Alpharetta, GA (February 28, 2019)
Dairy farmers gained practical insight into how the price formulas in Federal Milk Marketing Orders (FMMO) relate to dairy herd revenue and cash flow at the recent Western Dairy Management Conference.
“Butterfat prices are at record highs today, yet the Class III milk price is at an unsustainable level for dairies,” noted independent consultant John Geuss with John Geuss Consulting.
How is this possible? The answer is in the FMMO formulas, Geuss explained, as he started a review of the pricing formulas used in the FMMOs. He explained that the announced Class III milk price is an index. The index is linked directly and primarily to the price of cheese. Increases in the price of butter has little impact on the announced Class III milk price. That is why today’s record-high cheese inventories can keep downward pressure on cheese prices. That is also why, the Class III price is very low.
The announced Class III milk price is based on 3.0 percent milk protein, 3.5 percent butterfat, and 5.7 percent other solids. Components levels above those rates provide incremental revenue and cash flow at the announced rates for those components. Additional milk per cow also adds to revenue and cash flow, according to Geuss.
Big picture, the U.S. dairy industry is trending to a no growth/declining industry. Consumption of fluid milk [Class I], the highest paid milk, is decreasing at an accelerating rate, and the growth in other dairy categories is stalling or falling. Currently the excess milk is absorbed in cheese production because excess cheese can be held in cold storage. This has caused inflated cheese inventories and low cheese prices.
Per capita consumption of fluid milk has been declining for years. Until recently, the total demand had remained constant, as a result of annual increases in the U.S. population. The increase in population has now slowed to less than one percent per year.
Cheese consumption continues to increase, but the rate of increase is slowing. The rate has gone from six-to-eight percent per year to two percent. Yogurt sales had been a bright spot, but now growth has slowed. Butter consumption had taken off, but the increase is currently less than just 2.8 percent per year and is expected to continue to slow.