The statistics below are based on the Upper Midwest March 2024 payments for milk and their 12-month Averages. They are taken from the USDA monthly reports. Table I below lists the value of each class of milk and the percentage of each Class. Class I cannot be de-pooled, and Class III would not be de-pooled as it is the second lowest priced Class. How can Class II and IV have such high values? Obviously, most of Classes II and IV are de-pooled.
The data below represents the pooled milk in the Upper Midwest Federal Order. Class I is designed to be the highest priced milk. Obviously, that is not happening.
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| Table I – Cwt. Prices and Percent Pooled by Class |
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| Table II – Percent Butter Fat by Class |
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| Chart I – Pounds of Class II Milk |
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| Chart II – Class II Butterfat Percent |
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| Chart III – Pounds of Class II Milk |
The average percent butterfat used for Class I is about 2% which is a blend of the four fluid milk products (Chart IV). The butterfat percent of the incoming milk is over 4%. The unused butterfat is transferred primarily to Class II pooled milk.
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| Chart IV – Class I Butterfat Percent |
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| Chart V – Pounds of Class IV Milk |
The Class IV 12-month average of butterfat is at 50% (Chart VII)! Class IV has the highest percent butterfat and gets 95% of its value from butterfat. Obviously, most of the butterfat is coming from another Class. In this case it is coming primarily from Class III pooled milk.
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| Chart VI – Class IV Butterfat Percent |
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| Chart VII – Pounds of Class III Milk |
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| Chart IX – Class III Butterfat Percent |
Chart X follows the protein/butterfat ratio. Cheese making needs enough protein to coagulate and retain the butterfat. Butterfat volume has been growing faster than protein volume. Butterfat is expensive and a smaller amount has a cost advantage for processors. Rather than increasing protein levels, butterfat is removed. The amount of butterfat removed is now around 140 million pounds per month!
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| Chart X – Class III Butterfat/Protein Ratio |
So why is Class III milk so low priced? There are a number of reasons:
- The formula for calculating the price of milk protein in Class III reduces the value of milk protein when the butterfat price increases. Due to the high butterfat pries, milk protein has lost value. For details see this prior post.
- De-pooling moves money around. When a milk Class is de-pooled it is done to keep the milk value high but that means a lower Uniform price. The Upper Midwest has very flexible rules for de-pooling, so it can be implemented month-by-month. (California’s rules for de-pooling are similar.) The Northeast Federal Order rules for de-pooling make it more difficult to de-pool. In the April 2, 2024 post to this blog, the Northeast Federal Order had the highest Uniform (average) price among the Federal Orders paid on the Class and Component system. The Upper Midwest and California had the lowest Uniform prices.
- With high-priced butterfat and low-priced cheese, the financial impact is to put the most effort and money behind higher butterfat levels and less effort and money behind protein levels. But by the Federal Order guidelines, this forces butterfat to be removed from Class III and added to Class IV. With less butterfat in Class III, the value will be lower.
The Federal Order pricing protocols developed before the year 2000 are now leading to moving milk processing out of Federal Order control by de-pooling. De-pooling leads to lower Uniform prices. Once de-pooled, the pricing is negotiated with the buyer, but not under the control of the Federal Order pricing.
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