Sunday, May 30, 2021

As COVID Declines, what is Happening to Milk Sales?

The February 21 post to this blog reviewed fluid milk sales through 2020.  Data for the first quarter of 2021 is now available.  Eating habits changed starting in March 2020 and continued with more in home dining as the U.S. instituted "stay at home" edicts to reduce the spread of COVID.  As the U.S. is now exiting from the many COVID restrictions, life is normalizing.  This post will cover the available data on milk sales that cover the first quarter of 2021.  The first quarter was only the beginning of a return to normal, but there are signs that fluid milk sales are beginning to return to normal levels and trends.  Unfortunately, that means that U.S. fluid milk consumption is decreasing.

The data in this post is based primarily on 12 month moving averages.  The 12 month moving averages eliminate monthly fluctuations, seasonal changes, and changes in the days per month.  All charts compare sales trends from the beginning of 2018.

In 2018 and 2019, fluid milk sales were declining by two percent annually.  In 2020, fluid milk sales did not decrease, giving hope to a fluid milk recovery.  The period beginning with March 2020 showed significant growth in fluid milk sales.  The increases were probably a combined impact of hoarding and more mornings with cereal and milk during the "stay at home" period.  The first quarter of 2021 shows a return to normalcy which includes a return to decreasing milk sales.  The first quarter of 2021 shows major drops averaging over five percent from the prior year.  This large percentage decline is partially the result of the high comparative March 2020 sales.  Chart I shows fluid milk sales in millions of pounds.  The current sales appear to be following the prior year trends of decreasing milk sales.

Chart I - Total U.S. Milk Sales

A recent post to this blog covered the "Amazing Success of Organic Milk."  Chart II shows the comparison of total milk sales to conventional milk sales and organic milk sales.   While the growth of organic milk at high prices is "amazing," it is still a very minor part of total fluid milk sales.

Chart II - Total, Conventional, and Organic Milk Sales

The pattern of total milk sales follows the conventional milk sales pattern as shown in Chart III.  Trend lines in Chart III show the continuing decline in conventional and total fluid milk sales.

Chart III - Total and Conventional Milk Sales

Chart IV compares the sales of whole milk, two percent milk, one percent milk and fat free milk in the first quarter of the year.  Whole milk and two percent fat milk are holding their own while other categories of milk continue to see declines.  

There are consistent declines in one percent milk, fat free milk and flavored fat free milk. One percent milk is declining at about five percent annually, fat free milk is declining at about 15 percent annually, and flavored reduced fat is declining at 19 percent.  The declines in these three categories make up most of the total year to year declines. 

Chart IV - First Quarter Milk Sales for 2018, 2019, 2020 and 2021

As the impact of COVID continues to dissipate, the impact on milk sales will likely also return to the trends of prior year.  Chart V and VI show graphically the sales of whole milk and two percent milk since the beginning of 2018.  These two categories make up 70 percent of total milk sales.  Chart V displays whole milk sales and clearly shows the peak in sales in 2020 and the rapid decline to a more normal level in the first quarter of 2021. 

Chart V - Whole Milk Sales

Chart VI displays two percent milk sales.  As whole milk sales were increasing in 2018 and 2019 (Chart V), two percent sales were falling.  In 2020, two percent fat milk saw a resurgence, but in the first quarter of 2021 two percent milk sales are declining.  Will two percent milk return to lower levels as the U.S. returns to a post COVID environment?  As data is available for the second quarter, it will be covered in a future post.

Chart VI - Two Percent Milk Sales

Sales of one percent milk and fat free milk continue their tumble.  One percent milk got a slight bump in mid 2020, but that quickly disappeared (Chart VII).  

Chart VII - One Percent Milk Sales

Fat free milk continued its fall in a very linear decline (Chart VIII).  Over the course of Chart VIII, fat free milk sales have dropped by 30 percent. With minimal sales, fat free milk may start losing shelf space in the expensive refrigerated sections of grocery stores.  There is no reason to expect any changes in the consistent decline of one percent fat and fat free milk.

Chart VIII - Fat Free Milk Sales

Flavored reduced fat milk is primarily a school item.  With many schools closed for COVID in 2020, sales dropped.  As schools reopen, there should be some rebound, however prior sales declines of five percent annually will likely continue after the brief rebound.

Chart IX - Flavored Reduced Fat Milk Sales

WHAT DOES IT ALL MEAN?

With a very successful vaccination program, COVID mandates are now being dropped.  The second quarter of 2021 data should show the impact of a return to normal.  A total return to normal will probably not occur until the third quarter.  As data is available for the upcoming 2021 periods, they will be reviewed in future posts to this blog.

Sunday, May 16, 2021

Is the Growth Rate of Milk Production Still Too High?

U.S. milk production is hitting new record highs.  In March 2021, 19.8 billion pounds of milk were produced, a two percent increase over the prior year.  In the first quarter of 2021, the twelve-month moving average of milk production (Chart I) grew by two percent over the prior year.  After adjusting for leap year in 2020, the quarterly growth rate was also up two percent over the prior year.  By every calculation, milk production is growing by two percent annually.

Chart I - 12 Month Moving Average of U.S. Milk Production

The number of dairy cows has hit a new record high of 9,468,000 cows (Chart II).  The increase in number of cows was just under one percent vs. the prior year.

Chart II - Number of Dairy Cows in the U.S.

Milk per cow has also continued to increase just over one percent vs. the prior year (Chart III).   This is consistent with prior years.  The increases of more cows and more productive cows combine to make up the two percent increase in milk production.

Chart III - 12 Month Moving Average of Milk per cow per day

All classes of milk are paid for butterfat based specifically on the butterfat content.   More butterfat equals more revenue for all producers.

As shown in Chart IV, butterfat percent in milk is growing, through breeding, genetics, nutrition, and management.  In the first quarter of 2021, butterfat in milk averaged over four percent for a record quarter.  The growth of butterfat in milk is just shy of two percent over the prior year. With more milk being produced and higher butterfat content in that milk, total butterfat production is growing at a rate of nearly four percent annually.  This is nearly twice the growth rate of domestic butter consumption.

In the prior post, the significant growth of butter inventories was shown.  With the increase in inventories, butter prices have tumbled (Chart IV).  Slowing the growth of butterfat would be difficult as this is a good revenue stream for all milk producers.  Butter exports will likely increase to absorb this excess butterfat.

Chart IV - Butterfat Price and Percent of Milk

Class III milk for cheese makes up over 50 percent of total milk usage.  Milk protein is very important for efficient cheese production and financial incentives are common for higher milk protein levels in Class III milk.  However,  milk protein is not specifically paid for Class I and Class IV milk.  Increasing milk protein typically requires improved nutrition which does typically carry an increase in feed costs.  Therefore, increases of milk protein are not as consistent as butterfat growth.  The growth of milk protein is also dependent on the price of milk protein as shown in Chart V.  During 2021, milk protein as a percent of milk is growing by over one percent annually.  Milk protein in milk has averaged 3.25 percent in 2021 with higher milk protein prices.  

With the growth in milk at two percent and a one percent increase in milk protein percent in milk, the volume of milk protein in the U.S. is growing by about three percent annually.  In areas like the Upper Midwest where nearly 90 percent of the milk goes to cheese, the increases in milk protein are much higher. For the first quarter of 2021, milk protein percent in milk in the Upper Midwest grew by 7 percent over the prior year.

Chart V - Milk Protein Price and Percent of Milk

WHAT DOES ALL THIS MEAN?

The chain of events leading to producer milk and component payment begins with milk and component production.  Increases above consumption will increase cheese and butter inventories.  In turn the increased inventory levels will decrease cheese and butter prices.  By the formulas, lower cheese and butter prices will decrease milk protein and butterfat values.  

Considering the analytics in this post and the prior post, the pricing of butterfat and milk protein will likely remain stable in the near future. 
  • Butterfat stocks are high, and production of butterfat is robust.  There is increasing amounts of milk available, and that milk has more butterfat than previously.  Therefore, butterfat prices will remain low.  More exports of butter, especially to Canada, are likely.
  • Cheese prices are remaining relatively high with April at $1.71 per pound.  By the component pricing formulas, high cheese prices and low butter prices combine to make milk protein pricing higher.  As covered in the prior post, cheese inventories are steady.  However, there is some caution on cheese pricing as producer milk (growing at two percent annually) will supply more milk than needed domestically.  Historically, any excess will be converted to cheese as it can be stored for longer periods.  This would bring bloated inventories and lower prices.  This could occur in the second half of 2021.
  • Table I displays the three year history of cheese and butter pricing.  The current prices are in line with historical averages.  The futures markets are showing a small (approximately six percent) increase in butter pricing later in 2021.  Cheese futures are showing slightly larger price increases (approximately eleven percent) later in 2021.  Based on the currently available data, these increases are unlikely.
Table I - Cheese and Butter Pricing

Producer emphasis on butterfat and milk protein components remains the most important parameter to maximize revenue and cash flow on dairy farms.








Wednesday, May 5, 2021

Update on Butter and Cheese Inventories

As butter and cheese inventories increase, wholesale butter and cheese prices decline.  As butter prices decline, the value of butterfat declines.  As cheese prices decline, the value of milk protein and Class III milk decline.  This post will update the January 24, 2021 blog post.  As the COVID pandemic declines, more normal pricing relationships are returning to the dairy marketplace.  The next post will include a quarterly update of milk production, cows, component levels, and Somatic Cell Counts.  Together, these two posts provide insight into where producer milk prices are going. Together, the parameters covered in these two posts are a good predicator of future milk prices.

BUTTER

The relationship between butter inventories and butter prices is very precise.  As inventories increase, prices go down.  Chart I below is based on 12 month moving averages.  The moving averages reduce the impact of seasonal changes and monthly variations.  During 2018 and 2019 butter was above $2 per pound.  As inventories grew (the blue line) butter prices dropped (the red line).

Chart I - Inventory and Pricing of Butter

Butter production is currently well above domestic wholesale disappearance (Chart II).  This has led to the increased inventories in Chart I.  In the last few months, butter disappearance has increased, perhaps as more restaurants are reopening.

Chart II - Production and Disappearance 

Exports of butter remain small (Chart III), but with more available inventory, they have increased.  Most of these exports go to Canada.  However, this level of exports will not significantly impact butter inventories and butter prices.

Chart III - Butter Exports

If the recovery of restaurant dining continues, it may increase butter disappearance, but it will take some time to reduce inventories and improve butter (and therefore butterfat) prices. 

CHEESE

The parameter used for cheese pricing is the price of young Cheddar cheese.  While data on inventories of this specific cheese are not made public, Cheddar production does make up 70 percent of American cheese production (Chart IV). This post will therefore rely on data for American cheese as an indicator of Cheddar inventories.

Chart IV - Production of Cheddar cheese and "all other" American Cheeses 

For years, production of Cheddar cheese was stagnant.  However, in the last few years, production of Cheddar has seen some growth (Chart V).  Over the period of Chart V, Cheddar production has grown by more than five percent.

Chart V - Production of Cheddar - 12 Month Moving Average

The relationship between inventory levels and cheese pricing were mudded during the 2020 COVID pandemic.  However, in the more recent months in Chart VI, one can see the impact of lower cheese prices with larger American cheese inventories.  The "crazy" days of 2020 seem to be normalizing.  Chart VI below shows the correlation between inventories of American cheese and the Agricultural Marketing Service (AMS) prices for cheese.  During the last year, these inventories have grown by a little over two percent.

Chart VI - Inventory and Pricing of American Cheese

While Chart VI is somewhat concerning with growing inventories and lower cheese prices, the days' supply of American cheese shown in Chart VII below shows that the wholesale supply of cheese is in balance.  The difference between Charts VI above and Chart VII below is that the days' supply takes into consideration that American cheese production and disappearance is growing, and therefore inventories would be expected to grow as well.

Chart VII - Days of Inventory of American Cheese

 WHAT DOES IT ALL MEAN?

Changes in inventories bring changes in dairy producer milk prices.  Butter inventories are a little high and production is above wholesale disappearance.  Expect butter prices to remain low for the immediate future.

 Cheddar cheese used by AMS to price the value of "cheese" appears to be at reasonable levels.  There are minimal trends in Cheddar production that would influence major price changes.  Therefore, milk protein prices and the Class III milk price will probably be stable.

The next post will cover milk production, cow numbers and component trends.  All of these analytics are important because if milk protein and butterfat production is increasing faster than domestic consumption, inventories will increase, and prices will fall.