U.S. Dairy Consumption is Rapidly Changing. Producers and Processors Need to be Preparing.

U.S. sales and consumption of Dairy products is changing at a brisk pace.  Sales of beverage (drinking) milk are declining rapidly.   Fat free milk sales have declined 40% in just five years.  Reduced fat (1% and 2% fat) milk sales have also declined during this period.   After a ten-year period of growth, yogurt sales have plateaued.   What's increasing?  Cheese sales continue their growth and butter sales are showing an uptick.

The decline in beverage milk sales is dramatic, dropping 10 percent in just the last five years.  The often-quoted reason is that there are so many new drink products that beverage milk is losing shelf and mind space in the drinks category.

Sales of reduced fat and nonfat milk have all fallen in the last five years.  The drop in skim (fat free) milk, if continued, would nearly eliminate this product over the next decade.  As sales decline, retailers carry less and display less shelf space, which accelerates the decline.  When reduced sales reach the tipping point, skim milk could become a niche product, not available in all stores.

From 1995 to 2005, one percent fat milk was a growing category while two percent fat milk was declining.  It was possible that one percent fat would surpass the category leader, two percent fat milk.  Now, the comparison is between which will decline faster.

Two percent fat milk is still the category leader, but just by a hair, as sales of whole milk have increased slightly.  There was just a 7% difference in sales volume in 2016.

Obviously, the decline in overall beverage milk with significant declines in skimmed and reduced fat milk have significantly reduced the availability of butterfat for churning.

From a longer-range point of view, the two charts below compare the makeup of milk sales in 1975 and 2016.  While the population growth has risen by 50% during this time, total sales of beverage milk have declined by 8%.  That would indicate a 40% drop in per capita sales and consumption. Whole milk is less than half of what it was in 1975.

With the continuing reduction in sales of beverage milk, there will be a an equal drop in Class I milk. How this change impacts producer prices will be covered later in the post.

Cheese sales continue their growth curve.  Some developed European countries consume even greater per capita amounts of cheese, so it is very possible that this growth will continue.  While there is some price elasticity of demand in cheese sales (higher prices mean slowing sales), current cheese pricing is not at a level that would adversely impact sales.  Considering these factors, continued per capita growth of cheese consumption can be expected.

Therefore, more Class III milk with good characteristics for cheese production will be needed. Typically, higher milk protein levels and a low somatic cell count are key characteristics of good quality Class III milk.  Over the last 46 years, with the increase in per capita consumption and population increases, the total volume of cheese sold domestically has increased by an average of nearly 4% per year!  Class III milk is already the largest of the four milk classes.  Class I represents the second largest milk class, and as it declines and Class III grows, it is possible that Class III may soon represent the majority milk production.

Butter consumption is an amazing story.  During World War II, butter consumption dropped by nearly 75% as lower priced and readily available vegetable based spreads emulating butter took the market. The lower per capita consumption of butter continued for roughly 40 years.  However, in the last five years there has been some growth.  

As a result, due to both population growth and increased per capita consumption, butter demand has increased nicely.

How will the sales and consumption changes impact producer milk prices?   And how will these changes impact the desired components in milk?

• Less Class I milk will be needed.  Class III milk for cheese, which is currently the largest Class of milk.  The Class III category will continue to increase and dominate the demand for milk.  For those paid on the component system, this will reduce the Producer Price Differential. Lower amounts of the high priced Class I milk will reduce the blended Uniform price, and thereby reduce the difference between the Uniform price and the Class III price, which will result in a lower Producer Price Differential.
• Those Federal Orders paid on the advanced system are primarily Class I producers.  The changes in consumption will impact these Orders with reduced demand.  The Florida order will see the greatest impact.
• The Upper Midwest Order is well positioned to grow.  Currently, over 80% of the Upper Midwest Order milk is Class III.
• With less butterfat available from beverage milk, pressure on butter availability will remain high keeping the butter price high.  Unfortunately, this has little impact on the Class III price. With higher priced U.S. butter, exports will remain low and imports will increase.
• It's doubtful that the increased demand for cheese can offset the reduction in demand for beverage milk.  Also, with a strong USD, exports will remain an uphill battle and imports will look increasingly attractive. Therefore, with stagnant domestic demand and pressure on exports, it will be difficult to support continued growth in cow numbers.  In fact, with higher producing cows, fewer cows may be needed to met demand.
• With less dependence on beverage milk and stronger demand for cheese and butter, milk protein and butterfat will be a priority for producers and a necessity for financial returns.