Milk Production is Down! Why? Where?

Milk production in the U.S. is down versus the prior year.  This is unusual and is the reason for tight inventories of some dairy products and the current high milk prices.  In January 2022, USA milk production was down 1.63 percent from the prior year (Chart I).  In February the year-to-year loss was lower at just under one percent, but it was still a decrease in milk production.  The decline began in September 2021 and has continued to decline.  Some recent articles have mentioned a lack of heifer availability.  Others have sited high feed costs and limited labor availability.  However, there are other factors involved.  There are geographical shifts, environmental issues, and new processing facilities. 

Chart I - Percent Change in USA Milk Production

In January 2022 the USA decline from the prior year amounted to 315 million pounds, and in February it declined by 170 million pounds (Chart II).

Chart II - Pounds Change in USA Milk Production

The changes by state are varied, with some states increasing production and other states declining.  Table I below shows the gainers ranked by percent and million pounds of increases vs. the prior year.  With new and expanded cheese plants in South Dakota, milk production has grown tremendously. and in Texas, milk production has continued to grow as milk production has moved from New Mexico.

Table I - States with the Largest Gains in Milk Production
by Percent and Pound

South Dakota's growth (Chart III) has been substantial and consistent since 2019.  However, it is still not a major milk producing state.  South Dakota is ranked 17th in terms of total milk production in 2021.

Chart III - Growth of Milk Production in South Dakota

Texas has seen steady growth (Chart IV) since 2019 and is now the fourth largest dairy producing state.  In January 2022 milk production was up by 47 million pounds and in February it was up 52 million pounds.  As shown in the chart below, there has never been a month of milk production lower than the prior year.

Chart IV - Growth of Milk Production in Texas

There have been many states with declines in milk production compared to the prior year as listed in Table II below.  New Mexico had the largest losses in pounds and percent compared to the prior year, and California had the second largest volume losses.  However, the losses in California were a small percent of their overall production.  States like Florida and Arizona (in red) which are very dependent on Class I fluid milk suffer from the declining sales of fluid milk.

Table II - States with the Largest Loses in Milk Production
by Percent and Pounds

Since July 2021, New Mexico milk production has declined (Chart V).  New Mexico has the advantage of several large cheese plants and is unique as having the largest herd sizes of any state.  The large herd sizes have brought economies of scale but have also raised some environmental concerns.  Since June 2021, milk production has started dropping.  In the last six months, the decline vs. the prior year has averaged about 13 percent.

Chart V - Growth and Declines in Milk Production
 in New Mexico

California had January and February 2022 losses of 68 million pounds and 6 million pounds of milk vs. the prior years.  Because California is a major dairy state, the 2022 percentage losses were minor in percentage at 1.6 percent and .3 percent.

Chart VI - Growth and Declines in Milk Production
in California

Michigan was on a roll, steadily increasing milk production until mid 2021.  Michigan milk production has now turned to negative growth.  In 2022, year-to-date losses were 36 and 27 million pounds and averaged three percent annual declines.

Chart VII - Growth and Declines in Milk Production
in Michigan

There are a lot of dynamics going on in the dairy industry.  Certainly, COVID upset the balance, now inflation in feed and labor costs have increased, and environmental concerns are creating uncertainty.  Where milk production is going in volume and geography remains uncertain.  It is interesting that enough milk seems to be available for cheese production, and fluid milk needs must be met.  However, butter churning is behind and butter inventories are low.  

How has COVID Impacted Dairy Exports and Imports? How Will the Russia Invasion of Ukraine Impact Dairy Exports and Imports?

In 2020, COVID hit the entire globe and things changed. Now Russia has invaded the Ukraine and more international events are changing.  How did COVID impact dairy exports and imports?  How might Russia's invasion impact dairy exports and imports?  China is threatening an invasion into Taiwan and that could bring additional major international changes.

Exports and imports of the four commodities used to price producer milk are reviewed in this post, starting with cheese and butter, and then covering exports of nonfat dry milk (NDM) and whey.  

CHEESE

Cheese exports have strengthened during COVID, gaining 14 percent over the prior year in January 2022 based on 12-month moving averages. U.S. cheese was exported to 116 different countries in 2021 with the four largest importers being Mexico, South Korea, Japan, and Australia.  China and Taiwan also received  significant cheese exports from the U.S.  There were very minor cheese exports to Russia.

There was a slight dip in cheese exports to Mexico in 2020 which have now recovered.  It is possible that this was related to COVID as travel to Mexico was restricted.

Chart I - Cheese Exports

Cheese imports were less than cheese exports making the U.S. a net exporter of cheese.  The major imports were from six European countries listed in Chart II below.  In total, cheese was imported from 74 different countries.  Minor amounts were imported from the Ukraine, Croatia, Russia, and Belarus.

Chart II - Cheese Imports

BUTTER

Butter exports and imports are minimal.  Butter production is struggling to meet domestic demand.  Most of the time, imports exceed exports making the U.S. a net butter importer.   Most of the butter exports go to Canada.  With butterfat in short supply, the exports may begin to drop but to-date exports remain relatively strong.  In 2022, U.S. butter was exported to 77 different countries with significant amounts exported to China and a very minor amount shipped to the Ukraine.  None was shipped to Russia.

Chart III - Butter Exports

The real story on butter is the continuing increase in imports of butter from Ireland.  Kerry Gold butter continues to expand shelf space in retail grocery stores.  As of January 2022, the 12-month moving average of imports is dominated by butter from Ireland which is currently 63 percent of butter imports.  No butter was imported from Russia or China.

Chart IV - Butter Imports

NDM

Exports of NDM and skim milk powder (SMP) continue to grow.  Mexico is traditionally the main importer.  The SE Asia countries (Thailand, Indonesia, Malaysia, Cambodia, Singapore, Philippines, Vietnam, Myanmar, Laos, Brunei, and Timor-Leste) have grown their imports significantly.  Together Mexico and the SE Asia make up 75 percent of NDM/SMP exports.  China imported six percent of the U.S. exports of NDM/SMP.

There are no significant imports of NDM or SMP.

Chart V - Exports of NDM and SMP

WHEY

Whey exports go primarily to China.  In 2021, 46 percent of whey exports went to China.  Combined with Mexico and SE Asia, the top three importers make up 76 percent of whey exports.  The data in Chart VI include products like whey permeate (dried whey without whey proteins.)

Chart VI - Exports of Whey Products

There are no significant imports of whey products into the U.S.

SUMMARY

There is very little indication that COVID had any influence on dairy exports or imports.  There is no important dairy trading with Russia, Ukraine, Croatia, or Belarus.

However, there is an important tie to China especially in exports of whey.  A major part of this is whey permeate that is used in swine feed.  China also has significant imports of cheese, butter, and NDM.

The current events do not appear to have any influence on U.S. dairy exports or imports.  However, it is possible that if China invades Taiwan and sanctions are imposed, there could be some difficult issues, particularly with whey exports.

Part II of Why Producer Milk Prices are High

In the prior post, producer components and milk prices were reviewed.  This post will look at the underlaying factors that determine the price of the commodities that are used to price components and in turn price producer milk.  The production and inventories of these commodities are key.

There are four commodities that are used to price producer milk.  They are Cheddar cheese, butter, dry whey, and nonfat dry milk (NDM).  Cheese and whey (and therefore dry whey) are strongly related as whey is a byproduct of cheese production.  Butter and NDM are similarly related as NDM is a byproduct of butter production.

BUTTER

Butter has seen tremendous price increases that are reaching near historical highs.  Production is down and inventories are scarce.  

Chart I shows the Agricultural Marketing Service (AMS) price for butter since 2014.  This is the commodity price used for calculating butterfat prices.  The February 2022 price of $2.67 per pound is a near record price and is an 84 percent increase from January 2021 (Chart II).

Chart I - AMS Butter Prices

Chart II - Butter Prices in 2021 and early 2022

Butter production (the blue line in Chart III) has taken a significant drop starting in mid 2021.  However, butter domestic disappearance (the red line in Chart III) has not declined. There is very little disappearance from exports, so the domestic disappearance really represents the total disappearance.  

Chart III - Butter Production and Domestic Disappearance

This has caused a drop in inventories as shown in Chart IV.  When inventories decline, prices increase as shown in Chart I.

Chart IV - Butter Inventories

For more information on butter production and inventories see the January 2022 post and November 2021 post to this blog.

NDM

Nonfat dry milk (NDM) and skim milk powder (SMP) come primarily from Class IV milk for butter and in a sense are the byproducts of butter churning.  Therefore, it is no surprise that when butter production drops, so does NDM production (Chart V).

Chart V - NDM Production

Therefore, as inventories drop, prices increase as shown in Chart VI.

Chart VI - Inventory and AMS Price of NDM

The price increase in 2021 and early 2022 has been extreme, increasing NDM prices by 53 percent.  The February 2022 price is $1.65 per pound compared to $1.13 per pound at the start of 2021.

Chart VII - AMS NDM Price per Pound

NDM is an export item, and year by year less is used domestically and more is exported.  

Current international prices are in line with the AMS NDM prices.

Chart VIII - NDM Domestic and Export Volumes 

NDM prices are important as they are used to price Class II and Class IV skim milk and are partially used to price Class I skim milk.

CHEESE

Cheese pricing is based on the wholesale price of young Cheddar cheese.  Production of Cheddar has plateaued in 2021 as shown in Chart IX.

Chart IX - Production of Cheddar Cheese

Inventories of Cheddar cheese or specifically young Cheddar cheese are not available publicly.  However,I Cheddar cheese makes up about 70 percent of the American cheese category.  Chart X shows the relationship between American cheese inventories and the AMS price of cheese.  As inventories go up, prices go down.  

Chart X - American Cheese Inventories and Prices

In 2021 and early 2022, the cheese price has increased by 16 percent, much less than the butter price increase of 84 percent or the NDM price increase of 53 percent.  In the first two months of 2022, the prices have increased by nine percent.

Chart XI - AMS Cheese Prices for 2021 and early 2022

Exports are not a factor in cheese inventories and prices. Chart XII shows the relationship between net exports of American cheese and domestic disappearance. 

Chart XII - American Cheese Disappearance

The AMS price of cheese is used to partially price milk protein and Class III milk.   The changes in the cheese price are very small compared to increases in the other commodities used to price milk components.

DRY WHEY

Whey is the byproduct of cheese production.  Overall cheese production has continued its longterm growth pattern.

Chart XIII - Total Cheese Production

Most of the whey is dried thereby creating a more salable product that can be shipped at a low cost.  The decline in dry whey production (Chart XIV) is not caused by a decrease in cheese production (Chart XIII). Dry whey production has been declining since mid 2020.  Over that time the 12-month averages of dry whey production have declined by six percent (Chart XIV) while cheese production has been increasing (Chart XIII).

Chart XIV - Dry Whey Production

Disappearance has also slowed down, but not as fast as production has slowed down (Chart XV).  This is decreasing inventories of dry whey (Chart XVI) and increasing dry whey prices.

Chart XV - Dry Whey Disappearance

Chart XVI - Dry Whey Inventory

With lower inventories, prices have increased, reaching $.78 per pound in February 2022, which is an all time record high price (Chart XVII).

Chart XVII - Dry Whey Price

The reason for a decrease in dry whey production is not clear.  However, the conversion of whey to other products like whey permeate and whey proteins may have an influence.

 SUMMARY

There are a few changes occurring in the commodity prices that are somewhat difficult to explain.  Butter production is down significantly, and this is often explained as a lack of available milk, logistics, and labor shortages.  However, cheese production has continued to grow with almost no interruptions.

While cheese has continued to grow, production of dry whey has slowed.  Since the two are typically linked, the reason for the change is not clear.  Dry whey fractions and their higher values may be in play.  If fractions can command a higher price, that is a trend that will not reverse.

If butter production does not increase, prices will remain high and supply and demand will increase retail butter prices.  This appears to be happening.  With higher retail butter prices, butter alternatives based on vegetable oils, may increase market shares slowing the consumption of butter.  That could be difficult to reverse once more butter is produced and is available at lower prices.