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The ups and downs of a farmer's milk price

John Oncken
Ice cream is included in the Class  II category in dairy pricing.

It’s indeed a very strange year the world is going through. Nothing seems to be what we know of or did before. No meetings, no conventions, no county or State fairs in Wisconsin or Minnesota. No nothing!

Farmers may be the most stable population of all as they pretty much are doing what they normally would do - farming. June, July and August is generally the non-meeting season anyway so the farming community will get along OK.

Yes, Farm Technology Days has been postponed for a year as have most fairs and normal summer events but I haven’t met any farmers who said they would sorely miss this year’s event originally scheduled for July 21-23, figuring the host farm near Eau Claire features growing horseradish, something they can learn about next year.  

What farmers of all sorts really miss is the talking that takes place when two or more farmers meet at any get together. That situation won’t be helped by this “stay at home” year.

It’s the Cheddar cheese

Can anyone figure out what’s going on in the cheese pricing market? (Note: The price of 40# Block cheddar cheese as traded daily at the CME in Chicago is a crucial factor in the price dairy farmers are paid for their milk.) All winter the Block price was cruising along in the $1.90 per pound range and dairy producers were enjoying an upswing in their milk price.  

Only Cheddar cheese in the form of 40# Blocks and 400 pound Barrels are traded on the CME spot market. Their price is a major factor in the farmer milk check.

On March 24 the Cheddar Block price was still at $1.80 per pound but the drop in cheese consumption and the loss of school lunches and restaurant eating hit the cheese market with a mighty crash and it dropped like a rock. On March 31 Cheddar Blocks dropped to $1.33 and on April 15 the price for Blocks had hit the $1.00 per pound mark, an almost unheard of low price. Doom and gloom best described dairy producer emotions as they looked at their milk checks to be. 

The fast turnaround in prices

The cheese market got little attention for the next few weeks as the corona virus commanded the front pages of every news source. But it wasn’t standing still - it was sneaking upward a cent or two a day and sometimes more. And up it went until on June 5th a gain of 10 and 1/2 cents per pound brought the cash Cheddar Block price to an amazing $2.5050 - a new all time record price breaking the previous high of $2.45 recorded September 19, 2014 (The year of record producer milk prices.)

Fluid milk is considered Class I in the USDA pricing system.

Two days later a two cent gain created another record of $2.5250 per pound and on June 5 the price increased to $2.5525 another all time high and today (June 23) cash trading at the CME saw Cheddar Block settling at $2.81 per pound - 36 cents over the 2014 record. All I can say is WOW!

What’s going on?  

Bob Cropp. UW-Madison dairy economist explains: “Restaurants are slowly reopening, and food service sales are increasing. Restaurants and food service needed to place rather big orders of cheese and butter to restock their supplies." 

With people staying at home retail sales of milk, cheese and butter increased. By May 15 and into June the Farmers to Families Food Box Program kicked in and the government bought rather large quantities of milk and cheese. And on the supply side many dairy processors implemented base excess plans to their producers to reduce milk production. The two leading dairy states California and Wisconsin had lower milk production of 1.5 percent and 3.1 percent respectively. Both had reduced cow numbers with California down 4,000 head and Wisconsin 12,000 head. 

The price milk sells for in the store does not impact the producer price.

So, all these activities tightened the supply-demand situation and milk prices responded. This shows we can have big changes in milk prices from relatively small changes in supply and demand.

So what?

What does this all mean to the dairy farming community? In the short term it means happiness reigns as producer income rises with the various government payment programs and increased demand. My hope is that farmers do not embark on a higher production program- history shows that what goes up usually comes down - both of which happened in the last six months. 

Dairy production rises yearly as management and technology improve continuously.  This big 72 cow milking carrousel is an example.

Cheese and farmer price?

A question a reader recently asked. Why is the cheddar cheese market so important to dairy producers? My simple (?) answer: Because as the cheese market goes, so go farmer milk prices. Here’s sort of how the very complicated  system works.

Supply and demand combined with federal and state dairy policies are used to establish prices farmers receive for their raw milk. Most milk is priced according to its end use, with products grouped into four classes: Class I is milk used for fluid, or beverage products; Class II is milk going into 'soft' manufactured products such as sour cream, cottage cheese, ice cream, and yogurt; Class III is milk used for making hard cheeses and Class IV milk is used to make butter and dry products. 

Butter is the main Class IV product in the USDA pricing system.

USDA determines class pricing through formulas tied to values for four storable dairy commodity products: Minimum farm prices – often referred to as the blend price – reflect Class prices weighted by utilization in a specified geography. USDA calculates and publishes those minimum prices each month. Local supply and demand conditions often generate additional premiums paid over and above published minimums.

Understand? Probably not, hardly anyone does, just know that cheese pretty much determines the farmers milk price. And, that the price of milk in the store has little to do with the dairy farmer price.

John F. Oncken is owner of Oncken Communications. He can be reached at 608-572-0747 or e-mail him at jfodairy2@gmail.com.