Thursday, November 1, 2012

Protein up 13% - Class III over $21

October Class and Components Milk Prices were announced on November 1st.  The increases met all expectations with significant increases in all parameters, especially the most important one, protein.  Milk protein increased $.48/lb as cheese prices increased 10% and butter prices increased a smaller 5%.  See the August 8, 2010 post to this blog for an explanation of this formula driven relationship.

Chart 2 illustrates the magnitude of the protein increase.  Milk protein reached exceptional highs in 2008, driven by unusually huge exports.  Exchange rates are again impacting exports and keeping demand high.   Currently there is a big difference because, in addition to favorable exchange rates, export programs that will have a long term impact are also driving higher exports.

Milk protein made up 53% of the milk check in October (Chart 3).  Clearly, a producer trying to maximize revenue must do everything he can to maximize protein volume from his cows.  An increase of .1 lbs of milk protein per cow per day will increase revenue by $.37 per cow per day.  For a producer with 1000 lactating cows, this represents additional revenue of $135,000 per year.

Although milk protein and cheese are the big news, in the sections below, "Other Solids" will be analyzed first.  Other Solids prices are based on the dry whey price.  While inventories are low, causing the higher prices for dry whey, the production of dry whey cannot react to this shortage because the availability of dry whey is totally dependent on cheese demand.  Dry whey is the by-product or maybe the co-product of cheese manufacturing, but no one makes cheese just to get the whey.  The demand for cheese drives the availability of whey.

Other Solids

Inventories of dry whey are at six year lows.  Demand is far outstripping supply.  There is very little reason to expect this to change.  Whey as a co-product of cheese manufacturing
is a food grade product with relatively high protein (the non-casein proteins that do not remain in cheese pass on to the whey).  There is a high lactose content that gives whey a very sweet taste.  Typically it is low priced.  All these factors make whey an attractive product for use in human foods and animal feed.

Whey exports (Chart 5) remain at record levels.  These exports have more than doubled over the last 10 years.

Typically, Other Solids have not been much of a factor in the Class III Milk Price, but this may be a long term positive change.  In October, Other Solids made up 12% of the milk check or $2.47 per cwt of milk.


Cheese prices are the real story for the month of October.  Inventories of cheese are lower than they have been since 2009 in spite of significant increases in production and demand.

The low inventories are keeping cheese prices near record levels.  Chart 8 shows the NASS prices ending with the October average price.  CME prices are typically about two weeks ahead of the NASS prices and as of early November, the CME prices maintaining prices above $2/lb.

The production of cheese continues its long term trend of increases.  Cheese is continuing to increase its dominance of the U.S. dairy industry.


Butter inventories remain tight, but not as tight as in 2010 and 2011.

Butter production continues it growth which started in 2006.

This growth in demand is really fueled by exports (Chart 12) which remain robust, but do not show much current growth.  Exports represent about 7% of butter production.

Butter markets are reaching an equilibrium, which will probably result in a softening of butter prices.  Fortunately, the price of butter does not have a large impact on the Class III Milk Price.  The math behind this is explained in the April 23, 2009 post to this blog.

Where is it all going?

The rest of 2012 looks very good.  The increased price of cheese to over $2/lb appears to be holding and can be expected to maintain the Class III Milk Price above $20/cwt for the remainder of 2012.  Although the futures market is not expecting the price to stay above $20/cwt in 2013, there is good reason to expect the above $20/cwt prices to continue into 2013.