Does Dairy Need Fewer Cows?

In the June 5, 2019 post, based on domestic consumer consumption trends, the milk needed to satisfy this consumption is growing at about one-half percent annually.  With domestic fluid milk consumption decreasing, cheese consumption increasing, and other dairy products mixed, there is an overall need for milk production to grow only slightly.  This post examines why the domestic dairy industry may need fewer cows every year, not more.  The analysis is based on full year analytics from 2014 to 2019.

The factors measured include the following:

• Increases in milk per cow have increased steadily for decades.  The rate of increase is about one percent per year on the average.

• Increases in butterfat levels in milk have also increased, lessening the need for more milk volume. The annual rate of increase in butterfat per cwt. of milk is also near one percent per year.

• Increases in milk protein levels in the milk are also helping fill the needed demand.  While the growth in milk protein levels has been slower than milk per cow or butterfat increases, the protein levels in milk are also growing.

• Lower Somatic Cell Counts (SCC) will improve cheese yield.  SCC have been declining by about two percent per year.

Combining these factors suggest that cow numbers should decrease each year.  In early 2019, cow numbers were decreasing.  However, as milk prices increased at the end of 2019, cow numbers again began to grow.

MILK PRODUCTIVITY

The increase in milk volume per cow has been a long term trend that is likely to continue (Chart I).  Improved genetics, feed, and management practices contribute to the steady increases in milk volume per cow.  The rate of productivity increases can vary depending on conditions, but over time, the growth remains at about one percent annually.  This trend is one of the best methods to reduce the cost of producer milk.  If fewer cows can deliver the same amount of milk, almost all variable producer costs will decline accordingly.

Chart I - Milk per Cow

BUTTERFAT

Butterfat level increases (Chart II) gained significantly with higher butterfat prices from 2015 to 2018.  The techniques used to increase butterfat are very cost effective.  Butterfat prices are now declining.  As butterfat prices decline, the revenue for higher levels of butterfat is still positive and should continue this growth.  However, history says that lower butterfat prices may reduce the growth of butterfat levels.  The revenue/cost analysis typically supports the continued and expanded practices needed for growing butterfat levels. But, with lower milk and butterfat prices, some producers will remove feed additives that support butterfat development.

The increases over the last five years added almost one percent more butterfat/cwt. of milk annually.  Combined with the increases in milk volume, this should satisfy the need for domestic butterfat, with no additional cows.

Chart II - Butterfat Percentage

Table I below shows the growth in butterfat by Federal Order.  Butterfat is paid in all Federal Orders, so there is a financial benefit for producing milk with more butterfat.  Overall, butterfat levels have increased over the five-year period for every Federal Order.  Some areas have done better than others, and there is still opportunity for higher levels of butterfat.

Table I - Butterfat Increases by Federal Order

MILK PROTEIN

Techniques for increasing milk protein are known, but the implementation has been slow.  Higher protein levels are very important for cheese producers and they typically pay bonuses above the Federal Order payments for protein in milk.  While the numbers in Chart III are positive, there is much additional potential to be gained.

Chart IV - Milk Protein

Milk protein levels for the seven Federal Orders that pay for protein are shown in Table II below.  As with butterfat, all Federal Orders show gains over the last five years.  The largest gains were in the Pacific Northwest and the Southwest Federal Orders.  The Upper Midwest showed only slight gains and has the second lowest protein levels of any Federal Order.  That is surprising because the Upper Midwest has 88 percent of its milk going to cheese where protein is needed and protein payment bonuses are exist.

Table II - Protein Increases by Federal Order

SOMATIC CELL COUNT

Over time, SCC have dropped significantly.  This is an important parameter for herd health and is important for efficient cheese production.  With lower SCC, less milk is needed to produce cheese.

Chart IV - Somatic Cell Count

Federal order payment for lower Somatic Cell Counts is present in only four of the Federal Orders.  The data from these four Federal Orders involves money and is therefore carefully measured and considered accurate.  However, many milk processors pay producers additional bonuses outside of the Federal Order pricing for lower Somatic Cell Counts.

All of the Federal Orders listed in Table III have found ways to lower SCC.  Improved genetics and sanitation efforts have helped reduce SCC.  Some producers have cell counts well below the averages listed in Table III.  Continued progress will continue to make more and better cheese available with less milk.

Table III - Somatic Cells Counts

SUMMARY

Milk is a commodity.  The only way for a producer to survive and succeed is to be a low-cost producer with strong revenue.  Increasing component levels brings increased revenue.  Doing it with fewer cows is one factor in lowering cost.  The mind set for producers should be to increase cow productivity and add cows only when there is demand for significantly more cows.

Cheese is What Dairy is all About. Revenue Management is Required at all Levels.

The most important parameter in the Class III milk price is the wholesale price of Cheddar cheese.  (See these prior posts,  October 13, 2019 and March 22, 2020, for detail on the relationship between the price of Cheddar cheese and the Class III price.)  Chart I below shows graphically the correlation between the two.  Statistically, it is a 96 percent correlation.  If you know the price of Cheddar cheese, one can accurately predict the Class III price.

Chart I - Cheese and Class III Milk Prices

Understanding the drivers behind the price of Cheddar cheese is important to see where the price of Class III milk is going.  This post will analyze some of the elements influencing cheese pricing at the wholesale and retail levels.  There are four very different levels of management involved in cheese production and distribution; the milk producer, the cheese maker, the processor and distributer of retail cheese, and the grocer. Producers have the most variation in revenue and the last paragraph of the post will address what can be done to manage revenue at the producer level.

Chart II below shows the ups and downs of cheddar cheese prices over the last 20 years at the retail and wholesale levels.  The retail price shown here is for purchases of Cheddar cheese by consumers.  Cheddar used in food service and Cheddar used as an ingredient in other products are not included.  Trend lines are also shown for both the wholesale and retail prices of cheese.  Both the wholesale and retail prices have grown over time.  Wholesale cheese prices are what a cheese maker gets for blocks and barrels of bulk cheese.  The retail price is what the consumer pays at the grocery store.

The retail prices are more than three times the wholesale bulk cheese prices. The spread between the retail and wholesale prices includes processing the cheese into consumer forms including slicing, shredding, etc., packaging, branding, logistics, and marketing.  

Also included in Chart II is the "make allowance" which is used in the FMMO formulas to calculate the value of milk used to make cheese.  The Class III price is calculated by subtracting the cost of making Cheddar cheese from the wholesale price of Cheddar cheese.  The make allowance is what the cheese maker gets for his efforts.  In 2007, that make allowance was $.165/lb. and through two increases in 2008, the make allowance was increased to $.2003/lb. in the Class III formulas.  That formula change increased the cheese makers allowance from $.068/lb. to $.083/lb.  The make allowances have stayed the same since 2008.  Various studies indicate that making cheese from milk costs about $.07/lb., so the make allowance appears to be reasonable.  The advance to a cheese maker is that he has no variability in his revenue for cheese making.  The variability of the wholesale price of cheese is pushed down to the producer while the make allowance does not vary.  The cheese maker can also improve revenue by selling whey, managing his cheese production and inventories. and sales to food service and food processors who use cheese as an ingredient.

The next level in cheese pricing is the processor and distributor of packaged cheese for retail sales.  A company making and selling cheese for the retail market can manage revenue by timely purchasing of wholesale cheese, managing branding, and providing promotional opportunities for increased sales.

Chart II - Retail and Wholesale price of Cheddar Cheese
and Cheese Makers Make Allowance

Chart III shows the change in consumer consumption with changes in the retail price.  While cheese consumption has steadily grown, when prices escalate, the growth is slower and when the price is lower, the growth is faster.  In 2012, when retail prices of Cheddar cheese increased to a record high, the growth in consumption slowed.  In 2016 and 2017 when the price was low, the growth in consumption accelerated.  These periods of slow growth and fast growth are circled in Chart III.

The consumption line in Chart III is based on the available data for American cheese which is primarily Cheddar cheese.

Chart III - American Cheese Consumption vs. Retail Price of Cheddar

Chart IV is a stacked graph which shows the buildup of Cheddar pricing.  The four levels of management mentioned above are very different. The price of the milk used varies considerably from month to month.  The revenue of making cheese has little variability.  The branding and processing of bulk cheese into the consumer market primarily involves management of marketing.  

The grocer's job of managing consumers sales is complex and operates with typically thin margins.  Margins at the grocer's level are very carefully managed and the largest grocers manage these margins based on daily analytics.

Chart IV - Stacked Graph of Cheddar Pricing

All the four levels as defined above are complex and require very different skills.  Much of the revenue variability is pushed down to the producer.  What are the management skills needed at the producer level maximize revenue?

Obviously, control of costs is very important for milk producers to survive, and these skills are honed over time with a lot of "on-the-job" experience.  However, management of revenue for producers is often not as well managed because it is complex and because it requires very different skills.

Revenue for the majority of milk producers is paid on the component system and the money comes from selling components, not milk.  Those three components are milk protein, butterfat, and other solids.  Selling other solids is a small revenue contributor and requires almost no management at the producer level.  Managing butterfat levels is something that has always been managed in the producer environment, because payment for butterfat has been standard for all producers for at least a century.  

Maximizing milk protein revenue is the most complex.  In areas where milk is paid on the advanced system, there is no specific payment for protein, so there was little incentive to manage protein levels.  However, 90 percent of the Federal Order milk is paid on the Component system which does specifically pay for protein, measured by "true protein" in the milk. The skills to manage protein levels have evolved over a few decades, but there is still a great opportunity to implement practices to improve milk protein levels.  With half of the milk now used for cheese production (see the recent post on Class usage of milk), the importance of milk protein has reached the highest level of importance.  In addition to the Federal Order pricing, most cheese makers pay an additional bonus for higher levels of protein.  Revenue management of milk protein should be on the top of most every producer's priority list.  Techniques such as the balancing of amino acids in feed is a proven technology, but the management of this technology is newer and complex.   To be successful, amino acid balancing requires the right specialized feed supplements and formulating skills.