Profit Maximizing Strategies for Standardizing Milk for Cheese Manufacture

Profit Maximizing Strategies for Standardizing Milk for Cheese Manufacture D. Barbano, J. Pratt, A. Novakovic, " and I. Samakidis A prototype computer program to assist cheesemakers evaluate their milk resource utilization

2 The program we'll describe today is a linear programming model of cheese manufacturing which considers whey products as well as cheese yields, based on the van Slyke and Price cheese. yield formula or on a Cornell modification of this formula (Barbano). The objective is to maximize net revenue, defined as the difference between the revenue from cheese and whey products and the cost of milk resources. The constraints in the model consider mass balances for each milk component between: a) milk resources and standardized milk, and b) standardized milk and cheese/whey products. Additional constraints on milk resource availability can also be imposed. In the data entry part of the program, the user provides price and composition information for milk resources as well as cheese and whey products to be manufactured. In the solution report part of the program, the solution is presented in both physical and financial terms and an indication of the solution's sensitivity to changes in prices and technical relationships is given. ' Program Structure Page Page Data Entry Screens Solution Report Screens Composition and Prices of Milk Resources 4 Standardized Milk Composition 7 Composition and Prices Use of Milk Resources 7 of Products 5 Products Manufactured 7 Batch Size and Milk Resource Constraints 6 Financial Summary 8 Sensitivity Analysis 9

3 EXAMPLE A Based on our estimates of: (1) current milk resource compositions and prices, (2) cheese and whey product prices, (3) a very common specification for cheddar cheese (moisture, FDB and salt), and (4) milk component retention factors (fat, casein, and nonfat-noncasein solids), we obtained a "base" solution. Input and output screens for this solution are on the following pages.

Example A COMPOSITION AND PRICES OF MILK RESOURCES MW Price @3.5% fat S/cwt 12.41 Butterfat Differential 0.052 RAW MILK 3.74 Protein % 3.29 Total Solids % 12.63 Protein 15 Total Solids % NDM 0.8 36.53 97 Price S/cwt 12.76 Price_$/lb 1.09 SKIM MILK 0.1 Protein % 3.41 Total Solids % 9 Protein % Total Solids % CONDENSED SKIM 0.33 13.078 35 Price $/cwt 11.25 Price S/lb Solids 1.328 REMOVED CREAM 40 Protein % 2.0506 Total Solids % 45.541 Price S/lb fat 0.7875 Protein % Total Solids % Price S/lb fat ADDED CREAM 40 2.035 45.403 0.825

5 Example A COMPOSITION AND PRICES OF PRODUCTS Cheese type 1 Cheddar 1 (Crtl-M for list) Cheese yield formula 1 Van slyke 2 (Crtl-M for list) Fat retention 0.93 Casein retention 0.96 Retention factor 1.09 Calcium phosphate factor NA Solids exclusion factor NA Moisture % 37 FDB Min % 50 FOB Max % 53.5 Salt % 1.7 Price of cheese $/lb 1.44 Whey fat 1; 40 Whey fat recovery % 100 Price of grade-b butter $/lb 0.62 Price of whey cream $/lb of fat 0.775 Whey products: 2 Whole whey powder (wwp)3 (Crtl-M for list) Price of sep. whey S/lh solids NA Price of WWP (97% solids) S/lb 0.2 Price of WPC (34.5% protein) S/lb NA Price of whey protein product $/lb NA Protein of whey protein product ~ Price of lactose (95% lactose) $/lb NA Cost of waste $/lb of solids NA Protein recovery for WPC (or whey protein product) % NA (Ctrl-H for help) Yield of lactose % NA NA CD 1 CHEDDAR 2 MOZZARELLA 3 SWISS 4 OTHER @ 1 2 Van Slyke Barbano I-Separated whey 2-Whole whey powder (WWP) 3-WPC (34.5%) w/ lactose 4-WPC (34.5%) w/o lactose 5-0ther with lactose 6-0ther w/o lactose

6 Example A BATCH SIZE AND CONTRAINTS ON USE OF MILK RESOURCES Batch size (lbs) : 100 MINIMUM, MAXIMUM Total solids in the VAT (%) : 14 Amount of RAW milk to be used (lbs) : 0 Amount of NDM to be used (lbs) : 0 10000 Amount of SKIM milk to be used (lbs): 0 0 Amount of COND-SKIM to be used (lbs): 0 10000 Amount of ADDED CREAM to be used ( Ibs) : 0 10000 Casein as portion of protein content in the standardized milk (%) 78

.., Example A STANDARDIZED MILK COMPOSITION FILE NAMEccdrnpr1 Fat (%) 4.1279 casein to fat ratio 0.6925 Protein (%) 3.6647 Casein (%) 2.8585 USE OF MILK RESOURCES Lactose (%) Total solids (%) 5.3853 14 Raw milk (lbs) 97.6639 Condensed skim milk (lbs) 0 NDM (lba) 1.1714 SkLm milk (lbs) 0 PRODUCTS MANUFACTURED Added cream (lba) Removed Cream (lbs) 1.1647 o Cheese (lbs) 11.3898 of Cheddar Moisture (\) 37 Whey Cream elba) 0.7224 FDB (%) 53.5 Fat (%) " 40 Separated whey (lba) Separated whey solids (lba) 88".0814 6.6764 Whole whey powder (97% solids) (lba) 6.8828 WPC (34.5% protein) (lbs) 0 Whey protein product (lbs) 0 Whey protein product protein (%) 0 Lactose (95% lactose) (lbs) 0 Waste (lba of solids) 0

8- Example A OPTIMAL SOLUTION FINANCIAL SUMMARY FILE NAMEccdmpr1 Batch size (lbs) 100 COSTS (per batch) I. REVENUES (per batch) Raw milk ( S ) 12.4619 Removed cream ( $ ) 0.., NOM ($) 1.2768 Cheese ( $) 16.4013 Skim milk ( 5 ) 0 Whey cream ( $ ) 0.2239 Condensed skim milk ( $ ) 0 Separated whey ( S ) 0 Added cream ($ ) 0.3844 Whole whey powder ( $) 1.3766 Waste ($ ) 0 WPC ($) 0 Whey protein product (S) 0 Lactose ($) o Total cost (5) 14.1231 Total revenue ($) 18.0018 NET REVENUE ($/batch) 3.8788

Example A SENSITIVITY ANALYSIS FILE NAMEccdmpr1 RANGES IN which THE BASIS IS UNCHANGED VARIABLE CURRENT VALUE ALLOWABLE ALLOWABLE INCREASE DECREASE Raw milk 12.76 $/cwt 9.0892 18.4638 NOM 1.09 $/lb 0.2418 1.8934 Skim milk 11.25 S/cwt 9999899.498 99999999 Condensed skim 1.328 $/lb sol.285711.2266 0.2019 Added cream 0.825 S/ib fat 0.8922 0.0383 Removed cream 0.7875 S/lb fat 0.0384 99999999 Cheese 1.44 S/lb 19.0937 0.3859 Whey cream 0.775 S/lb fat 752.6296 15.2117 Separated whey 0 $/lb solo 0 Whole whey powder 0.2 $/1b 2.5122 0.6655 WPC 0 $/lb 0 0 Whey protein product 0 $/lb 0 0 Lactose 0 $/lb 0 0 Waste 0 $/lb sol.o 0 1% increase in the Total Solids content of cheese milk results in an increase of net revenue per batch by $ 0.32 0.1% increase in the FDB content of cheese results in an increase of net revenue per batch by $ 0.03 0.1% increase in the Moisture content of cheese results in an increase of net revenue per batch by $ 0.03 0.1% increase in both FOB and Moisture of cheese results in an increase of net revenue per batch by S 0.05

10 EXAMPLE B To illustrate the meaning of the sensitivity analysis part of the output, notice from page 9 that the "allowable decrease" for condensed skim is 20.19. This means, literally, that if the price of condensed skim in Example A is reduced by 20.19 and all other prices and technical relationships stay the same, something will change with respect to the choice of inputs or outputs. In many cases, like this one, we can easily guess the change which will take place, but sometimes the change is more difficult to anticipate. While Example B's optimal milk resource usage differs from A's with respect to the resources used (condensed skim instead of NOM), you can see that the revenues and costs and, consequently, net revenues, are almost identical. Also, you might notice that the allowable decrease for NDM is now very small,.3. In effect, by reducing the condensed skim price to $1.12, we have made condensed skim and NOM very close substitutes. At these prices it doesn't matter, in net revenue terms, which resource you use.

111 Example B COMPOSITION AND PRICES OF MILK RESOURCES MW Price @3.S% fat $/cwt 12.41 Butterfat -Differential 0.052 RAW MILK. 3.74 Protein % 3.29 Total Solids % 12.63 Protein % Total Solids % NDM 0.8 36.53 97 Price $/cwt 12.76 Price $/lb 1.09 SKIM MILK 0.1 Protein % 3.41 Total solids % 9 Protein % Total Solids % CONDENSED SKIM 0.33 13.078 35 Price S/cwt 11.25 Price $/lb solids 1.12 REMOVED CREAM 40 Protein % 2.0506 Total Solids % 45.541 Price S/lb fat 0.7875 Protein % Total Solids % Price $/lb fat ADDED CREAM 40 2.035 45.403 0.825

12' Example B STANDARDIZED MILK COMPOSITION FILE NAMEccdmpr2 Fat (%) 4.1272 Casein to fat ratio 0.6925 Protein (%) 3.6641 Lactose (%) 5.3862 Casein (%) 2.858 Total solids (%) 14 USE OF MILK RESOURCES Raw milk (lbs) 94.5476 Condensed skim milk (lbs) 4.0077 NDM (lhs) o Added cream (lbs) 1.4447 Skim milk (lbs) 0 Removed Cream (lbs) o PRODUCTS MANUFACTURED Cheese (lbs) 11.3879 of Cheddar Moisture (%) 37 Whey Cream (lbs) 0.7223 FDB (%) 53.5 Fat (%) 40 MANUFACTURED PRODUCTS (continues) FILE NAMEccdmpr2 Separated whey (lbs) 88.0834 Separated whey solids (lbs) 6.6776 Whole whey powder (97% solids) (lbs) 6.8841 WPC (34.5% protein) (lbs) a Whey protein product ( Ibs) 0 Whey protein product protein ( %) 0 Lactose (95% lactose) (lbs) 0 waste (lbs of solids) 0

13 Example B OPTIMAL SOLUTION FINANCIAL SUMMARY FILE NAMEccdmpr2 Batch size (lbs) 100 COSTS (per batch) I REVENUES (per batch) Raw milk (S) 12.0643 Removed cream ($) o NDM (5) o Cheese "" ( $ ) 16.3986 Skim milk (5) o Whey cream ($) 0.2239 Condensed skim milk (S) 1.571 Separated whey ($) o Added cream ($) 0.4768 Whole whey powder ($) 1.3768 Waste ($) o WPC ($) o Whey protein product ($) 0 Lactose ($) o ======================================= "======================================== Total cost ($) 14.112 Total revenue ($) 17.9993 NET REVENUE ($/batch) 3.8873

14 Example B SENSITIVITY ANALYSIS FILE NAMEccdmpr2 RANGES IN WHICH THE BASIS IS UNCHANGED VARIABLE CURRENT VALUE ALLOWABLE INCREASE Raw milk 12.76 $/cwt 173.6773 NOM 1.09 $/lb 99999999 Skim milk 11.25 $/cwt 9999899.5 Condensed skim 1.12 $/lb sol.6.1e-3 Added cream 0.825 $/lb fat 0.076 Removed cream 0.7875 $/lb fat 0.038<f Cheese 1.44 $/lb 4.4882 Whey cream 0.775 $/lb fat 176.9132 Separated whey a $/lb solo ALLOWABLE DECREASE 0.273 7.3E-3 99999999 1. 5751 0.0383 99999999 0.3939 15.5259 a Whole whey powder 0.2 $/lb 2.499 WPC a $/lb 0 Whey protein product a $/lb 0 Lactose 0 $/lb a Waste o $/lb 801. 0 0.6769 a o o o 1% increase in the Total Solids content of cheese milk results in an increase of net revenue per batch by $ 0.33 0.1% increase in the FOB content of.cheese results in an increase of net revenue per batch by$ 0.03 0.1% increase in the Moisture content of cheese results in an increase of net revenue per batch by $ 0.03 0.1% increase in both FDBand Moisture of cheese results in an increase of net revenue per batch by $ 0.05

15 EXAMPLE C In Example B, we reduced the condensed skim price to a point where the program was indifferent to using condensed skim or NDM. A look at the sensitivity analysis for Example B on Page 14 reveals that raw milk now has an "allowable decrease" of 27.3. If the price of raw milk were reduced to 12.48, then some input or output choice would change. Any ideas? Example C's optimal milk resource mix uses the same resources as Example A's (raw milk, NDM, and added cream), while the quantities used are different. Thus, a reduction in the raw milk price resulted in the use of more raw milk and a switch from condensed skim to NDM. The cheese yield is virtually the same in all three cases, but the net revenue in example C is larger due to the reduced cost of milk resources.

16 Example C COMPOSITION AND PRICES OF MILK RESOURCES MW Price @3.5% fat $/cwt 12.41 Butterfat Differential 0.052 RAW MILK 3.74 Protein % 3.29 Total Solids % 12.63 Protein % Total Solids % NDM 0.8 36.53 97 Price $/cwt 12.48 Price $/lb 1.09 SKIM MILK Fat 'l; 0.1 Protein % 3.41 Total Solids % 9 Protein % Total Solids % CONDENSED SKIM 0.33 13.078 35 Price $/cwt 11.25 Price $/lb Solids 1.12 REMOVED CREAM 40 Protein % 2.0506 Total Solids % 45.541 Price $/lb fat 0.7875 Protein % Total solids % Price $/lb fat ADDED CREAM 40 2.035 45.403 0.825

1 7 Example C STANDARDIZED MILK COMPOSITION FILE NAMEccdmpr3 Fat (!ti) 4.1279 Casein to fat ratio 0.6925 Protein (%) 3.6647 casein (%) 2.8585 USE OF MILK RESOURCES Lactose (!k) Total solids (%) 5.3853 14 Raw milk (lbs) 97.6639 Condensed skim milk (lbs) 0 NDM (lbs) 1.1714 Skim milk (lbs) 0 PRODUCTS MANUFACTURED Added dream (lbs) Removed Cream (lbs) 1.1647 o Cheese (lbs) 11.3898 of Cheddar Moisture (%) 37 Whey Cream (lbs) 0.7224 -FOB (%) 53.5 Fat (%) 40 MANUFACTURED PRODUCTS (continues) FILE NAMEccdmpr3 Separated whey (lbs) Separated whey solids (lbs) 88.0814 6.6764 Whole whey powder (97% solids) (lbs) 6.8828 WPC (34.5% protein) (lba) 0 Whey protein product (lbs) 0 Whey protein product protein (% ) 0 Lactose (95% lactose) (lba) 0 Waste (lbs of solids) 0

18 Example C OPTIMAL SOLUTION FINANCIAL SUMMARY FILE NAMEccdmpr3 Batch size (lbs) 100 COSTS (per batch) I REVENUES (per batch) Raw milk (S) 12.1885 Removed cream ( $ ) a NDM (S) 1. 2768 \.. Cheese ( $) 16.4013 Skim milk ($ ) a Whey cream ($ ) 0.2239 Condensed skim milk ( $) a separated whey ($ ) 0 Added cream ( $) 0.3844 Whole whey powder ($ ) 1.3766 Waste ($ ) 0 WPC ($) 0 Whey protein product ( S ) 0 Lactose (S) 0 Total cost (S) 13.8496 Total revenue ( S ) 18.0018 NET REVENUE (S/batch) 4.1522

19 Example C SENSITIVITY ANALYSIS FILE NAMEccdmpr3 RANGES IN WHICH THE BASIS IS UNCHANGED VARIABLE CURRENT VALUE ALLOWABLE INCREASE Raw milk 12.48 S/cwt 7E-3 NDM 1.09 S/lb 2E-4 Skim milk 11.25 S/cwt 9999899.188 Condensed skim 1.12 $/lb s01.285711.4284 Added cream 0.825 S/lb fat 0.8787 Removed cream 0.7875 S/lb fat 0.0384 ALLOWABLE DECREASE 18.1838 I.B89 99999999 2E-4 1.9E-3 99999999 Cheese 1.44 $/lb ~ 19.1014 0.1143 Whey cream 0.775 S/lb fat 752.9303 Separated whey o S/lb sol.0 4.5049 o Whole whey powder 0.2 S/lb 0.1724 WPC 0 'S/lb 0 Whey protein product 0 $/lb 0 Lactose 0 $/lb 0 Waste 0 $/lb 901.0 1% increase in the Total Solids content of cheese milk results increase of net revenue per batch by $ 0.32 0.6554 0 0 a a in an 0.1% increase in the FDB content of cheese results in an increase of net revenue per batch by,$ 0.03 0.1% increase in the Moisture content of cheese results in an increase of net revenue per batch by $ 0.03 0.1% increase in both FDB and Moisture of cheese results in an increase of net revenue per batch by S 0.05

20 PRELIMINARY FINDINGS Using monthly price and composition data for 1991 and 1992, we used this program to evaluate the effects of: a) monthly price variations of inputs and outputs, and b) monthly composition variation in inputs. We also investigated the impact on net revenue of picking one milk resource mix (based on annual average prices and compositions) to be used throughout the year. Based on these two years: I) Price relationships among milk resources determined which resources should be used, while composition variations affected the amount of each resource used. II) During times of stable relative prices, such as 1991 and 1992, using the average optimal strategy based on the prices and compositions resulted in modest levels of lost revenues. This program was written to assist us investigate the issue of milk resource utilization in cheese making and the impacts of price and composition variation on optimal resource utilization. While we do not envision the use of such a tool for short-run, day-to-day, decisions, it may have usefulness in evaluating and investigating your longer-run resource mix decisions.