Is Inflation Hitting Dairy Prices?

The news is full of inflation concerns.  This post will deal with inflation in the dairy industry, specifically fluid milk. This data used in this post is from the beginning of 2018 through May 2021.  Milk prices are compared based on per gallon prices of whole milk and two percent milk, which make up most of the fluid milk sales.  Producer milk prices are converted from hundred-weight to gallons based on 8.6 pounds per gallon.  Prices are based on 12 month moving averages to eliminate seasonal trends and short-term fluctuations.

Chart I below compares the producer milk prices with U.S. retail milk prices.  The producer prices are based on Class I prices for the Northeast Federal Order which has the largest amount of Class I milk of any Federal Order.  As can be seen in the chart, retail prices are growing while producer prices are stable. In the last 18 months, retail prices have increased by over eight percent and producer prices have declined by one percent. 

Chart I - Retail and Producer Milk Prices

The spread between the retail price for milk and the price paid to producers for Class I milk includes the cost and margins to process milk, deliver milk, and sell the milk in grocery stores and other outlets.

Chart II below charts the "spread" between retail prices and producer prices on a per gallon basis.  Over the last 18 months. the spread between producer prices and retail prices has increased by $.29 per gallon.  This is where the inflation in retail milk prices is coming from.

Chart II - Expenses and Margins to Process, Deliver,
and Sell Fluid Milk.

Below are three tables.  One is based on the U.S. retail milk price, one is based on producer prices for the NE Federal Order, and one is based on the spread between them.

The retail prices are based on the retail (grocery) prices as collected from the checkout scans of the UPC codes.  As shown in Table I, the retail price fell in 2018 as compared to 2017.  However, since 2018, the prices have been escalating.  In 2020, retail milk prices increased by over 6.2 percent compared to 2019.  There is price elasticity of demand for milk, so these increased retail prices may accelerate the decrease in sales of fluid milk.  In the time span used in this analysis, 2018 through May of 2021, the retail price of milk has increased by nine percent with the bulk of this occurring in the last year and a half.  

Table I - Retail Price of Milk

Producer Class I milk prices are calculated based on the prices of skim Class III and skim Class IV milk and butterfat.  Class III skim prices are based on the price of cheese, butter, and dry whey with cheese prices having the most impact.  Class IV skim prices are based on Nonfat Dry Milk (NDM).  See the prior post for an update of how these commodity prices are moving.  

There is no USDA link between milk retail prices and producer prices.

Table II - Producer Price of Milk for the NE FMMO

Table III has the most revealing data on where milk inflation is building. In the last18 months, processing, distribution and selling have increased their share of the retail price by 17 percent. Are the elements in this piece of the pie really incurring higher expenses that they are passing on to customers, or is the general expectation of inflation allowing some retail price increases which are improving margins for this part of the pie?  Labor costs and energy costs are increasing.  However, because many of the costs in processing delivery and selling are fixed, like depreciation, the variable costs of wages and energy would have to raise more the overall percentages in Table III.  This is unlikely.

Table III - Spread Between the Retail Milk Price and
Producer Milk Price

IS THERE REALLY INFLATION IN DAIRY?

There is clearly no inflation in the value of raw milk.  Producer prices for Class I milk are stable, not rising.  The Class I skim base price is based primarily on the price of cheese and NDM.  It bears no relationship to fluid milk pricing.

Is the inflation in retail milk prices coming from processing, delivery, and selling?  The answer is yes.  With the annual increases shown in Table III the increases appear to be more than just increases forced by rising labor and fuel prices.  There appears to be a significant increase in margins.  

Fluid milk is a commodity.  Retail prices are subject to competition.  The news has created an expectation for consumers that prices are rising.  For the dairy segment of consumer prices analyzed in this post, most of the increases have to do with growing margins.  Over time, competition will re-tighten these margins. 

As the U.S. and the world exit the COVID period with a return to "normal" many of the inflationary prices that are concerning today will lessen and will return to more normal levels.  As an example, lumber prices were strongly inflated a few weeks ago, but are already returning to lower levels of inflation.  Fluid milk prices will likely follow a similar pattern

Producer Milk Prices are Skyrocketing! Why is this happening? Will it continue?

In 2021 producer milk prices have skyrocketed.  This post will examine the elements behind these increases to see why the prices are increasing and if they are sustainable.  

The data in this post is the most current data available.  USDA Class and Component pricing data is through May, cold storage inventory data is through April, and weekly commodity prices are through June 5.

CLASS AND COMPONENT PRODUCER MILK PRICES

• The Class II milk price has increased by 16 percent in 2021.

• The Class III milk price has increased by 21 percent in 2021, all in the last three months.

• The Class IV price has increased steadily by 21 percent in 2021.

• The butterfat price has increased by 29 percent in 2021.

• The milk protein price has increased by only three percent in 2021.

• The "Other Solids" price has increased by 106 percent in 2021.

COMMODITY PRICES USED TO PRICE MILK COMPONENTS

• Butter prices have increased by 25 percent in 2021.

• Cheese Prices have increased by 11 percent in 2021.

• Dry Whey Prices have increased by 56 percent in 2021.

• Nonfat Dry Milk prices have increased by 13 percent in 2021.

The chain of events in pricing producer milk begins with the wholesale dairy inventories, which in turn influence dairy commodity prices, which in turn influence component prices, which in turn influence producer milk prices. 

As the U.S, has rescinded restrictions that were implemented to reduce the spread of COVID in 2020, dining is shifting back to more food service and less eating at home.  This can be disruptive for production of dairy products and the supply chains that deliver those products.  The disruptive changes influence dairy inventories. 

CHEESE

During 2021 cheese inventory levels have averaged an increased of four percent, with "American Cheese" levels increasing four percent and "Other Cheese" levels increasing by five percent.  "American cheese" is dominated by Cheddar cheese and "Other Cheese" is dominated by Mozzarella cheese.  Production of these categories have remained robust.  Based on the increases in cheese inventory levels of these categories, there is no apparent reason for the 11 percent increase in cheese pricing.  However, the cheese pricing used in the USDA formulas is based only on young (less than 31 days old) Cheddar cheese, and there can be changes that influence just the Cheddar inventories.   Inventories of Cheddar are not made public.

Another area that can influence pricing is the price of blocks of cheese vs. barrels of cheese.  Blocks of cheese are used for slices, shredded products, etc.  Barrels of cheese are used as an ingredient in manufacturing products like processed cheese slices, cheese spreads, etc.  Blocks of natural cheese are typically more expensive than barrels of cheese.  Charts I and II show the Agricultural Marketing Service (AMS) pricing of Cheddar for blocks and barrels of cheese.  

In 2021, block Cheddar cheese prices (Chart I) have traded in a tight range of $.22 per pound.  They are currently in the middle of that range at $1.71 per pound.  In 2021 Cheddar block prices have varied between $1.61 per pound and $1.83 per pound.

Chart I - Weekly Block Cheese Prices

However, barrels of Cheddar cheese have seen volatility in 2021 with a much wider spread of $.37 per pound.  For two weeks in May, Cheddar barrels were more expensive than Cheddar blocks.  Cheddar barrel prices have ranged from $1.47 to $1.84 per pound.  The current price is $1.68 per pound.

Chart II - Weekly Barrel Cheese Prices

Clearly, the increase in cheese prices is the result of the changes in barrel prices.  This is likely related to changes in eating habits as COVID restrictions are rescinded.

As production and supply changes adjust to the eating changes, Cheddar block prices will likely return to a more normal level.  Therefore, the 21 percent escalation in cheese prices will return to lower levels.  Based on the last few weeks of Cheddar block pricing, that is already beginning.  The current escalation and volatility in AMS "cheese" prices is a result of the narrow sampling of cheese prices which are based only on the price of young Cheddar cheese.

BUTTER

Butter prices are the basis for pricing butterfat.  Butter prices has been steadily increasing in 2021. The USDA monthly Class and Component price of butter has risen 25 percent in 2021.   Usually, there is a correlation between butter inventories and butter prices (see Chart I in a recent post displaying this inverse relationship). The 2021 increase in butter inventory over the prior year is three percent.  That is more than the increase in domestic consumption.  Production has remained strong (see Chart II in the recent post to this blog).  In 2021 there is not a butter inventory issue, so that makes the price increase a little unusual.  

With more butter inventory available, exports are starting to expand.  To date, those exports are small, but they are building.   It appears that the weekly pricing is leveling out (Chart III), so there may be no further price increases. It is probably safe to say that butter prices will maintain the current levels or decrease as inventories continue to build.

Chart III - Weekly Butter Prices

DRY WHEY

Dry whey is the basis for pricing "Other Solids."  Dry whey is a manageable commodity, as there is no reason to dry the whey if there is no market.  Dry whey is sold primarily by export.  The international market price of dry whey has been increasing as reported by CLAL.  China has been an active buyer of dry whey and especially whey permeate.  Domestic use is down, and exports are up, but the combined disappearance is stable. The pricing seems to be leveling off, but international prices can be very volatile.  U.S. inventories of dry whey were very high in mid 2020, but currently are near three-year lows.  Pricing of dry whey is all about the international markets.

Chart V - Weekly Dry Whey Prices 

NDM

The price of NDM is very important because it is now used for Class IV skim pricing, Class II skim pricing, and partially for Class I skim pricing.  NDM prices are at three-year highs (Chart VI).  Approximately three quarters of NDM is exported.  International prices have significantly increased.  The latest weekly price of $1.27 per pound represents a three year high.  NDM has increased in price by 13 percent in 2021.   International competition will decide if NDM will continue to increase or decrease in pricing. 

Chart VI - Weekly NDM Prices

SUMMARY

Cheese prices will likely moderate in the coming weeks as shortages in block Cheddar inventories will probably be corrected.  

Butter prices will at best stay the same with a good chance of falling as inventories of butter continue to grow.  If exports of butter continue to grow, it could help maintain reasonable inventory levels.

Dry Whey prices will move with whatever happens in the international markets.  The price of "Other Solids" in Class III milk has doubled in price in 2021.  The increase is adding about 2 dollars to the current Class III price as compared to the 2020 prices.  International prices can vary tremendously based on supply and demand, international events and international politics, but currently the pricing is very positive.

Very importantly, NDM prices, which are also dependent on international events, are having a very positive price impact on all skim milk except Class III skim milk.  As an example, since the beginning of 2021 NDM has increased in price by 13 percent causing the Class IV skim price to increase by 16 percent.  

International events which impact dairy exports are coming in play with butter, dry whey, and NDM.

As COVID issues continue to diminish domestically, it will impact domestic consumption, dining patterns, and the supply chain. We do know that overall, too much milk is being produced which will likely increase dairy product inventories with negative pricing consequences.  Future posts will continue to follow these events.