The New Normal?

October Class and Component Prices were announced October 31.  Prices were mixed resulting in a 3.5% drop in the Class III price to $15.53/cwt.  That is a pretty normal price based on current history.  This post will review the "new normal" for milk and component pricing.  Prices have been fairly consistent for over three years.

Chart I - Dashboard of Dairy Prices

A quick review of Class III milk prices (Chart II) shows that for over three years the price has been in a fairly tight range from about $13/cwt. to $17/cwt.  Currently, at $15.53/cwt. the price is near the midpoint of the range.  Compared to Class III price movements in the past, this is a very long time for prices to be in such a tight range.  Considering inflationary adjustments, the price of Class III milk is at a low and is staying there for a longer time than ever before.

Chart II - Class III Milk Prices 2000 to 2018

The Class III milk price is primarily based on the price of cheese.  Therefore, Chart III which shows the cheese price over the same time period looks almost identical to Chart II.  For a review of the linkage between cheese pricing and the Class III price, see the April 16 post to this blog.   As long as the price of cheese is low, the price of Class III milk will remain low.

Class III - NASS Cheese Prices 2000 to 2018

Butter prices (Chart IV) has a similar tight range.  The range represents a new higher price level for butter.  The range is between $1.80/lb. and $2.70/lb., well above the long-term butter price.

Chart IV - NASS Butter Prices 2000 to 2018

And, Nonfat Dry Milk (NDM) prices (Chart V) have a clearly lower price also within a tight range for the last three years.  The price range is between $.70/lb. and $1.10/lb.  Cheese and Class III milk prices are low considering inflationary adjustments.  In the case of NDM, the price range is low even without an inflationary adjustment.  The demand for more butter and lower reduced fat fluid milk have lead to an abundance of NDM.  Too much supply equals lower prices,

Chart V - NDM Price 2000 to 2018

If we look at the comparative cheese and butter prices we also see a multiple year period of butter worth about $.70/lb. more than cheese.  That difference seems to be spreading.  In the past, butter has been worth more than cheese for only short periods of time.  This time, butter is worth more than cheese for over three years.

Chart VI - Cheese and Butter Price difference 2000 to 2018

Clearly we are in a period different from any other periods since this current pricing was started in 2000.   

Is this the new norm?  Will milk prices stay low?  Will butter remain expensive?  Will NDM remain low priced?

The reason behind the current circumstances is simply, too much milk, too much cheese in inventory, declining consumption of fluid milk, exports that don't seem able to export cheese, and increased consumption of butter, which leaves a lot of NDM to be disposed of at lower prices.  It is the perfect storm of financial issues for the U.S. dairy industry.  

What will probably not change?  Decreased consumption of fluid milk is a continuation of a very long trend that is accelerating.  It is very unlikely that the trend will change.  Because fluid milk (Class I milk) is the highest paid, that will cause some long-term reduction in the uniform or average producer milk price.

Will the volume of producer milk quit growing and perhaps shrink?  Low milk prices are forcing some producers out.  However, the long-term trend of more milk per cows continues and will continue.  The only thing that can reduce more milk is lower prices to limit herd expansions and force more producers out.  That's a pretty grim statement, but it is incontestable.

Will cheese consumption continue to grow?  U.S. cheese consumption has grown for over 100 years.  Per capita consumption is still less than other mature markets like France.  However, as the market matures, the rate of growth is slowing down.  That is what a mature market does.  The cheese market, Class III milk, is the largest segment and even moderate growth will help.  

  

Can exports begin selling high value dairy products like cheese?  This is certainly a wild card.  If the U.S. can develop strong international brands, there could be a stable growing market.  This would require more vertical integration of the dairy industry with a plan to develop brands that carry the language and graphics for the international market segment.  

Will butter consumption continue to grow?  Domestic consumption increases are beginning to slow.  Will consumer look to a more vegetable based diet?  This is certainly another wild card.

The recent market analysis done by the USDA sees steady growth is both the domestic market and the export market.  Frankly, it is not hard to find fault with the analysis.  International events are always adding volatility to exports.  The growth in the domestic market is hard to rationalize with declining fluid milk consumption and a slowing of cheese consumption.

The above analysis does not project a rosy environment for growth of the U.S. dairy market.  That said, there is opportunity to make money as a milk producer if a strong emphasis is made on component production and tight financial controls.