Why are Milk Prices Down?

Producer milk prices are down significantly in 2023.   Why?  This post will look at some of the reasons for this decline.  It will review the price movement of the three commodities that have the most influence on producer prices, butter, cheese, and nonfat dry milk (NDM).  NDM pricing is primarily an export item and will be covered in the most detail.

Table I below shows the change in the Agricultural Marketing Service (AMS) pricing of these three commodities.  Since October of 2022, all three have taken major losses.  In just six months, butter prices have dropped by 25%, cheese prices have dropped by 13%, and NDM has dropped by 27% (Table I).

Table I - Butter, Cheese. and NDM Prices

Chart I below displays the pricing of these three commodities.  It is a coincident that all three peaked in October of 2022 and continued falling in price to the most current prices in April 2023.

Chart I - Price of Butter, Cheese, and NDM in 2022 and 2023

Chart III covers the long-term pricing of these commodities over the last 24 years.  Butter pricing has increased like a rocket ship, over 100%, cheese pricing has made a modest increase of about 50%, and NDM has increased the least with about a 30% increase.  

To project the future, long-term trends are better than wild guesses and crystal balls.  With the trends in pricing, there are some pricing formulas that create additional producer price declines.  Here is one clear issue.

The milk protein price formula is based on the price of cheddar cheese plus a factor to increase the protein price because butterfat is worth more in cheese than in butter.  As butter and butterfat prices have increased more than cheese prices, butterfat is now more valuable in butter than in cheese.  That has revered the impact of protein pricing by making that impact of butterfat in cheese calculation go from positive to a negative, in turn reducing the price of milk protein and lowering the revenue paid to producers.

Chart II - The Long-Term Pricing of Butter, Cheese. and NDM.

The remainder of this post will look closely at the NDM pricing to see some of the factors reducing NDM pricing.  With the new Class I formula change mentioned above, NDM is significantly impacting overall producer pricing.  The fact that NDM is an export product, can bring new factors, like exchange rates and global events, into the pricing as compared to domestic cheese pricing.

Some of the charts below include both NDM and skim milk powder (SMP), similar products but with significantly different specifications.  The U.S. Trade and Tariff database does not have specific codes for the two products but combines them under one harmonized code.  For more on the differences, see this prior post.

The growth of NDM started in 2008 and has grown significantly since then (Chart III).  It has grown faster than butter production as new export markets for NDM have been developed.

Production increases can bring oversupply, but domestic inventories are not increasing (Chart IV).  Global inventories may be increasing.  Because NDM is a byproduct of butter churning, the priority is to sell the product at lower prices if necessary.

Chart III - NDM Production Long-Term

Chart IV below displays the domestic inventories of NDM and SMP.  It's easy to see that inventory levels have been very stable despite the growth of production.  This factor alone should bring higher prices for NDM, not lower.

Chart IV - Domestic Inventory of NDM and SMP

How much NDM and SMP are exported? From Chart V below its easy to see that the amount of NDM and SMP exported continues to climb.  It reached a high of 92% in 2021 and then fell to the 70%s in 2022 and the latest export percent is 43%.  That signals that exports have taken a drastic fall in the last three months!

Chart V - Percent of exports in disappearance 

Where do the exports go?  Mexico is by far the largest importer of NMD/SMP (Chart VI).  Their average imports have been around 70 million pounds per month.  In the latest available month this has jumped to 94 million pounds which represents 55% of the total exports in March 2023.  Its doubtful that consumption has increased that much, but more likely it is due to favorable price for a buy in.

Chart VI - Mexico Imports of NSM/SMP

The Italian Dairy Economic Consulting firm CLAL publishes competitive prices for many different dairy products and global locations.  They do show the tremendous price drop of NDM and SMP (Chart VII). which matches very closely to the AMS prices of NDM.  So, the basis of the low U.S. NDM prices is the global price.  (There database is also showing a global downturn in cheese and butter prices.)

Chart VII - Export Prices FOB U.S. West Coast from CLAL

Butter and cheese prices can be analyzed with domestic analytics, but NDM is more difficult to analyze due the changing global environment.  Because NDM is produced only by the U.S., it does not enjoy the broad market of SMP which is defined in the CODEX by the World Trade Organization (WHO).  Some SMP is produced in the U.S., but sales are much smaller than NDM.  NDM must be sold to avoid inventory buildups, but SMP can be produced to meet demand.  

Does it make sense that NDM is used to price Class I fluid milk?  More on this in future blog posts.