REPORT OF NAJ GENERAL MANAGER
Negative PPDs Persist Post-Pandemic Excerpts from the report of Erick Metzger, General Manager National All-Jersey Inc. (NAJ) at the 63rd Annual Meeting of the organization on June 26, 2021, in Bettendorf, Iowa.
year. Though we have seen negative PPDs previously, they have largely come and gone in short order. This time, they have hung around. The PPD average across the seven FMMOs has been negative 10 of the past 11 months. In the California and Pacific Northwest Orders, the PPD has been negative 11 straight months. Negative PPDs occur when the FMMO Class III price is greater than the uniform price (a weighted average of Class I, II, III and IV milk). In normal circumstances, the uniform price is greater than the Class
drops further and causes even greater negative PPDs. In our example, if 200 million pounds of Class III milk dropped to 10 million pounds of pooled Class III milk, the uniform price would drop to $12.97 and the hough most of agriculture is returnPPD to -$8.00. ing to more normal conditions post This is what happened in Federal Order pandemic, the dairy industry is still expeafter Federal Order, month after month, riencing long-term fallout due to negative over the past year. Producer Price Differentials (PPDs) and And while de-pooling was certainly a de-pooling. As well, momentum is gaining great contributor to negative PPDs, even for an overhaul of Federal Milk Marketing more impactful was the spread between the Orders (FMMOs) so the system better reClass III and Class IV price, according to an flects industry trends. It is as analysis by Dr. Marin Bozic important as ever for Jersey of the University of MinCalculation of Producer Price Differential breeders to come together nesota and Dr. Christopher JUNE 2020 - POOLED through an entity like NAJ Wolf of Cornell University. to ensure the interests of For the first five months Class Pooled Pounds Utilization Price Pooled Value high component producers of 2020, the spread averClass I 50,000,000 15.6% $11.42 $5,710,000 are represented in dairy aged a relatively normal Class II 20,000,000 6.3% 12.99 2,598,000 policy. $1.14 per hundredweight. Class III 200,000,000 62.5% 21.04 42,080,000 In this situation, Class I Class IV 50,000,000 15.6% 12.90 6,450,000 State of the Industry milk was the highest priced Total 320,000,000 $56,838,000 The single most imporin the pool and resulted in Uniform Price/Hundredweight 17.76 tant thing to know is that a positive PPD. But the PPD (3.28) we are producing a lot of rapid runup of Class III milk—record levels of milk, JUNE 2020 - DEPOOLED milk prices after the first six in fact. May production was weeks of the pandemic disClass Pooled Pounds Utilization Price Pooled Value up 4.6% over last year and rupted that balance. Cheese Class I 50,000,000 38.5% $11.42 $5,710,000 4.2% over 2019. We proprices that were previously Class II 20,000,000 15.4% 12.99 2,598,000 duced more milk this May $1 per pound on the CME Class III 10,000,000 7.7% 21.04 2,104,000 than we have since USDA were trading at $3. HowClass IV 50,000,000 38.5% 12.90 6,450,000 has been tracking producever, Class IV prices for Total 130,000,000 $16,862,000 tion. Cow numbers are way butter and nonfat dry milk, up too, with more than 9.5 Uniform Price/Hundredweight 12.97 which determine the Class PPD (8.07) million cows (up 145,000 IV price, did not follow over May 2019). And there suit. The last seven months appears to be no end to the growth, with an III price and the PPD is positive. But we of 2020 yielded an average spread of $7.20 additional 5,000 in May versus April. have had anything but normal price relabetween Class III and Class IV prices. With If the U.S. continues to crank out milk at tionships since the onset of the pandemic. a spread that large, the uniform price canthis pace, demand, principally as exports, The example above illustrates how a lower not be higher than the Class III price, and will need to continue too. Exports have uniform price ($17.76) and a higher Class a negative PPD will result. been strong the first half of the year, espeIII price ($21.04) equates to a negative PPD Also contributing to the negative PPDs cially to China, and world prices are favor(-$3.28) for June 2020. was a restructure of the Class I price forable. Last month, the Global Dairy Trade What compounds the PPD issue is demula. With the 2018 Farm Bill, the formula auction, a proxy for world prices, reported pooling, whereby handlers of Class III milk was changed from being the higher of Class cheddar prices $0.45 per pound higher than have the option to keep their milk in the III or Class IV to be the average of the two, the Chicago Mercantile Exchange (CME). pool or not. They can keep their milk in the plus $0.74 (the historical difference beButter was $0.30 higher and skim milk pool and pay the FMMO the equivalent of tween Class III and Class IV milk). Though powder was $.25 higher. Based on these the negative PPD ($3.28) so all producers traditional price relationships support posiprices, the U.S. should have ample export can be paid the uniform price ($17.76). Or tive PPDs, recent months cannot. opportunities. they can take that milk out of the pool— de-pool it—and pay the going rate. When Estimating the Value of De-Pooled Milk Negative PPDs widespread de-pooling occurs, significant What is the value of that de-pooled milk? Negative PPDs and de-pooling have had amounts of the higher-priced Class III milk And why does it matter? great impact on milk checks over the past are pulled from the pool. The uniform price (continued to page 34)
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JERSEY JOURNAL
