Spot Class III milk prices in the Upper Midwest have pushed to $2.63 per hundredweight (cwt.) over class values. That’s the highest midpoint since February 2019, prior to the COVID-19 pandemic. While that $2.63 figure represented the average, prices ranged from $2.25 to $3 during the third week of August. Just one week earlier, the range pushed to $3.50, and that was the highest spot figure dating back to February 2021, according to data collected by USDA.
These positive values for milk over the Class III market baseline essentially mean that milk supplies are getting somewhat tight. In July, the Class III price was $19.79 per cwt. and the August 2024 Class III futures closed at $20.66 on Friday, August 23. As a result, dairy processing plants are willing to pay premium prices above the prevailing Class III price to secure tanker loads of milk. While these premiums for milk typically occur in the marketplace following the spring and early summer flush of milk, this year’s premiums are taking place a little bit sooner when compared to the five-year average in the Upper Midwest.
Overall, it stands to reason that milk supplies are getting tight as milk production has been down for 13 straight months. Even though component production, largely butterfat and protein, continues to grow, it’s not been enough to meet dairy processors needs, as discussed in a recent webinar with CoBank and Terrain. Strong processor demand has driven the positive $2.63 Spot Class III milk price in the Upper Midwest.
How spot milk moves in market
Moving milk from farm to processor is one of the most complex marketing endeavors among all farm commodities within the United States. While dairy cooperatives process roughly 60% of the nation’s milk into dairy products, those same dairy cooperatives collect and market about 87% of the nation’s milk supply, according to the most recent USDA research. With that high market share, dairy cooperatives collectively process and/or market more of their farm owner’s product than any other farm commodity.
Most milk that doesn’t go through cooperative processing plants is shipped directly to private proprietary plants. That milk, more often than not, is shipped under preexisting contracts between the dairy cooperative and the proprietary processor.
However, milk supplies vary on a daily basis, and cooperatives don’t have contracts to sell all their milk from its dairy farm members. That’s where spot milk comes into play.
Spot milk is essentially “free agent” milk that cooperatives need to locate a processing home for. During the spring and summer flush, and when the school year ends and reduces fluid milk sales, there is typically more spot milk than processors want to run through their processing plants because they are already at capacity. That’s when the spot milk prices fall under Class III values. Cooperatives are essentially discounting that milk to more easily find a home. That discount serves numerous purposes, including providing financial incentives for propriety plants to process the milk and perhaps paying plant laborers overtime to run the plant extra hours. That’s just one of the many business factors for spot milk falling under class averages.
On the flip side, when spot prices go over the average, milk sellers are asking for a premium for that milk because cooperatives have multiple bidders for the same milk or could just as easily process it themselves. In this specific time of year, schools are going back into session, and that’s also pulling milk into the fluid market.
