The Block-Barrel Spread And Its Impact on Your Milk Check
Since 2017, the spread between 40 lb blocks of cheese and 500 lb barrels has widened to 10₵/lb, ten times the spread over the past decades.
This widening spread may have cost dairy farmers some $573 million lower milk prices in the past two years and a half, or about 16₵/cwt, says John Newton, chief economist with the American Farm Bureau Federation.
Some farmers smell a rat and some industry observers smell a conspiracy of foreign-owned cheese plants dumping tons of barrel cheese onto markets. Neither is really true, says Newton.
“It is important to note that end-product price formulas are working exactly as designed by reflecting the value of both blocks and barrels in the milk price formula,” he says. “The challenge is that when end-product pricing was envisioned, a wide block-barrel spread was unanticipated, and now the impact is perceived to be weighing down the regulated milk price.”
It all gets complicated quickly, and solutions are not easy to come by.
“Eliminating barrel prices from the survey and formulas would put the onus of price discovery in cheese markets on blocks alone; without mandatory price reporting, market signals, such as the block-barrel spread, would be less transparent,” he says.
And it may not affect farm gate prices anyway. “The use of only blocks in the pricing formula will increase only the regulated minimum price paid by beverage milk plants,” says Newton. Note: Federal Order minimum prices are not enforced on Class III and IV products, such as cheese and butter.
“As a result, the higher announced Class III price that uses only blocks could be offset by lower premiums or other discounts—resulting in no change to the market clearing milk price,” he says.
Newton suggest expanding mandatory price reporting might be the best path forward. “If the desire is to improve milk price discovery, more, not less, information may be the way to go,” Newton says.
You can read his entire article on the block-barrel issue here.