Fluid Milk Sales Trends for First Half of 2019

Previously, in the June 5, 2019 post to this blog, fluid milk sales trends were reviewed through the first quarter of 2019.  Data is now available to review milk sales in the second quarter of 2019.  Many of the same patterns seen in the earlier post linked above are continuing. 

1. Milk consumption is continuing to decrease.  The rate of decrease is slightly over 2 percent annually.
2. Sales of all reduced fat milks are declining.  The declines, which will be reviewed in detail below, range from 2 percent to over 10 percent per item compared with the prior year.
3. Whole milk is holding its own with a very slight increase in sales.
4. Organic milk sales are continuing to decrease at a faster rate than conventional milk.

Per capita consumption of milk has been falling for decades.  However, with significant population growth, total consumption was fairly constant.  In recent years population growth has slowed and per capita consumption has increasingly declined.

Chart I shows the decline in milk sales based on 12-month averages for 2018 and 2019 YTD.  Using a 12-month average eliminates seasonal and calendar variations.    As the chart shows, the decline in sales is very linear.  From the beginning of 2018 to June of 2019, the 12-month average has dropped from 4.1 billion pounds of milk to 3.9 billion pounds of milk, a 3 percent decline in 18 months.

Chart I - 12-Month Moving Average of Milk Sales

Chart II shows the percentage change in the 12-month rolling average sales numbers in 2018 and 2019 through June.  The monthly decreases range from 1.6 percent to 2.3 percent and average 2.1 percent.

Chart II - Percent change from Prior Year in 12-Month Averages

Getting into the detail, Charts III and IV show the decline by type of milk for the first and second quarters of 2019.  The biggest change is in sales of "fat free" milk.  The "fat free" sales decline in the second quarter was over 10 percent vs. the prior year.  "Fat free" milk is an easy target for alternate plant-based products which are typically "fat free."  In total, the fat reduced products were down 4.7 percent in the first half of 2019.

Chart III - Change vs. the Prior Year by Milk Type for the First Quarter of 2019

Chart IV - Change vs. the Prior Year by Milk Type for the Second Quarter of 2019

Another noted change is the accelerating decline in "organic" milk.  During the first half of 2019, "organic" milk was down 4.6 percent from the prior year.  Organic milk is a target for alternate plant-based products as they appeal to the same audience.

Chart V - Conventional vs. Organic Milk Sales

The final graph of interest shows the monthly decline in milk sales vs. the prior year for the last three years.  Versus the prior year, there have been monthly declines ranging from zero to negative six percent.  The trend line shows an annual decline of a little over two percent.

Chart VI - Percent Change in Sales for 2017 through 2019 YTD

SUMMARY

In total, milk sales continue to decline while milk production increases.  Analytically, the decline in milk sales is just above 2 percent annually.  Cheese, on the other hand, is a major growth area and will be reviewed for the first half of 2019 in an upcoming post to this blog.  Other major uses of milk include exports, which are not growing, and butter, where the consumption growth is largely taken by imports of Irish butter.   Excess milk is still a problem which must be resolved.

Exports and Imports through June 2019

Dairy export and import data was analyzed for the first three months of 2019 in the May 22, 2019 post to this blog.  Data for the first six months of 2019 is now available and is reviewed in this post.  As in the first quarter post, only cheese and butter will be analyzed as they have the most impact on producer milk prices.

Changes from the first quarter analysis are minimal except in the details.  Exports of cheese remain near the same level, and exports of butter remain minimal.  The growth of imported butter from Ireland continues to grow and has reached 50 percent of total butter imports.  Another 20 percent of butter imports come from Mexico making a total of 70 percent of butter imports coming from Ireland and Mexico.

CHEESE

Year by year comparative exports of cheese are shown in Chart I.  As shown by the blue line in the chart below, higher levels of cheese exports were achieved in the first quarter of 2019, but in the second quarter, cheese exports fell behind the prior two years.  Compared YTD, for the first half of 2019, cheese exports are up 4 percent over the prior year, based primarily on the strong exports in the first quarter of 2019.

Chart I - Imports of Cheese by Year

Chart II and Table I show where the cheese exports are going.  Combined, the four export markets shown below account for 62 percent of cheese exports.  Exports of cheese to Mexico are down as a result of the tariffs imposed during U.S. and Mexico negotiations.  Those tariffs have now been lifted and exports of cheese should rise in the second half of 2019.

In 2019, the reduced exports to Mexico have been largely offset by increased exports to South Korea and Japan.  Hopefully, these increases to South Korea and Japan can be maintained as exports to Mexico increase.  That would provide a nice increase in total cheese exports

Chart II - Top U.S. Cheese Export Markets

Table I - Top U.S. Cheese Export Markets

Cheese imports remain very low, as shown by the blue line in Chart III. May and June of 2019 are at four-year lows.  When U.S. cheese is so "cheap," why should any cheese except specialties be imported?

Chart III - Cheese Imports by Year

BUTTER

Butter net exports remain negative as shown in Chart IV.  Recent months are showing extreme increases in negative exports.  Negative net exports simply mean that more butter is being imported than exported.

Chart IV - Butter Net Exports

These imports of butter are heavily influenced by imports of "Irish" butter such as "Kerrygold."  Chart V and Table II below show where U.S. butter imports are coming from.  Butter imports from Ireland have grown by over 500 percent in the last five years.  Irish butter has clearly found a strong market in the U.S.  There are almost no competitors to the cultured Irish butter.  A more in-depth analysis of butter imports and Irish butter, based on first quarter import data, were covered in the May 28. 2019 post,

Butter Imports from Ireland and Mexico make up 70 percent of the butter imports.  Butter imports from other countries are small and inconsistent.

Chart V - Butter Imports from Major Suppliers

Table II - Butter Imports from Major Suppliers

SUMMARY

There is very little change in cheese and butter exports and imports.  Increased cheese exports are still needed to reduce the bloated cheese inventories. (See the August 5, 2019 post to this blog for a review of cheese production and inventories.)  With the tariff removed from U.S. cheese exported to Mexico, cheese exports should improve.

Butter is still plagued with imports filling the gap between supply and demand.  Domestic butter consumption is a growth area, but the increasing butter imports are getting much of that growth.

Cheese Prices up 33% and Class III Prices up 27% in 2019

July Class and Component prices were announced on July 31, 2019.  Producer milk prices scored a a major increase with Class III milk up 27 percent from the start of 2019 and up 8 percent from the prior month - Chart I.  Cheese prices were up 33 percent from the start of 2019 and up 8 percent from the prior month - Chart II.  The underlying data that calculates these prices was very positive and historical patterns indicate that further increases are probable.

Chart I - Class III Milk Prices - 20 Years of Data

Chart II - NASS Cheese Prices - 20 Years of Data 

Hopefully, this is not a signal to increase herd sizes.  Further reductions in the milk supply will be needed to avoid a return to low prices.

Chart III shows the impact on component prices.   Milk protein prices increased by 110 percent since the beginning of 2019, from $1.14/lb. to $2.40/lb.  Butterfat prices are up 7 percent from the beginning of 2019 and are currently $2.69/lb.

What is driving the great price increases when cheese inventories are still high and excesses from 2018 and not fully reduced?

Chart III - Component Prices - 20 Years of Data

Chart IV shows the cheese inventories for the last 20 years.  In 2014, inventories were very low and, as a result, cheese and Class III prices were strong.  Currently, cheese inventories are still high from the over production in prior years.   The low inventories of 2014 and the current inventory levels are circled in Chart IV.

Chart IV - Total Cheese Inventories - 29 Years of Data

When NASS does their survey of cheese prices, and announces the cheese price, what they are really surveying is Cheddar cheese prices.  Cheddar cheese pricing is the only item for which data is collected to establish the "cheese" price.  Chart V shows the relative production of Cheddar to total cheese production.  In 2000, Cheddar made up of 36 percent of the cheese production, but currently it makes up only 29 percent.

Chart V - Production of Cheddar and Total Cheese - 20 Years of Data

The next two charts show views of total cheese production and Cheddar cheese production in an expanded format and for just the last 10 years.  Chart VI shows production of total cheese.  The 2014 drop in total cheese production is barely perceptible and the increase 2018 is very brief.  It does show some decrease in total cheese production in 2019. 

Chart VI - Total Production of Cheese

Chart VII shows production of Cheddar cheese only.  Cheddar cheese production dropped significantly in 2014 which reduced Cheddar cheese inventories and brought excellent cheese values to the FMMO milk formulas. As a result, Class III prices increased to over $24/cwt.  However. Cheddar cheese production then increased from 2014 to 2018 by 15%, bloating inventories and decreasing prices. Currently, Cheddar cheese production is currently declining.  With lower production, inventories will shrink, and prices will increase

Chart VII - Production of Cheddar

Cheese prices have escalated by 33 percent this year.  Historically a significant increase, as seen in the first half of 2019, will continue for roughly four additional months.  The disclaimer for financial documents is that the past is no indication of future prices, however, history does tend to repeat itself.  It is likely that the cheese and Class III prices will continue to increase in 2019.

Based on this data, and the prior post to this blog, continued milk price increases are likely.  However, as also stated in the prior post, "This is not a time to expand."

Exports will be reviewed in the next post to this blog, and domestic consumption trends will be reviewed in September.