Dairy Processing - September/October 2023 - 73

milk processing costs
Cost to Process 100 lbs Class III Milk
$3.00
$3.20
$3.40
$3.60
$3.80
$4.00
$4.20
$4.40
$4.60
$4.80
$5.00
Cost to process 100lbs class III milk
$4.72
$4.20
$3.96
$3.40
$3.17
$3.31
$3.17
$3.70
$3.51
$3.17
$3.17
$3.17
$3.17
FMMO Class III
$3.17
$3.17
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
California Class III
Source: USDA, CDFA, Dairy Institute of California, StoneX Calculations and Estimates
Cost to process 100lbs class IV milk
Cost to Process 100 lbs Class IV Milk
$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
$3.30
$2.96
$2.75
$2.53
$2.32
$2.17
$2.43
$2.17
$2.17
$2.17
$2.17
$2.17
FMMO Class IV
$2.17
$2.17
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
California Class IV
Source: USDA, CDFA, Dairy Institute of California, StoneX Calculations and Estimates
$2.61
$2.51
$3.83
this when California switched from a
state-run marketing system to a FMMO.
The International Dairy Foods
Association (IDFA), Washington, DC,
also asked Dr. Bill Schiek from the Dairy
Institute of California to extrapolate the
most recent California processing costs to
an estimate of current costs using various
inflation indicators. His analysis suggests
the cost of making cheese and dry whey
was likely up 48% while butter and nonfat
dry milk was up about 51% compared to
the current make allowances.
Currently, a cheese plant gets to
keep $3.17 per hundredweight (cwt.) of
milk it processes to cover its processing
costs, but Bill Schiek's estimate is that
actual costs are currently closer to $4.72.
If the US Department of Agriculure
(USDA) were to adopt these higher make
allowances, it would reduce the minimum
Class III milk price by $1.53/cwt. and it
would reduce the minimum Class IV price
by $1.10/cwt.
IV milk prices are determined. Those are the minimum prices
that dairy processing plants have to pay back to the farmers,
although they can pay more if the supply of milk is tight
or agreements have been made to pay premiums based on
quality, consistent weekly deliveries or other reasons.
Probably the most contentious part of those milk price
formulas is the make allowance. That is the portion of the
revenue from selling bulk commodities that dairy processing
plants get to keep to cover the cost of converting raw milk
into those commodities. The last time make allowances were
changed was in 2008, and that was based on cost surveys
done back in 2005/2006. It is a long and involved process to
update the FMMOs, so the industry has avoided it until now.
So what should the new make allowances be? In the past
the industry has relied on voluntary surveys to try and find
an average cost of processing the different dairy products. A
survey was recently done again and found that costs were up
about 45% for making cheese and dry whey while the cost of
making butter and nonfat dry milk were up a whopping 71%
compared to the current make allowances.
THE COST OF PROCESSING
Previously, the state of California calculated the cost of
processing basic dairy commodities every year using audited
data from the dairy plants in California, but it stopped doing
That is a large and sudden reduction in milk
prices for farmers, so higher make allowances will likely be
phased in over time. While the exact magnitude of the change,
and the timing of the change are unknown, a change is not
likely before January 2025.
Editor's note: This material should be construed as
market commentary, merely observing economic, political
and/or market conditions, and not intended to refer to
any particular trading strategy, promotional element or
quality of service provided by the FCM Division of StoneX
Financial Inc. ( " SFI " ) or StoneX Markets LLC ( " SXM " ). SFI
and SXM are not responsible for any redistribution of this
material by third parties, or any trading decisions taken
by persons not intended to view this material. Information
contained herein was obtained from sources believed to be
reliable, but is not guaranteed as to its accuracy. Contact
designated personnel from SFI or SXM for specific trading
advice to meet your trading preferences. These materials
represent the opinions and viewpoints of the author, and do
not necessarily reflect the viewpoints and trading strategies
employed by SFI or SXM.
Nate Donnay is the Director of Dairy Market Insight at
StoneX Financial Inc. He has been applying his expertise
in large complicated systems and statistical analysis to the
international and US dairy markets since 2005.
DAIRYPROCESSING.COM | SEP-OCT 2023 73
Source: USDA, CDFA, Dairy Institute of California, StoneX Calculations and Estimates
http://www.DAIRYPROCESSING.COM
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