Producer Milk Pricing Fundamentals are Concerning.

This post will update the status of the commodities that are used for or influence pricing of producer milk.  It will cover the following:

• Cheese production and inventories are very important as they are key in determining the price of cheese and in turn, the Class I and Class III skim milk prices and the value of milk protein.

• Butter production and inventories are very important as they are key in determining the value of butterfat in milk.

• Nonfat Dry Milk (NDM) determines the Class II and the Class IV skim milk prices and half of the Class I skim price.  The combined impact of NDM is very significant.

• Dry Whey production and inventories are key in determining the value of dry whey and in turn, the price of "other solids" for Class III pricing.

• Milk production is key to determining the future pricing of cheese and butter.  When milk is plentiful, commodity inventories will swell, and prices will be lower.  This post will start with the most recent data on milk production.  The growth of milk production is a leading indicator of producer milk prices and currently it is the most troubling parameter for producer milk prices.

________________________________________

Milk production is reaching record levels.  Chart I graphically shows the increase based on 12-month moving averages.  While the 12-month moving averages are best for seeing long-term trends, the most recent monthly increases in milk production are indicators of how robust milk production is currently.  For the last two months the increases vs. the prior year were 3.5 percent and 4.6 percent respectively.  These increases are well above the needed supply of milk to match domestic consumption and exports.  Excess milk is often used for cheese as the cheese can be stored for a longer time.  This can inflate cheese inventories and lower prices.

Chart I - U.S. Milk Production

_________________________________________

The price of cheese, as determined by Agricultural Marketing Service (AMS), is based on the price paid for young (up to 30 days old) Cheddar cheese.  The monthly production of Cheddar cheese is public, and the current 12-month averages and trends are shown in Chart II. In May 2020, one year ago, the 12-month moving average increase in production of Cheddar vs. the prior year was .3 percent.  In May of 2021, the most recent data, the 12-month moving average increase is three percent.  

Chart II - Production of Cheddar Cheese

The inventory level of young Cheddar cheese is not available publicly.  However, the inventory of "American" cheese is available publicly and Cheddar cheese makes up 70 percent of "American" cheese production.  Chart III shows the current trends in "American" cheese cold storage inventories.  The numbers in Chart III are based on the National Agricultural Statistics Service and other sources of inventories and includes all "American" cheeses regardless of age.  The 12-month moving average of "American" cheese inventories has grown by just three percent over the last 12-months. 

In January of 2019, when inventories levels were near the current levels, the price of cheese as published by AMS was $1.54 per pound.  In May 2021 inventories are nearly the same, but the AMS price of cheese is $1.82 per pound.  It is no wonder that in June, the AMS price of cheese dropped to $1.64 per pound.  Currently, the NASS weekly survey numbers for cheese are falling to a level near $1.50 per pound.

Chart III - American Cheese Inventory

__________________________________________

Butter inventories are growing and have been for over a year.  Chart IV displays the size of the inventory expressed as 12-month moving averages.  In the last year and a half, the 12-month moving average of butter inventories have grown by 30 percent. 

Chart IV - Month End Butter Inventories

Net exports of butter have in the past been negative as more butter was imported than exported.  However, in the last six months, with more inventory available, exports have increased, and imports have decreased. As a result, net exports are now slightly positive.  However, net exports are still less than one percent of total disappearance.  Domestic disappearance is key.

Butter production has fallen in the last two months but is still higher than domestic disappearance (Chart V).  This means that inventories are still growing, but at a slower rate.

Chart V - Butter Production and domestic Disappearance

With the increase in butter inventories, the price of butter has fallen from the 2018 and 2019 record levels of $2.39 per pound.   In February 2021, butter prices were at $1.36 per pound.  In the last three months there has been increases in butter prices with June at $1.79 per pound.  The most recent weekly AMS prices have remained at the June 2021 levels.  But with rising inventories, prices will likely begin to fall in the near future.  

Chart VI - NASS Butter Prices

___________________________________________

NDM pricing has become very important as it prices both Class II and Class IV skim milk and half of the pricing of Class I skim milk.  With increased butter production, more NDM is available.  It is being increasingly exported (Charts VII) and, therefore, the AMS price for NDM is based primarily on international competition.  Currently, 70 percent of NDM is exported and it appears to be steadily rising.  International markets can be very volatile.

Chart VII - Exports and Domestic use of NDM

The 2021 increases in NDM prices are very positive for producer milk pricing.  The lowest 2020 NDM price was $.85 per pound and the June 2021 price is $1.27 per pound, a 50 percent increase.

The higher NDM price is positive for Class II and Class IV milk prices, and partially for Class I milk prices.  The May 2019 change in the Class I pricing formula change is finally positive.   The old Class I formula would calculate the July skim milk price at $10.59 per cwt., as opposed to the new formula which calculated the price at $10.95 per cwt.

As mentioned above, international dairy product sales and prices can be very volatile.

_________________________________________

Dry whey inventories are very stable (Chart VIII).  If there is not a ready market for dry whey, typically, it will not be dried.

Chart VIII

Dry whey has maintained a balance between domestic and export use favoring domestic use.  However, beginning in early 2021, there has been an increase in exports and a decrease in domestic use.  Exports now account for 60 percent of dry whey disappearance (Chart IX).  This increases the impact of dry whey pricing as determined by international competition.

Chart IX - Disappearance of Dry Whey

Dry whey prices hit a low of $.32 per pound in 2020, but have now increased to $.64 per pound, a 100 percent increase.  International pricing can be volatile, but for now the current price is providing producer revenue with a higher value of "other solids."

__________________________________________

In summary, producer milk pricing is becoming increasingly dependent on international pricing factors for NDM and dry whey.  Producer milk prices have always been volatile, but the increasing dependence on international markets will increase this volatility.

When producer finances allow, cow and milk production increases.  The increase in milk production is not demand driven.  As a result, milk production grows, prices fall, and then production levels come back in line.  It appears that milk production is entering this cycle.

Where are the Cows Going? Texas is Rising Fastest!

The number of cows in the U.S. continues to grow.  Within that growth, there are some state-by-state significant long-term changes.  The state "cow counts" in this post are for May of each year beginning with 2016 through 2021.  This allows the most recent data to be included and compared to the same month of prior years. The trends established though the last six years are used to extrapolate where the growth and losses will occur in the next four years.  

There are 24 states that make up 96 percent of the total U.S. dairy cow population and six states make up 59 percent of the total U.S. dairy cows.  The data for these 24 states and the six largest states will be used for much of this analysis.  These six largest states in order by size are California, Wisconsin, Idaho, New York, Texas, and Pennsylvania.

How do the six largest states compare in size?  California is significantly larger than any other state. Wisconsin is second with 26 percent fewer cows than California.  The next four states are smaller and close in size.  There are some ranking changes among these four over the last six years.

Chart I - Number of Cows in the six largest states

Table I below compares the six largest states by their gains and losses.  Three of these states have gained dairy cows while three have lost dairy cows.

Overall, the cow count over the last six years in the 24 major dairy states has increased by 349,000 cows which is a four percent increase.  The largest gain that occurred was in Texas with a gain of 153,000 cows.  Idaho also has a nice gain of 61,000 cows.  New York state had a small gain of 8000 cows. 

The loss of 55,000 cows in Pennsylvania was a very significant loss for their dairy business.  The two states with the largest number of cows, California and Wisconsin, have also decreased their cow counts.  In the case of California, the loss of 44,000 cows over the six years reviewed, was significant, while the loss in Wisconsin was very slight at just 5000 cows. 

The states with the biggest increases in the number of cows are Texas and Idaho.  Texas is in a Federal Milk Marketing Order and Idaho is not in a Federal Order.  With the massive de-pooling that is happening in the Federal Orders, one could question the value of being in a Federal Order.

Table I - The Top Six States for Dairy Cows

Chart II below shows the difference between California and Wisconsin, the two largest states.  The chart also provides a four-year projection if the same trends continue.  California would continue losing cows at the rate of about .5 percent per year.  However, California will remain by far the largest dairy cow state.  The loss in Wisconsin is small and in 2021 there is an increase of 1.4 percent over the prior year.  Wisconsin can best be described as stable.

Chart II - Number of Cows in the six largest states

The four states that were clustered together in Chart I have very different projections through 2025.  There are five states in Chart III because the rankings change, bringing in Michigan as one of the top six. Pennsylvania, the brown line, will continue to lose cows at a significant pace and will drop out of the top six largest cow states.

Chart III - Dairy Cows with Linear Projections Through 2024

Table II below ranks the states by cow population over the span of this analysis.  While California and Wisconsin will remain the leaders, there have been many changes in the ranking of the remaining four states.  Third place has changed from New York to Idaho in the last six years. By 2025, Texas would rise to third place in the four years of projections reducing Idaho to fourth place.  During the term of this 10-year analysis, Texas is moving from sixth place to third place.  

By 2025, Pennsylvania has fallen out of the top six and Michigan, which has a growth rate of 6.5 percent over the last six years, will replace Pennsylvania in the top six cow states.  New York is steadily dropping in the rankings during this time span, going from third place to fourth place and by the trends will soon be in fifth place. While New York is not losing many cows, it is also not growing.

Table II - Ranking of the Largest Dairy States

Another way of analyzing the gains and losses by state is by their percent gain or loss.  Table III shows the states with double digit percent gains and losses between 2016 and 2021.  Overall, the more central states with lower population densities have made gains.  The more heavily populated states, especially on the East coast have lost cow population.  The heavily populated states are greatly impacted by the decreases in fluid milk consumption.  Florida, which is almost totally fluid milk, is a prime example of a shrinking dairy state.

Table III - Double Digit Percent Gains/Loses by State

As covered in prior posts, Class I fluid milk is declining and Class III milk for cheese is growing.  (See the May 30, 2021 post and the September 11, 2020 post.). Table IV below lists the six largest cheese producing states.

The top three cheese producing states (Table IV) are the same as the top three states with the largest number of cows (Table I). New Mexico. the fourth largest cheese producing state, is the home to two large cheese producing plants and just across the border in Texas, Hilmar Cheese also has a large cheese plant.  Much of the Texas produced milk goes to these three cheese plants.  Hilmar Cheese also owns the world's largest cheese plant, located in northern California, which is very important to support the demand for Class III milk in California.

New York, the fourth largest state in Table I, and is ranked fifth in cheese production.  New York is well balanced between Class I fluid milk and Class III milk for cheese and, therefore, remains stable with only minor changes in their cow population. 

Table IV - Largest Cheese Producing States

This post provides insight into where milk production has moved and where it is going.  Some of the changes are driven by the changing consumer consumption with less fluid milk and more cheese.  The cows will follow where the cheese plants are built.  In turn, the businesses that support dairy producers must follow the cows.  

The changes are also driven by economic factors like taxes, labor availability, and land values.  These changes are not short-term, like the impact of COVID was.  These are long-term shifts that will continue.  Please post any comments or questions in the comment section of this post.