Amendments to the USDA – Agriculture Marketing Service (AMS) pricing formulas are finalized and must now be approved by each Federal Order. If the Federal Order does not approve the changes, steps will be taken to terminate the Order.
In the past, changes were made primarily to “make allowances.” The current changes impact many other parts of the formulas, making comparisons to past index data impossible. Protein and “other solids” levels are increasing, but the butterfat component level is not being changed in the formulas. The percent of nonfat solids is also being increased. The reasoning behind these changes in the index formulas is confusing.
This post will analyze the economic impact of these formula changes on the published Class III index prices and on the actual price changes as they impact dairy producer’s revenue. The changes to the pricing formulas include the following:
- Changes in the “make allowances” of the four commodities used to price components
- Changes to the butterfat recovery calculation in the protein formula
- Changes to the cheese prices based only on Cheddar cheese block prices,
- Changes to the percent component levels as used in the AMS index prices for four Classes of milk
- Changes to establish Class I skim prices based “higher off’ Class III or IV skim prices.
In the July 28, 2024 post, the proposed USDA changes were previously covered. All the “make allowances” in the final decision now have higher prices, reducing producer prices.
The analytics used to calculate the actual impact of producer revenue below are based on full-year 2023 prices. Comparisons are made between the current and new formulas.
OVERVIEW
There are two different sets of formulas in this post. The AMS publishes monthly prices for the different classes of milk. The data for each class is based on a constant percentage of components. That allows the published Class pricing to reflect the changes based on commodity prices with a constant level of components, specifically 3.1% protein for skim milk and 3.5% butterfat for delivered milk. No producer is paid based on these index class prices; they are strictly an index that measures the impact of changing component prices.
By comparison, the 2023 Federal Order actual component levels for delivered milk were 3.3% milk protein and 4.1% butterfat in milk delivered.
The changes approved include a change in the component level for milk protein, increasing it from 3.1% to 3.3%, and a change in the component level of “Other Solids”, rising from 5.9% to 6.0% in skim milk. That will make the new Class prices published by the AMS not comparable with prior Class prices. No producers are paid by these Class Prices; they are only for comparison, but with these changes, they will not be comparable to past publications.
INDEX PRICES OF CLASS III MILK
Table I shows the prices based on the AMS index formulas. They are calculated at both the new protein level (3.3%) and the current protein level (3.1%) in the formulas. These protein percentages represent the protein level of skim milk. With butterfat included, the percentages are lower.
The most significant “takeaway” is that with a new level of protein in skim (3.3%) and the higher “make allowances” in the formulas, the new formula shows a higher value ($.12/cwt) for skim milk. However, when calculated with the current protein index level (3.1%) and the higher “make allowances,” the value of skim milk decreases by $.27/cwt. Why was the protein level changed in an index formula?
The increases in the “make allowances” are reducing producer revenue but will be masked by the formula change for milk protein.
The changes in the index formula for “other solids” have a similar but much smaller impact.
The prices above include the change to valuing cheese based on block wholesale prices only. Data for the past five years show a 3% price increase with this change and that is included in the calculations below.
ACTUAL PRICES OF CLASS III MILK
The Actual changes in producer revenue are shown in Table II. They are not influenced by the change used for the AMS index formulas. They are based on the actual component levels delivered by producers in 2023. The actual change for producer revenue for Class III milk is a negative $.53 per cwt.
