"Summing Up" the U.S. Supply and Demand for Dairy Products

In prior posts, the growth of domestic dairy consumption, U.S. population growth, and milk supply growth were reviewed.  Fluid milk consumption is currently decreasing by 3.3% annually and the trend indicates that the decrease will continue to accelerate.  Cheese consumption continues to increase but at a slower rate than prior decades.  Cheese consumption increases have leveled off at about 2% per year.  Butter consumption started increasing around 2009.   Currently, butter consumption growth is increasing by about 2.6% annually.  U.S. population growth has slowed to about .8% annually.  The milk supply is growing at about 1.5% per year.

How do all these numbers reconcile?  The answer is easy.  They do not reconcile, and that is why there is an oversupply of raw milk.

Future domestic consumption is fairly easy to estimate from the above growth statistics.  Exports are the wild cards in this "reconciliation."  Exports can be significantly influenced by international events, exchange rates, tariffs, etc.

In 2017, the U.S. milk supply was used as shown in Chart I.  What we know, is that Class I, fluid milk, is decreasing.  That decrease is accelerating.  Class I was the largest Class, but is now the second largest Class.  Class III, milk for cheese. is continuing its long-term growth with no change is sight.  It is the largest usage of milk.  Class IV, milk for butter and skimmed milk, is growing primarily due to the growth in butter consumption.  Class IV milk is split into two products, butter and skimmed milk.  The growth is driven by butter consumption and what remains, skimmed milk, must be sold at prevailing prices.  The growth-forecasting dilemma for Class IV milk is that most Class IV skimmed milk is exported.  For the first four months of 2018, 86% of nonfat dry milk was exported.

Two forecast scenarios were developed based on the current consumption levels and trends in the the consumption rates.  One forecast, Scenario One, is simply based on an extension of 2017 rates of change.  The second forecast, Scenario Two, is based on current rates of change and trends.  Fluid milk consumption is in an accelerating decline and butter consumption growth, currently at 2.6% annually, is slowing down.  Scenario Two takes into account not only the current rates of change, but future rates based on trends.

Table one shows how an extension of the current growth changes, Scenario One, would impact the milk Class categories.  Class I will continue to decline while Class III and Class IV will continue to grow.  Class II, the smallest Class was assumed to grow at the rate of population growth.  How much milk is needed?  In Scenario One, the increase in domestic dairy consumption would range between .6% and .9% per year through 2025.  This growth rate in domestic consumption is well below the current 1.5% annual growth in the milk supply.  Table I below shows the breakdown by milk Class currently and in 2025 based on a continuing of the current rates of change.  Class III and IV would consume 68% of the milk supply by 2025.

Table I - Scenario One - Milk Classes for 2017 and 2025 based on Current Growth Rates.

Scenario Two takes into account the trends in dairy consumption.  The decline in fluid milk is gathering speed.  The annual growth rate of butter consumption is beginning to level out and decline to a growth rate more like cheese of around 2%.  In this scenario, Class III milk would consume 51% of the milk supply by 2025.

Table II - Scenario Two - Milk Classes for 2017 to 2025 based on weakening growth rates for fluid milk and butter

In Scenario Two, the growth rate for raw milk will become negative.  That means about .5% less milk is needed each year.  The current 1.5% growth rate in the milk supply will have to drop by about 2% to reach a decline of .5% per year.  Each year, another .5% decrease would be needed.

THE DREAM

Can exports really make up for this loss in domestic milk consumption?  Can exports bring enough demand to allow the milk supply to continue to grow?  The most recent export volume was close to 19% of milk production.  If it were to grow sufficiently to make up for the loss in Scenario One, exports would have to grow to about 25% of milk production by 2025  If Scenario Two occurred, exports would have to grow to about 35% of milk production by 2025.  As exports grow, volatility in milk demand and milk prices will increase.  There are many uncontrollable events that can drastically change international exports. 

New Zealand lives with export volumes around 80% of their milk production.  They have done an excellent job of very low cost production and strong international brands.  However, they still live with a great deal of volatility.  

What will limit U.S. growth in the milk supply?  Low prices?