Saturday, May 12, 2018

How Much Growth In Milk Production is Needed?

This post will frame one more element in the equation of how much milk is needed in the U.S..  When there is not enough milk available to meet demand, inventories are tight and producer milk prices are high.  With high prices, producers want to expand for two reasons.  They can because they are making a lot of money, and because they want to take advantage of the high prices in the future.  Where there is too much milk available, inventories become bloated and prices are low.  Low prices drive out some of the marginal herds and balance returns.  Prices have been relatively low for the last three years, but is milk production shrinking?

Where is the demand side for milk production going?  Do we need more milk to fill demand?  Demand comes from two areas, U.S. consumption and exports.  U.S. consumption comes from per capita consumption of individual dairy products and population growth.

The U.S. government does not control milk production.  There are no government assigned quotas.  Only the economics of supply and demand manage the milk supply.  It behooves a producer to understand where some of these parameters of demand are moving.

Lets first look at milk production over the last 18 years (Chart I).  The growth of milk production has been very steady for decades.  Chart I has a trend line that follows very closely to the blue line of actual milk production from 2000 to 2017.

Chart I - Annual Milk Production
Chart II shows the annual growth in milk production as a percentage of the prior year.  Since the year 2000, Milk growth has averaged 1.5%.  Milk production increases in the last three years are also around 1.5%, but with less wild volatility than prior years.  In the first quarter of 2018 milk volume increases were again averaging 1.5%.  That is well above the population growth as shown below in Charts III and IV.

Chart II - Percentage Growth in Milk Supply
Population in the U.S. has, over the last 35 years, increased in the range of 2.1 to 3.5 million people per year.  Chart III shows the population growth from the year 2000 to 2017. Just like with milk production, the steady increase in numbers however means a lower percentage growth.

Chart III - Population Growth in the U.S.
Chart IV shows the slowing percentage of population growth.  In the year 2000, the population growth was 1.1%.  Over the last three years, the population growth has slowed to .7%.  

The difference between the current population growth of .7% and the growth in milk production of 1.5% leaves a gap of .8%.  To keep inventories in line, the difference between the population growth and milk growth has to be resolved with greater exports and/or greater per capita consumption of dairy products. 
Chart IV - Percentage Growth in Population
In the March 31 post to this blog, consumption of cheese and butter were analyzed.  Consumption of cheese has slowed to a 2% growth rate.  Butter consumption is growing by 2.6% per year.  The missing part of the domestic consumption of dairy products is fluid milk.  Per capita consumption of fluid milk consumption has been decreasing for decades.  Data for 2017 should be available very soon.   This will provide an update on how fast the fluid milk category is shrinking.

March exports and imports will be analyzed in the next post.  More insights into the trends of export volume and the breakdown by category will be covered.

Once the data for domestic per capita consumption, export trends, and population growth is analyzed, a summary will be made of how the current trends may impact the bloated inventories and producer pricing.

California will become a Federal Order toward the end of this year, so the final analysis will include California data as a Federal Order paid by the component calculations.

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