The prior two posts, Part I and Part II covered Class III and Class IV milk price changes when the new USDA formulas are implemented. This post will cover the impact on Class I milk, the second largest category of Federal Order milk. The reason for covering Class III and IV first is that the price of Class I skim milk is based on the prices of Class III and/or Class IV milk.
Prior to 2019, Class I skim milk was priced by the “higher of” Class III skim or Class IV skim. Since 2019, the Class I skim has been priced based on the “average of“ Class III skim and Class IV skim plus $.74. The USDA changes will return the pricing formula to the “higher of“ calculation.
The wholesale commodity prices used in this post are based on 2023 prices, as in the prior two posts. Index prices refer to the monthly Agricultural Marketing Services published Class prices, and the actual prices are based on commodity levels reported from producer milk deliveries.
Table II below shows the difference between the “average of” and “higher of” pricing. In 2019, the price of Class I skim milk was higher based on the then-new pricing that averaged Class III and IV and added $.74 per cwt. In 2020, with the COVID “stay at home” policies in place, producers took a hit with $1.76 per cwt—lower prices. 2021, the price was slightly positive with the new “average of “ formula. Since then, the “average of” formula has resulted in lower producer revenue. The change implemented in 2019 is now being reversed back to the “higher of” formula.
Chart I below follows the difference between the two formulas based on the monthly payments. As covered above, during the COVID period in 2020, producer payments would have been significantly higher if the “higher of” formulas had been used. For the last three years, the Class I skim “higher of” formula has delivered higher producer prices.
As numbers are calculated with the “higher of” formula (Table III), the index and actual Class I skim will pay a higher price per cwt. The increased “make allowances” for Class III and IV milk have reduced the value of Class I milk. However, change to the “higher of” formula will offset the “make allowances,” leaving a price increase of $.24 per cwt. for Class I skim milk.
The skim plus butterfat value of Class I is shown in Table IV. The Class I skim value will increase values with the “higher of” formulas, as shown in Table III above, but the butterfat value will be lower based on higher “make allowances.” The change in the index formula announced monthly by the USDA will show only a very small difference of -$.01 per cwt. The Class I milk based on the actual levels of components will show a slightly more negative price of -$.05 per cwt. as the value of butterfat is lower in the new formulas.
