Cheese Manufacturing Margins: Cheese Manufacturing Margins: Balancing Cooperative and Producer Balancing Cooperative and Producer

InterestsInterests

Brian W. GouldBrian W. Gould

Associate ProfessorAssociate Professor

Department of Agric. and Applied EconomicsDepartment of Agric. and Applied Economics

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

Daily CME Block Prices: 2005-2006Daily CME Block Prices: 2005-2006

R2 = 0.5793

110

120

130

140

150

160

170

180

1/31/

242/

14 3/73/

284/

18 5/95/

306/

207/

11 8/18/

229/

1210

/310

/2411

/1412

/512

/261/

16 2/62/

273/

20

Cents/lb

Support

Daily CME Block

Trend Line

PPI: Natural Gas and Electricity

80

100

120

140

160

180

200

220

240

PP

I (A

vg. 2

003=

100) Natural Gas

Industrial Electric

Emergency Federal Order HearingEmergency Federal Order Hearing Initiated via request by Agri-Mark, Inc., Nov. 2005Initiated via request by Agri-Mark, Inc., Nov. 2005

Change make allowances to account of higher Change make allowances to account of higher production costsproduction costs

Adjust protein price in Class III formula to recognize Adjust protein price in Class III formula to recognize reduced value of whey butterreduced value of whey butter

Reduce the 3¢ addition to NASS survey barrel Reduce the 3¢ addition to NASS survey barrel cheddar price to 1.5¢ blockcheddar price to 1.5¢ block

Hearing held over Jan. 24 – Jan. 27 periodHearing held over Jan. 24 – Jan. 27 period

Complete hearing record including exhibits available at:Complete hearing record including exhibits available at: www.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htmwww.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htm

Current and ProposedCurrent and ProposedMake Allowances (¢/lb)Make Allowances (¢/lb)

CurrentFederal Order

California Agri-Mark

Value CA-FO Value AM-FO AM-CA

Cheese 16.5 17.1 0.6 18.1 1.6 1.0

Butter 11.5 15.6 4.1 15.4 3.9 -0.2

NFDM 14.0 15.2 1.2 19.7 5.7 4.5

Dried Whey 15.9 20.0 4.1 21.9 4.1 1.9

CA-FO CA-FO = California make allowance – Federal Order make allowance= California make allowance – Federal Order make allowanceAM-FO = Agri-Mark make allowance – Federal Order make allowanceAM-FO = Agri-Mark make allowance – Federal Order make allowanceAM-CA = Agri-Mark make AM-CA = Agri-Mark make allowance – Federal Order make allowanceallowance – Federal Order make allowance

 

All Cheese 40-lb Block¢/lb % ¢/lb %

Wages & Benefits 5.406 37.9 6.046 35.5

Energy-Related 1.299 9.1 1.181 6.9

Packaging Materials 1.835 12.9 1.944 11.4

Other Materials 2.522 17.7 2.690 15.8

Repair & Maintenance 0.785 5.5 1.144 6.7

Depreciation 0.793 5.6 0.900 5.3

Other Non-Milk 1.627 11.4 3.115 18.3

Simple Average 14.27   17.02  

Weighted Average 13.30   15.14

California Survey Results ----- 17.69  

2004 Dairy Product Plant Costs2004 Dairy Product Plant Costs

Source: Charles Ling, USDA Rural Development Cooperative Programs, 2006 andCalifornia Dept. of Food and Agriculture, 2005

 

Cond. Whey

(Solids)Dried Whey Butter NFDM

¢/lb % ¢/lb % ¢/lb % ¢/lb %

Wages & Benefits 2.363 35.2 2.887 25.0 6.883 38.0 6.798 31.7

Energy-Related 2.030 30.2 3.277 28.4 1.862 10.3 5.028 23.5

Packaging Materials 0.000 0.0 0.940 8.1 2.769 15.3 1.375 6.4

Other Materials 0.680 10.1 1.197 10.4 1.394 7.7 1.351 6.3

Repair & Maint. 0.449 6.7 0.672 5.8 0.748 4.1 1.783 8.3

Depreciation 0.494 7.3 0.835 7.2 1.541 8.5 2.033 9.5

Other Non-Milk 0.706 10.5 1.738 15.1 2.94 16.2 3.049 14.2

Simple Average 6.722   11.55   18.14   21.42  

Weighted Average 6.549   11.41   16.59   16.82  

CA Survey Results 26.73 13.68 15.71

2004 Dairy Product Plant Costs2004 Dairy Product Plant Costs

Source: Charles Ling, USDA Rural Development Cooperative Programs, 2006 andCalifornia Dept. of Food and Agriculture, 2005

Cheesemaker Margins and Energy CostsCheesemaker Margins and Energy Costs

2004 Average Jan 2006 Total

ChangeElec. Fuels Total Elec. Fuels Total

All Cheese 0.4250.425 0.8740.874 1.2991.299 0.4840.484 1.4901.490 1.9741.974 0.6750.675

40-lb Block 0.4250.425 0.7560.756 1.1811.181 0.4840.484 1.2891.289 1.7731.773 0.5920.592

Cond. Whey 0.3940.394 1.6361.636 2.0302.030 0.4490.449 2.7892.789 3.2373.237 1.2071.207

Dried Whey 1.0101.010 2.2672.267 3.277 1.1501.150 3.8643.864 5.015 1.7381.738

Butter 0.9140.914 0.9480.948 1.8621.862 1.0411.041 1.6161.616 2.6572.657 0.7950.795

NFDM 1.2071.207 3.8213.821 5.028 1.3751.375 6.5136.513 7.888 2.8602.860

Estimated Energy Costs (Estimated Energy Costs (¢¢/lb of product)/lb of product)

Source: 2004: Charles Ling, USDA Rural Development Cooperative Programs, Source: 2004: Charles Ling, USDA Rural Development Cooperative Programs, 2006: Estimated from PPI: 1.969 adj. for Fuels and 1.156 for Elec.2006: Estimated from PPI: 1.969 adj. for Fuels and 1.156 for Elec.

Estimated Cheddar Cheese Energy Costs: Jan 2004-Jan 2006

0.85

1.00

1.15

1.30

1.45

1.60

1.75

1.90

2.05

Cen

ts/lb

Estimated Dried Whey Energy Costs:Jan 2004-Jan 2006

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

Cen

ts/lb

Recent Cheesemaker Gross MarginsRecent Cheesemaker Gross Margins

We undertook an analysis of gross margins from We undertook an analysis of gross margins from cheese manufacture and effect of energy price cheese manufacture and effect of energy price increasesincreases Federal Order Product Price Formulas and Federal Order Product Price Formulas and

Cheesemaker Margins: A Closer LookCheesemaker Margins: A Closer Look by by E.V. Jesse and B.W. GouldE.V. Jesse and B.W. Gould

Undertook this analysis in Oct. 2005Undertook this analysis in Oct. 2005Can be downloaded from the UW Dairy Can be downloaded from the UW Dairy

Marketing Website: Marketing Website: www.aae.wisc.edu/futurewww.aae.wisc.edu/future

Recent Cheesemaker Gross MarginsRecent Cheesemaker Gross Margins

We estimated cheesemaker gross margin over the We estimated cheesemaker gross margin over the 1991-2005 period1991-2005 period Gross margins are defined as value of sales of Gross margins are defined as value of sales of

cheese and by-products (e.g., whey, butter, etc)cheese and by-products (e.g., whey, butter, etc) We recognize that actual margins will vary across We recognize that actual margins will vary across

plant because of scale, yield differences, plant because of scale, yield differences, production technologies and uniquely negotiated production technologies and uniquely negotiated pricesprices

Recent Cheesemaker Gross MarginsRecent Cheesemaker Gross Margins

Cheddar Cheese yield simulated via Van Slyke Cheddar Cheese yield simulated via Van Slyke formulaformula38% cheese moisture38% cheese moisture109% solids retention factor109% solids retention factor91.5% fat recovery91.5% fat recovery82.93% true protein recovery82.93% true protein recovery

Milk compositionMilk composition3.5% BF3.5% BF2.99% protein2.99% protein→ → cheese yield of 9.8 lbs.cheese yield of 9.8 lbs.

Values assumed in current Class IIIValues assumed in current Class III

Constants Used inConstants Used inVan Slyke FormulaVan Slyke Formula

Imputed Total and Cheese Only Plant Margins

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

$/C

wt.

Jan. 1, 2000Formulas

Jan. 1, 2001Formulas

April. 1, 2003Formulas

Note: Total margin includes the valueof cheese, butter and whey sales

Total Margin

Cheese OnlyMargin

Contact InformationContact Information

Brian W. Gould: gould@aae.wisc.eduBrian W. Gould: gould@aae.wisc.edu

Access the UW Dairy Marketing Web Site: Access the UW Dairy Marketing Web Site: www.aae.wisc.edu/futurewww.aae.wisc.edu/future

Cheese Manufacturing Margins: Cheese Manufacturing Margins: Balancing Cooperative and Producer Balancing Cooperative and Producer

InterestsInterests