Tuesday, February 26, 2019

Where is the Dairy Industry Going? What can a Producer do to Increase Revenue?

The dairy industry is in transition as domestic consumption is shifting.  Where is domestic dairy consumption going?  Per capita consumption of fluid milk is declining and has been since 1975. Chart I shows the year-to-year percent change in per capita consumption.  Since 1976, there has been only one positive year when per capita consumption increased year-over-year.  
Chart I - Year by Year Percent Changes in Per Capita Consumption of Fluid Milk
For years, the population growth kept the total domestic consumption of fluid milk nearly even. Individuals were drinking less milk, but more people were drinking milk, keeping overall domestic consumption steady.  Recently, the per capita consumption of fluid milk stated falling much faster.  Additionally, the population growth has slowed to just .6% in 2018 (Chart II).
Chart II - Year by Year Percent Changes in U.S. Population
The result is a significant drop in total domestic fluid milk purchases (Chart III).  The drop is significant and appears to be accelerating.  Competition from “alternative” milks and other beverages is increasing and the new products are being accepted by U.S. consumers.
Chart III - Total U.S. Domestic Sales of Fluid Milk
The biggest use of milk in the U.S. is for cheese.  Total domestic cheese consumption (Chart IV) is still increasing.  However, the days of 6% to 8% annual growth are far behind.  Today, the growth rate is closer to 2%.  As the cheese market continues to mature, that growth rate will likely decrease.
Chart IV - Year by Year Changes in U.S. Cheese Consumption
The annual growth in yogurt was once as high as 20% (Chart V).  For the last four years, the growth rate has been negative.  Recently, two of the largest yogurt producers have introduced “plant based” yogurt.  It is likely that this will accelerate the decline of traditional yogurt.
Chart V - Year by Year Percent Change in Yogurt Consumption
The growth of butter consumption is also slowing.  In 2017, per capita consumption became negative.

Chart VI - Year by Year Percent Growth in Butter Consumption
The market for milk is changing.  With the declining market for fluid milk, there is increased pressure to provide components, not just milk.  The products that are growing, like cheese, require components.  Exports also require components because the cost to ship water is too great.  Producers paid on the component system are paid only for components.  More butterfat and milk protein mean higher revenue.  Also, processors that require a high level of protein often pay additional bonuses for increased milk protein levels. 

The key to maximizing producer revenue and cash flow is to produce maximum components.

One of the proven techniques to increase components is to balance rations for amino acids.   Amino acid balancing has been proven many times to increase protein, butterfat, and milk volume.  Chart VI below shows a brief history of amino acid balancing in the Upper Midwest Federal Order.  From 2010 to 2014, more and more herds were balancing for amino acids and butterfat and milk protein increased.  However, as milk prices started dropping, producers were reluctant to try anything that could increase feed cost.  This was not a good plan.  The increase in revenue and cash flow from amino acid balancing always pays for itself as it produces more butterfat, milk protein, and milk volume

While there are many things that an individual producer cannot control, like the standardized Class III price, a producer can manage to maximize revenue and cash flow.  That may be the key to survival in the current dairy climate.

Chart VII - Impact of Amino Acid Balancing
For more details on the how a producer can increase revenue and cash flow in the current environment, see the recent article by this author in Progressive Dairyman.