Regulated milk prices guaranteed to farmers in the U.S. are based on end-product pricing formulas and mandatory price reporting for wholesale butter, cheddar cheese and dry milk powders. This pricing methodology was crafted nearly two decades ago and has remained virtually unchanged since then (How Milk Is Priced in Federal Milk Marketing Orders: A Primer).
A Widening Block-Barrel Spread
One of the challenges of a regulated, rigid pricing system is the unintended economic impacts of the free market. This is the case in today’s cheese and whey markets. For the better part of the last 20 years, block and barrel cheese prices have followed each other closely, with an average difference of 1 cent per pound, and milk pricing formulas essentially weighted them equally. Since 2017, however, things have changed: Increased barrel cheese production and increased demand for whey proteins derived from barrel cheese have resulted in a widening price spread between block and barrel cheese. That spread is equivalent to a nearly $600-million-dollar reduction in dairy farm revenue over the past two and a half years. This divergence in block and barrel prices was likely unforeseen by the architects of the current milk pricing system two decades ago.
USDA announces a monthly weighted average price for cheddar cheese based on the prices of both 40-pound blocks and 500-pound barrels. The announced cheese price is equal to the weighted average of the block price and the barrel price plus 3 cents. Prior to 2017, the difference between the block price and the barrel price averaged slightly more than 1 cent per pound and ranged from a low of -9.6 cents per pound to a high of 13 cents per pound. However, beginning in 2017, the block-barrel spread began to widen, averaging nearly 10 cents per pound and reaching a record-high of 22 cents per pound in October 2018, Figure 1.
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