Understanding capricious milk prices: How to make the most of your next milk check

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By the time you read this column, the Federal Milk Marketing Order prices for August will have been announced. But as of this writing, I do not know what they will be — although I have a pretty good idea.

Educated guess

Based on the information that I have, the Class II price for August will be in the $16.50 to $17 per cwt (hundredweight) range. But is this just a wild guess? How do I get these estimates?

Some people mistakenly think that the USDA sets Federal Order prices. True, the USDA (through the Federal Order Administrators) calculates these prices, but the USDA personnel only play the role of glorified accountants — they only add, subtract, multiply and divide numbers according to set formulas. In fact, prices for all four classes of milk are entirely determined by the national prices of five dairy commodities: butter, block cheddar cheese, barrel cheddar cheese, nonfat dry milk and dry whey. That’s it, all prices are calculated using these five prices plus a Class I differential that depends on the location and remains constant across the months.

Finding prices

Heres an example using today’s prices. I just went on the Chicago Mercantile Exchange (CME) and retrieved today’s cash prices for the five dairy commodities: butter, $2.42 per pound; blocks, $1.70 per pound; barrels, $1.67 per pound; nonfat dry milk, $0.82; and dry whey, $0.283. I then consult page 17 of the document “Order Language,” found at www.fmmaclev.com. Using the formulas found in this document, I calculate the following component prices as of today: butterfat price, $2.72 per pound; nonfat solids price, 65 cents per pound; protein price, $2.253 per pound; other solids price, $0.169 per pound. These components give us a Class III skim milk price of $7.98 per cwt, and a Class III price of $17.22 per cwt.

Of course, these prices are only good for today, and are from the CME, whereas the USDA uses prices from surveys are averaged over a whole month.
Even simpler. There is an even faster and easier rule of thumb that one can use to get a pretty good guess at what milk prices will be like. For the Class III price, take the price of cheddar cheese blocks and multiply by 10.

Today, cheddar blocks are trading at $1.70 per pound. Thus, the Class III would be about 1.70 times 10 is equal to $17 per cwt. If you are shipping in Federal Order 33, take the Class III price calculated from cheese blocks, add 80 cents per cwt and you will get an approximate blend price for milk at 3.5 percent butterfat. Take the butter price and divide it by 10 and you will get approximately what a point of fat will be worth per cwt of milk. For example. If butter is selling for $2 per pound, then the butterfat will be worth two divided by 10, which is equal to 20 cents per point and per cwt. So, in our example, the blend price at 3.5 percent fat for Federal Order 33 should be about $17 plus $0.80 is equal to $17.80.

If you ship milk at 3.8 percent butterfat, then you add three points of fat times 20 cents per point, which equals 60 cents per cwt. So our blend price should be about $17.80 plus $0.60 is equal to $18.40 per cwt. We might be off by up to a quarter per cwt, but this takes the surprise out of the price announcements.

The milk check

Using the component prices that we previously calculated, it is relatively easy to determine what portion of your milk check comes from producing each component. For milk at 3.8 percent fat, 3 percent protein and 5.7 percent other solids, we get the following results. The 3 pounds per cwt of milk protein contributes 36 percent of the total; the 3.8 pounds per cwt of butterfat contributes 55 percent, whereas the 93.2 pounds of other solids and water contributes to only 9 percent of the total. If we were factoring the nutritional costs associated with the production of each component, the scale would tilt even more in favor of butterfat and protein.

Butterfat and genetics

Historically (i.e., over the last five years), butterfat has been priced from $1.50 to $1.75 per pound. So the current price of about $2.75 per pound is a clear signal that the markets are looking for butterfat and are willing to pay for it. Genetics play a significant role in the average butterfat of a herd, but nutrition and feed management can also play a significant role. If your herd butterfat is less than the breed average, now would be a good time to talk to your nutritionist and your veterinarian.

As for milk protein, its current price (about $2.25 per pound) is a bit less than the five year average ($1.75 per pound), but it is still attractively priced. Here too, genetics play a significant role on a long-term basis, but nutrition can impact milk protein by up to two points: that’s equivalent to nearly 50 cents per cwt of milk.

The USDA might be the entity that calculates component prices, but you are the one who determines how much of each component your cows are producing. Producing and shipping water right now is simply not profitable.

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