Guest Columns

Perspective:
Dairy Markets

A look at market factors impacting the producer price differential

Cody Koster

Cody Koster is a dairy risk advisor at Rice Dairy*, a brokerage firm in Chicago that specializes in dairy and markets at dairy’s periphery. He contributes this column exclusively for Cheese Market News®.

“Only five people in the world know how milk is priced, and four of them are dead.” That is the adage that I have heard from many different people in the past few months. Over these months, Class III milk prices have been the talk of the town, settling above $20 per hundredweight in June and $24 in July. An even bigger discussion in these same circles centers around the producer price differential (PPD). While typically a positive element in milk checks, the PPD has been hugely negative in recent months.

So, what is PPD? While I am not that one person who is still alive to explain all that goes into the pricing of milk, let us look at the basic influences that impact it. The easiest way to explain PPD is that it is the difference between the Class III price in milk, and the blend price of Classes I, II, III and IV.

When calculating this difference, timing and market forces make a difference. In late May of this year, the cheese price started a dramatic increase at the Chicago Mercantile Exchange (CME) as a result of USDA announcing the Farmers to Families Food Box program. This announcement took prices from a low of $1 per pound of block cheese to a high of $3 per pound in a matter of two months. This increase also brought the Class III price to the $20+ realm in June and July. Meanwhile, the other Class prices only increased minimally in comparison. With more cheese needed for the food boxes and not as high of a demand for butter or nonfat dry milk in those same food boxes, you can understand why there was such a wide price spread between all of these products relative to cheese.

Another factor that influences PPD is timing. More specifically, the calculation of the Class I price occurs on a different schedule than and when other class prices are announced. Class I is calculated using an advanced pricing system and is announced on or before the 23rd of the previous month. For example, for September 2020 Class I, the advanced price was announced Aug. 19, 2020. The Class III price for September will be announced in the first part of October 2020 using prices from the sale of products that occurred during the month of September. This very timing element was a large contributor to the wide spread between the Class III price and the Class I mover that fed the negative PPD in producers’ milk checks during June and July.

Inversely, if a decline in cheese prices (which correlates to weaker Class III prices) occurs before the Class I mover is calculated, this can result in a higher or positive PPD in milk checks.

Another influence on PPD is that of pooling or not pooling the Class III milk. When the Class III milk price is higher than the blended price of all classes, there is not much incentive for a plant to pool that milk. While all Class I (fluid milk) processors must participate in the pool, most Class III milk buyers choose not to pool the majority of their milk receipts in the federal order every month. This is their decision. However, if they choose to pool less in one month than they had in the previous month, they are only allowed to return the next month at a level that does not exceed 125% of the previous month. This feature makes it difficult to move in and out of the pool. And since PPD is generally positive, it often causes most to maintain similar volumes from month to month. However, this decision is left in the hands of each processor each month.

While there has been much chatter about announced Class III prices and the astronomical run in their values, it has been the pricing behind the scenes that has witnessed even more discussion from farm to farm. To recap, the reasons for these swings are the relationship between the Class III price and the blended price, the timeline that each of those prices are arrived at, and the monthly decision among co-ops as to whether they do or do not pool Class III milk. The large swings in PPDs the past couple of months have many producers wrestling with the massive disparity between what is announced and what they receive in their milk checks.

Rest assured that this subject will be given closer scrutiny as future discussions regarding federal orders and milk pricing formulas take place.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*The risk of loss trading commodity futures and options can be substantial. Investors should carefully consider the inherent risks in light of their financial condition. The information contained herein has been obtained from sources to be reliable, however, no independent verification has been made. The information contained herein is strictly the opinion of its author and not necessarily of Rice Dairy and is intended to be a solicitation. Past performance is not indicative of future results.

© 2024 Cheese Market News • Quarne Publishing, LLC • Legal Information • Online Privacy Policy • Terms and Conditions
Cheese Market News • Business/Advertising Office: P.O. Box 628254 • Middleton, WI 53562 • 608/831-6002
Cheese Market News • Editorial Office: 5315 Wall Street, Suite 100 • Madison, WI 53718 • 608/288-9090