth of Component Prices from 2000
and Current 12 Months
Charts I through III below cover the movement of the component prices since January 2020.
Chart I covers the movement of butterfat prices. The March 2022 price is $3.09 per pound, which is not a record price, but it is the third highest price ever for butterfat.
What happened right after the two previous highest prices in 2014 and 2015? The price dropped quickly by more than one dollar per pound within two months. Will history repeat itself?
Butterfat Price = 1.211 x Butter Price – $.21
Chart I – Butterfat Prices since January 2000
Milk protein prices (Chart II) are not near any record highs. In 2020, there were two price spikes as the U.S. economy reacted to the “stay at home” policies enacted to slow down the spread of COVID. Those spikes quickly disappeared.
The milk protein price is influenced by the price of cheese and the price of butter. When cheese prices go up, milk protein prices go up. When butter prices go up, milk protein prices go down.
Protein price = 3.222 x Cheese Price – 1.275 x Butter Price – $.43
See this prior post for details.
Chart II – Milk Protein Prices since 2000
The price of “Other Solids” is based on the price of dry whey. A lot of dry whey is exported, so the price is based on both international and domestic events. The current price is a record at $.61 per pound. Dry whey and its derivatives like whey permeate and whey proteins have found new value. Over the 23 years covered in Chart III below, dry whey initially had little value and in 2009 carried a negative value as it cost more to dry than could be recouped in the wholesale price. Today’s market appears to be very different as real value has been found in dry whey.
Unfortunately, “Other Solids” still adds very little to the overall price of Class III milk. Its value at $.61 per pound pales in comparison to the price of butterfat at $3.09 per pound and milk protein at $2.72 per pound.
Other Solids Price = 1.03 x Dry Whey Price – $.21
Chart III – Other Solids Prices since 2000
There are three commodities that are used to price milk components. They are butter, cheese, and dry whey. Nonfat dry milk (NDM) is used as the basis for pricing nonfat solids for Class IV milk. Their prices are wholesale prices which are largely influenced by supply and demand. The movement of the inventories of these commodities will be covered in an upcoming post.
Butter prices are used to calculate butterfat prices per the formula above Chart I. Therefore, Chart IV on butter below moves with Chart I on butterfat. The weekly AMS survey is showing a small further increase for April. Butter prices may be peaking. If history repeats, the price of butter may soon be taking a significant drop.
Chart IV – Butter Prices since 2000
Cheese prices are more difficult to follow. While the name “Cheese Price” implies that this is the overall price of cheese, that is not true. The Agricultural Marketing Service (AMS) calculates the price used to represent cheese as the wholesale price of one type of cheese, young Cheddar cheese. While production data for Cheddar is available publicly, the inventory of young Cheddar cheese is not publicly disclosed.
Chart V that tracks the AMS price of cheese that has a current price of $2.05 per pound which is not near any records for high or low pricing.
Chart V – Cheese Prices since 2000
Dry whey directly influences the price of “Other Solids.” As goes dry whey prices, so goes the price of “Other Solids.” While dry whey prices are high and will likely stay high, they still contribute very little to the Class III price of milk.
Chart VI – Dry Whey Prices since 2000
NDM prices are not at record levels, but at $1.80 per pound they are the highest since 2014. Compared to the price growth shown in the above three charts, the price growth of NDM has been minimal. This is an export product and is therefore subject to changing international events.
Chart VII – NDM Prices since 2000
MILK CLASS PRICES
After the first payment to a producer is made based on component pounds and prices as discussed above, the final payment will be based on the difference between the first payment and the average or “Uniform” price for the four classes of milk. The pricing of Classes III and IV milk and skim milk are covered below in Charts VIII through Chart XI. While the initial payment for producer milk is based on component levels which are under the control of the milk producer, the second payment is based on the average pricing of all four milk Classes and is not under a producer’s control. The average or “Uniform” price will be used to determine the Producer Price Differential which is the basis for final payment for delivered milk.
Class III milk prices are above the long-term trends but have not reached record levels (Chart VIII). The Class III skim milk price (Chart IX) shows a very average or normal price. Obviously, the high butterfat price is responsible for the relatively high Class III price.
The Class IV milk price (Chart X) is at record highs. That makes the Class IV price of $24.82 per cwt $2.37 higher than the Class III price. Because the Class I and II skim milk prices are based at least partially on the Class IV skim milk price, the Class III initial payment will be lower than the “Uniform” price. This should ensure that Producer Price Differentials will be positive and provide a positive second payment to producers.
Chart VIII – Class III Milk Prices
Chart IX – Class III Skim Milk Price
Chart X – Class IV Milk Prices
Chart XI – Class IV Skim Milk Prices
The four commodity prices used to price producer milk are all positive compared to historical prices.
Cheese is only slightly above the norms.
Dry whey is at a record level, and it may be sustainable as new uses are influencing demand. However, dry whey has a very small influence on milk pricing.
NDM prices are high but not at record levels. Because NDM prices are primarily based on international factors, the price can change rapidly. There are no elements that should make the higher NDM prices sustainable so there will likely be a drop.
Butter prices are not at record levels, but they are near record levels. Butter prices influence the price of all Classes of milk in all 11 Federal Orders. Historically, high butterfat prices don’t last long. Once the peak has been reached, prices may quickly fall by one dollar per pound or more. However, the most recent weekly AMS prices do not yet show any sign of a reduction in butter prices, but they do show a leveling out of the current price.