Class I Milk Crash Accelerates

There are lots of headlines in the dairy news that milk production is continuing to grow.  There may be fewer cows, but the remaining cows are producing more milk.  This post will look at the other side of the supply/demand ratio, specifically, the decline in milk consumption.  In the May 26 post to this blog, the declining consumption of fluid milk was analyzed based on consumption data.  Not only was it declining, but the decline also appeared to be accelerating.  This post will update the fluid milk "disappearance" by analyzing Class I milk production in the Federal Milk Marketing Orders.

Fluid milk is perishable and requires refrigeration.  It cannot be frozen or economically stored for long periods of time.  Therefore, the link between production of fluid milk and consumption is firm and tightly linked.  What is produced must be sold within a very limited time.

Chart I below shows the monthly production of Class I milk.  For years per capita consumption has been declining, but population growth has keep the Class I milk category stable.  But, starting in 2017, the total Class I milk  category started a decline.  As we get more data on the decline, it becomes obvious that the decline is accelerating.  The trend line in Chart I was extended through 2019.  By the end of 2019, Class I milk will be down to about 3000 million pounds per year by this analysis.  Compared to 2016, that would represent a 13 percent drop.  Declines typically shrink in pounds as they reach a new plateau.  The decline in dairy milk is not following that pattern.  Its volume decline is increasing with time.

Chart I - Class I Milk per Month

Class I milk is always the highest paid milk.  The FMMO formulas are designed to assure this pricing structure.  The "Uniform" milk price is the weighted average of the four calculated milk classifications.  Producers are essentially paid by the  "Uniform" price through procedures such as the Producer Price Differential.  As less Class I milk is produced, the "Uniform" producer price will therefore decline.  Chart II below shows the reduction in the percentage of Class I milk in the total producer milk.  The trend line shows a decline from around 33% of Class I milk in the mix to a level around 28% by the end of 2019.

Unless something changes, the decline will continue and Class I milk will have a reduced impact on the "Uniform" price and, all other things equal", the "Uniform" price will decline.

Chart II - Class I Milk as a percent of Total Milk

Chart III is the most important change.  It shows the increasing rate of volume decline.  In 2016, Class I was not increasing or decreasing.  By year-end 2017, it was decreasing by more than one percent per year.  By year-end 2018, the volume of Class I milk will be decreasing by about three percent per year.  If the trends continue, by year-end 2019, the rate of decline will be about 6 percent per year.  These numbers are lower than those calculated by the using consumer consumption data in an earlier post.  However, both sets of data do show a rapidly increasing reduction in Class I milk.

Chart III - Class I Milk Reduction from Prior Year

The biggest problem is that there is weakening domestic demand for milk while the supply side keeps growing.  Can exports make up the difference?  Exports have shown growth in inexpensive products, but exports of high quality dairy products like cheese have not grown. Due to the water content in Class I milk and the limited shelf life, Class I milk is not a good export item.  The volume of Class I milk is strictly dependent on domestic consumption.  Export activity is not currently helping producer milk prices.

The decline in drinking milk appears to be the start of a long-term trend and the depth of the trend is growing.  It has to be faced directly and plans made to insure the financial future of the dairy industry with less Class I milk.