1. Cheese Manufacturing Margins: Balancing Cooperative and Producer Interests Brian W. Gould Associate Professor Department of Agric. and Applied Economics University of Wisconsin-Madison

2. Daily CME Block Prices: 2005-2006

4. Emergency Federal Order Hearing  Initiated via request by Agri-Mark, Inc., Nov. 2005  Change make allowances to account of higher production costs  Adjust protein price in Class III formula to recognize reduced value of whey butter  Reduce the 3¢ addition to NASS survey barrel cheddar price to 1.5¢ block  Hearing held over Jan. 24 – Jan. 27 period  Complete hearing record including exhibits available at: www.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htm

5. Current and Proposed Make Allowances (¢/lb) Current Federal Order CaliforniaAgri-Mark ValueCA-FOValueAM-FOAM-CA Cheese16.517.10.618.11.61.0 Butter11.515.64.115.43.9-0.2 NFDM14.015.21.219.75.74.5 Dried Whey15.920.04.121.94.11.9 CA-FO = California make allowance – Federal Order make allowance AM-FO = Agri-Mark make allowance – Federal Order make allowance AM-CA = Agri-Mark make allowance – Federal Order make allowance

6. All Cheese40-lb Block ¢/lb% % Wages & Benefits5.40637.96.04635.5 Energy-Related1.2999.11.1816.9 Packaging Materials1.83512.91.94411.4 Other Materials2.52217.72.69015.8 Repair & Maintenance0.7855.51.1446.7 Depreciation0.7935.60.9005.3 Other Non-Milk1.62711.43.11518.3 Simple Average14.27 17.02 Weighted Average13.30 15.14 California Survey Results-----17.69 2004 Dairy Product Plant Costs Source: Charles Ling, USDA Rural Development Cooperative Programs, 2006 and California Dept. of Food and Agriculture, 2005

7. Cond. Whey (Solids) Dried WheyButterNFDM ¢/lb% % % % Wages & Benefits2.36335.22.88725.06.88338.06.79831.7 Energy-Related2.03030.23.27728.41.86210.35.02823.5 Packaging Materials0.0000.00.9408.12.76915.31.3756.4 Other Materials0.68010.11.19710.41.3947.71.3516.3 Repair & Maint.0.4496.70.6725.80.7484.11.7838.3 Depreciation0.4947.30.8357.21.5418.52.0339.5 Other Non-Milk0.70610.51.73815.12.9416.23.04914.2 Simple Average6.722 11.55 18.14 21.42 Weighted Average6.549 11.41 16.59 16.82 CA Survey Results26.7313.6815.71 2004 Dairy Product Plant Costs Source: Charles Ling, USDA Rural Development Cooperative Programs, 2006 and California Dept. of Food and Agriculture, 2005

8. Cheesemaker Margins and Energy Costs 2004 Average Jan 2006 Total Change Elec.FuelsTotalElec.FuelsTotal All Cheese0.4250.8741.2990.4841.4901.9740.675 40-lb Block0.4250.7561.1810.4841.2891.7730.592 Cond. Whey0.3941.6362.0300.4492.7893.2371.207 Dried Whey1.0102.2673.2771.1503.8645.0151.738 Butter0.9140.9481.8621.0411.6162.6570.795 NFDM1.2073.8215.0281.3756.5137.8882.860 Estimated Energy Costs (¢/lb of product) Source: 2004: Charles Ling, USDA Rural Development Cooperative Programs, 2006: Estimated from PPI: 1.969 adj. for Fuels and 1.156 for Elec.

11. Recent Cheesemaker Gross Margins  We undertook an analysis of gross margins from cheese manufacture and effect of energy price increases  Federal Order Product Price Formulas and Cheesemaker Margins: A Closer Look by E.V. Jesse and B.W. Gould  Undertook this analysis in Oct. 2005  Can be downloaded from the UW Dairy Marketing Website: www.aae.wisc.edu/future

12. Recent Cheesemaker Gross Margins  We estimated cheesemaker gross margin over the 1991-2005 period  Gross margins are defined as value of sales of cheese and by-products (e.g., whey, butter, etc)  We recognize that actual margins will vary across plant because of scale, yield differences, production technologies and uniquely negotiated prices

13. Recent Cheesemaker Gross Margins  Cheddar Cheese yield simulated via Van Slyke formula  38% cheese moisture  109% solids retention factor  91.5% fat recovery  82.93% true protein recovery  Milk composition  3.5% BF  2.99% protein  → cheese yield of 9.8 lbs. Values assumed in current Class III Constants Used in Van Slyke Formula

14. Jan. 1, 2000 Formulas Jan. 1, 2001 Formulas April. 1, 2003 Formulas Note: Total margin includes the value of cheese, butter and whey sales Total Margin Cheese Only Margin

15. Contact Information  Brian W. Gould: gould@aae.wisc.edu  Access the UW Dairy Marketing Web Site: www.aae.wisc.edu/future

16. Cheese Manufacturing Margins: Balancing Cooperative and Producer Interests