In June, the new USDA dairy milk formulas for pricing producer milk will be implemented. When that happens, financial comparisons to past milk Class prices will not be compatible with historic prices. (See this post for details.) For that reason, future posts in “MilkPay.com“ will focus on component prices. With the new USDA component prices, each component will be valued lower with the increases in “make allowances.” That will be the amount paid to producers and will be consistent with past revenue when comparing revenue trends. This post will focus on the increases and decreases in the prices of these four dairy components.
BUTTERFAT
Butter and butterfat prices have been increasing for over 20 years. In the last four years the prices per pound increases have accelerated. The price is based on supply and demand. (See this post for details.)
Presently, producer butterfat revenue has made up over 50% of the payment for milk. However, butterfat prices have fallen by 25% from their highs. This pricing trend is concerning to the dairy industry. The butterfat supply is low and will remain low so only minor future price decreases are likely.
PROTEIN
Protein is paid specifically in Class III milk only and Class III milk is over 50% of producer milk. Protein prices have fallen as butterfat prices increase. Charts I and II below reflect a mirror images of producer butterfat revenue and protein revenue. There is a reason.
The formula below for protein is what is currently in use for pricing protein. In the red circle is a deduction in the formula. As butterfat prices go up, the value of protein will always go down. There is more butterfat than protein in the producer milk. Producer revenue will go up with higher butterfat prices, but it will be partially offset by the decline in protein prices
Protein Price = ((Cheese Price – .2003) x1.383) +((Cheese price – .2003) x 1.572)
Charts III and IV below show the average revenue for butterfat and protein based on actual monthly component levels. Chart V combines both the butterfat and protein revenue. In the combined payments, the increased value brought by butterfat will be somewhat reduced based on the protein price formula above.
OTHER SOLIDS
“Other Solids” make up the third part of the Class III payment (Chart VI). There is volatility in the value of “Other Solids”, but the prices are low, and they impact producer revenue only slightly. The price of “Other Solids “shows no consistent increasing or decreasing trends in price. “Other Solids” pricing is based on the value of dry whey. Dry whey is a major export item with 66% being exported. A major buyer is China. They buy whey in the form of whey permeate (whey with the protein removed).
NONFAT SOLIDS
Class IV milk for butter pays based on butterfat and “nonfat solids.” The value of “nonfat solids” is dependent of the price of nonfat dry milk (NDM). Over the course of the 15 years in this Chart VII, prices have ranged from a high nearly four time higher than the lowest price. That is a lot of volatility. NDM is primarily an export item with 60% being exported, primarily to Mexico. This volatility does financially impact cheese churning companies and the value of producer milk.
SUMMARY
The sciences of producing milk with the right feeds, breeding, and other factors and will influence EBIDA (earnings before interest, taxes, depreciation, and amortization) in the financially complicated U.S. dairy industry. Survival depends on knowing how to best manage a dairy financially.
The next post will cover the revenue from the four components priced above based on the price movement and the level of components produced, including revenue for “Other Solids” and “Nonfat Solids”.
