Continuing a trend started last November, Federal Milk Marketing Order (FMMO) January 2022 uniform milk prices were up while the Class IV milk price impacted handler pooling.
Natzke dave
Editor / Progressive Dairy

Administrators of the 11 FMMOs reported January 2022 uniform milk prices, producer price differentials (PPDs) and milk pooling data, Feb. 9-12. Here’s Progressive Dairy’s monthly review of the numbers and their potential impact on your milk check.

Class prices rise

January prices for all individual classes of milk were up from December:

  • The advanced January Class I base price moved to a 13-month high, up 54 cents from December to $19.71 per hundredweight (cwt). Adding Class I differentials, the January Class I price averaged $22.53 per cwt, with a high of $25.11 per cwt in the Florida FMMO and a low of $21.51 per cwt in the Upper Midwest FMMO.

  • January’s Class II milk price was $22.83 per cwt, up $2.99 from December, up $8.65 from January 2021 and the highest since September 2014.

  • The January 2022 Class III price rose $2.02 from December 2021 to $20.38 per cwt, the highest since November 2020, when government purchases of cheese for food boxes supported Class III prices. It’s also up $4.34 from January 2021.

  • The Class IV milk price soared to a 90-month high in January 2022 and is $9.34 higher than a year ago. At $23.09 per cwt, it’s up $3.21 from December 2021 and the highest since August 2017. After reaching $23 per cwt six times in 2014, the Class IV price hadn’t topped $20 per cwt since October 2017.

January Class III-IV milk prices moved higher due to increases in values of butterfat and milk solids used in monthly milk price calculations, but the value of protein was down.

The value of butterfat rose about 66.5 cents from December to almost $2.96 per pound. The value of milk protein slipped about 24 cents from December to $2.36 per pound. The value of nonfat solids rose a dime in January to $1.47 per pound, while the value of other solids increased 7 cents to 52.5 cents per pound.

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Uniform prices higher

With higher individual milk class prices, January blend or uniform prices at standardized test rose in all FMMOs (Table 1) and were the highest since the final months of 2014. When multiplied by milk class utilization in each FMMO, January uniform prices increased in a range of $1.52-$2.37 per cwt across all 11 FMMOs compared to December. The high uniform price for January was $25.49 per cwt in Florida FMMO #6; the low was $20.59 per cwt in the upper Midwest FMMO.

FMMO PPDs

January baseline PPDs were positive and changed little from December, ranging between 16 cents less to 35 cents more than December.

As we remind you each month, PPDs have zone differentials within each FMMO. Also, whether positive or negative, individual milk handlers apply PPDs and other deductions to milk checks differently.

Impact on pooling

January’s milk class price relationship not only created a wide spread ($2.71 per cwt) between Class IV and Class III milk, but the Class IV price was also higher than the average Class I price with differentials, giving Class IV handlers incentive to depool.

You can get a general picture of depooling in a couple of ways: on a volume basis, comparing monthly pooling totals to previous months, and on a percentage basis, comparing the percent utilization of a specific class of milk relative to all milk pooled that month.

Looking at January data, about 12.65 billion pounds of milk were pooled on federal orders in January.

Class IV milk pooled across all FMMOs fell to about 1.217 billion pounds (Table 2), the lowest volume since February 2019. January Class IV milk utilization represented about 9.6% of total FMMO milk marketings, less than one-third of the level seen in the first half of 2021 and the lowest percentage since January-February 2019, when Class IV prices were running $1.50-$2 higher than Class III milk.

milk utilization

January’s Class III-IV milk relationship again had an opposite impact on Class III pooling. With the Class III milk price below than Class IV price, Class III handlers brought more milk back to the pool. On a volume basis, Class III milk pooled in January was estimated at about 6.64 billion pounds, more than four times the average monthly volume pooled during the first five months of 2021 and the most since June 2019. As a percentage of utilization, Class III milk represented about 52.5% of the total FMMO pool, also the highest since the first quarter of 2019.

Looking ahead

Class and uniform prices will move higher for February milk marketings but the incentives for depooling continue.

The February 2022 advanced Class I base price moves to an 86-month high. At $21.64 per cwt, it’s up $1.93 from January 2022 and $6.10 more than February 2021. Adding Class I differentials to each order's principle pricing point, the February 2022 Class I price averages $24.46 per cwt, with a high of $27.04 per cwt in the Florida FMMO and a low of $23.44 per cwt in the Upper Midwest FMMO.

February Class II, III and IV milk prices will be announced on March 2. At the close of Chicago Mercantile Exchange (CME) trading on Feb. 11, the February Class III futures price was $20.80 per cwt, up another 42 cents from January. The February Class IV futures prices settled at $23.80 per cwt, up another 71 cents per cwt from January. If those prices hold, the Class III-IV price spread would reach $3 per cwt.

Longer term, as of Feb. 11, Class III futures prices averaged $21.70 per cwt for all of 2022, with Class IV futures averaging $23.76 per cwt. The spread between the Class III-IV futures prices averages about $1.97 for the year, maintaining Class IV depooling incentives.

Individual FMMO pooling, depooling and repooling rules play a role in how much. And milk markets change, so the ride continues.

Class I mover

After a seven-month reprieve, the debate over the “higher-of” versus “average-of plus 74 cents” formula resurfaced in February.

The difference between February’s advanced Class III skim milk pricing factor ($10.43 per cwt) and the advanced Class IV skim milk pricing factor ($12.97 per cwt) is $2.54 per cwt, plus the advanced butterfat pricing factor, means producers will saw a negative (-51 cents per cwt) impact using the average-of Class I formula compared to the old higher-of formula. That difference will be diminished in producer milk checks, however, depending on Class I utilization in each FMMO and its impact on “blend” or uniform milk prices.

The March advanced Class I base price, along with advanced Class III-IV skim milk prices used to determine the Class I mover, are released on Feb. 16.

October 2021 mailbox, all-milk price spread increased

One other historical side note: Two monthly average milk prices announced by the USDA both improved for October milk marketings. However, the spread between the average “all-milk” and “mailbox” prices widened.

Based on Progressive Dairy calculations, October 2021 mailbox prices were $1.16 cwt less than the all-milk prices for comparable states and regions. That was the largest difference since May 2021, a month in which PPDs were negative in all applicable FMMOs. Mailbox prices averaged about 86 cents per cwt less than all milk prices in July-September.

The all-milk price is the estimated gross milk price received by dairy producers and includes quality, quantity and other premiums but does not include marketing costs and other deductions.

The mailbox price is the estimated net price received by producers for milk, including all payments received for milk sold and deducting costs associated with marketing.

The price announcements reflect similar – but not exactly the same – geographic areas. The USDA National Ag Statistics Service (NASS) reports monthly average all-milk prices for the 24 major dairy states. The mailbox prices are reported by the USDA’s Agricultural Marketing Service (AMS) and covers selected FMMO marketing areas. The AMS announcement of mailbox prices generally lag all-milk prices by a couple of months.

The difference in the two announced prices can affect dairy risk management, since indemnity payments under the Dairy Margin Coverage (DMC), Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy) programs are all based on the all-milk price, before any marketing cost deductions.  end mark

Dave Natzke