Dairy Market Update: What's up with Whey?

A lot of attention is being paid to the current record high prices for whey products, both in the U.S. and in international markets. The U.S. Department of Agriculture's (USDA) Agricultural Marketing Service (AMS) reported last week, that the midpoint of the Central States price for dry whey reached $0.6950 per pound; just six short months ago, in August 2006, the average price for dry whey was only $0.3118. Before 2006, the highest monthly average price since 1990 was $0.3305, and it was set in December 1997.

USDA's National Agricultural Statistics Service (NASS) also publishes a dry whey price, which is used in the dry whey product price formula to determine the Class III minimum price in federal orders. For the week ending February 17 (the most recent data available), NASS reported a weighted average price of $0.6141 based on its survey of more than 12.1 million pounds sold that week.

It's not just the U.S. domestic market price that has risen so sharply. The most recent international market price in Europe as reported by USDA AMS for the two-week period ending February 16 showed a midpoint of $0.67 per pound. Just like in the U.S., the highest monthly average price in Europe prior to 2006 was $0.35 over ten years ago.

One result of this strong market for whey is the announcement last week by the Chicago Mercantile Exchange that it would begin trading a futures contract for dry whey on March 19, 2007. This contract will be cash-settled to the USDA NASS monthly average price that is used in the federal order Class III minimum price each month.

Since the January 2000 advent of using product price formulas to determine federal order minimum prices for milk, it has been easy to assign a value to what this increase in dry whey prices means to dairy producers in their milk check. Prior to 2000, however, federal orders relied on a competitive price series to determine minimum prices. That M-W price series represented what manufacturers paid for the Grade B milk used to make manufactured dairy products, but it was dominated by cheese plants.

Even before 2000, whey had some value to those cheese manufacturers, and that value was reflected in the competitive market price paid for Grade B milk, which in turn became part of the federal order minimum price. If the market price of dry whey back then had reached the levels seen today, the competition for farm milk would have included the higher value of whey in the price of Grade B milk and, in turn, the federal order minimum milk prices.

What's the difference today? The use of product price formulas in federal order minimum prices has removed market competition for farm milk from the equation. Processors are locked into paying the full value of any price increase in dry whey to dairy producers under federal order regulation.

The competitive market for farm milk also used to determine how manufacturers reacted to increases in costs of processing by adjusting farm milk prices. When processing costs increase today, the only recourse is for manufacturers to request a hearing to change the make allowances in the product price formulas; previously the competitive market farm milk price used to adjust every month to such changes.

As recent events have shown, the process of submitting a petition and holding a federal order hearing is slow; USDA has only begun this month to implement changes sought by IDFA and others in petitions first filed in September 2005 —17 months ago. And even this decision by USDA is only tentative.

In addition, a hearing's outcome can be uncertain. The recent decision by USDA was not only put off one month due to a lawsuit, but it has been criticized by IDFA and many dairy cooperatives that manufacture dairy products for not providing a sufficient allowance. The costs of processing have increased greatly in the past seven years since changes to the make allowances were last considered.

Posted February 26, 2007