The prior post covered Class III milk pricing changes resulting from the recently approved new USDA formulas. This post will cover the impact on Class IV milk for butter. In this post, the values of Class IV milk are analyzed for the index prices announced by the Agricultura Marketing Service (AMS) and the impact on actual payments to producers. The pricing data used to compare the current and new formulas is based on the full-year wholesale prices of cheese, butter, and nonfat dry milk in 2023.
BUTTERFAT PRICING
Butterfat values are calculated the same for all Classes of milk. Table I below is a comparison of the current and new formulas. The only change in the “make allowance” for churning butter from butterfat. The change is from $.1715 to $.2257 per pound, a 32% increase. Based on the average price of butter in 2023, that would lower the value of butterfat from $2.96 to $2.89 per pound, a 2.4% decrease in producer payments
CLASS IV INDEX PRICING
Class IV Skim milk is valued based on the value of nonfat dry milk (NFDM). The average price for NFDM in 2023 is $1.1856 per pound. The formulas used to price “Nonfat Solids” are shown in Table II below. The “make allowance” has increased from $.1678 to $.2393 per pound, a 43% increase. Based on the average price of NFDM in 2023, that would change the value of Nonfat Solids in producer milk from $1.01 to $.94 per pound, a 7% decrease in NFDM value for producer payments.
The pricing formulas in Table III show a significant increase in the Class IV skim index formula for nonfat solids. The components levels increase from 9% to 9.3%. This aligns with the Class III increase in protein level in skim milk used to calculate the Class III price (see the prior post for details.).
Why have protein levels increased in the index formulas while butterfat remained unchanged? Is it to mask the changes in “make allowances?” Changes in an index formula make prior data comparisons impossible.
ACTUAL IMPACT OF USDA CHANGES
Table V below shows the impact of the current and new formula changes on producer revenue. The data below is based on 2023 wholesale prices and actual component levels.
The current formula for Class IV actual revenue is $21.28 per cwt. for 2023. The Class IV revenue price with the new formulas is $20.36 per cwt. The change will reduce 2023 Class IV prices paid for milk delivered by $.92 per cwt., about 4%.
WHAT ABOUT CLASS I Milk?
Class I milk is the second largest usage of milk at 26% of total milk delivered in the Federal Orders. The changes with the new Class I formulas will be covered in detail in the next post. Classes III and IV, covered in Part I and Part II, both show that producers will see lower prices for their milk. What will be the results of the changes on Class I base prices?
