Sunday, August 6, 2017

Milk Protein hits 16 year low, Butterfat Prices Near Record

July Class and Component milk prices were announced on August 2.  The class III milk was down $1/cwt. to $15.42.  Milk protein hit a 16 year low and butterfat is at near record highs.

Chart I - Price Movements for July vs. the Prior Month
As shown in Chart II below, the price of milk protein has not been this low since the start of 2001.  The value of milk protein for July is $1.22/lb.  This compares to record highs for milk protein at nearly $5.00/lb.  Butterfat in July was worth $2.95/lb., near the all-time records which are just above $3.00/lb.
Chart II - Long-term Trends
With these abnormal prices, July's butterfat contribution to the milk check jumped to 67%.  July is a record setting month, but only because of the extremes in pricing.

Chart III - Pie Chart of Class III price
What caused these extremes?  Cheese prices were down only 5.3% in July, but protein prices went down 30.2%.  Frankly, it's surprising that cheese prices went down at all.  Exports of cheese are improving (see July 9 post) and inventories are declining (Chart V below).  Typically, this scenario causes an increase in cheese prices.  For that reason, the 5.3% dip should be taken as a normal fluctuation, not a trend.  

The real reason for the big dip in protein prices is the increase in butter prices.  When butter prices go up, the value of butterfat goes up, and the value of milk protein goes down.  There are many published articles stating how much money producers are making from the increase in butter prices.  However, butter prices do not drive higher milk checks.  The Class III hardly changes when butter increases in value.

The formulas behind this are shown below.  The price of butter influences both the formulas for butterfat and milk protein.

Butterfat Price = (Butter Price − 0.1715) x 1.211) 

Protein Price = ((Cheese Price − 0.2003) x 1.383) + ((((Cheese Price − 0.2003) x 1.572) − Butterfat Price x 0.9) x 1.17)

If one collapsed the protein price formula, to its simplest terms it would be as follows:

Protein Price = Cheese Price x 3.22 - Butter Price x 1.28 - $.42

In July, the cheese price was $1.54/lb. and the butter price was $2.60/lb.  Because the butter price has a negative influence in the formula, it significantly drove down the value of milk protein.

The chart below shows the cheese and butter prices since the beginning of 2000.  There have been a few times in the past when butter was worth more than cheese, but they were short-term spikes. However, starting in 2015, butter prices shot up.   During that same period, cheese prices have been moderately low.  In July, this reached an extreme point with very high butter prices and very low cheese prices.

Chart IV - Cheese and Butter Prices
A high butter price moves the money from protein to butterfat, but has a small impact on the overall milk check.  (See more detail on this relationship in a prior post.)

July's pricing was an extraordinarily unusual event and extraordinarily unusual events don't typically last. It would not be wise to make long-term decisions based on Pie Chart III above.   Retail prices for butter are very high, and high retail butter prices will reduce domestic consumption as some consumers change to lower priced vegetable spreads.  With reduced consumption, inventories will grow and domestic prices will fall.  The future's market is indicating a 10% increase in cheese prices by the end of 2017, and a 10% decline in butter prices. This would bring the milk protein price back to $2.00/lb. from the current $1.22/lb. price.

The moderately low cheese prices result from excess inventories and the excess inventories are caused by lagging export volumes of cheese.  However, as covered in a prior post, cheese exports are growing quickly and inventories are starting to fall.

Chart V - U.S. Cheese Inventories
Cheese exports for June will be covered in the next blog, but the data available indicates that cheese exports are continuing to grow at a rapid rate.

July component pricing was abnormal.  But all indicators show that more normal pricing will quickly return.

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