It is Expensive to Transport Milk. But Much of Fluid Milk Must Travel.

In the June 19 post to this blog, the trends in sales of fluid milk sales were covered.  The decline in fluid milk sales was between three and four percent annually.  It is expensive to move milk around because it is mostly water.  The perishable nature of fluid milk adds to the complications.  This post will review the movement of fluid milk to satisfy demand in the U.S.

In a declining market, which fluid milk is, building new plants can only make sense if they reduce costs.  There is no good reason to build a new processing plant based on increased demand.  In this analysis, a two percent shrinkage between production and sales is used.  What is shrinkage?  The shrinkage can come from damage, out of date product, stealing, and other events.  Not all the milk produced gets sold.

The Map below shows where the Federal Orders are located.  The USDA collects data on sales and production of fluid milk in each Federal Order.  When they provide an estimate of total U.S, fluid milk sales, they make the calculation based on the assumption that 92 percent of fluid milk is produced and sold within the borders of the Federal Orders.  The other eight percent of sales comes from areas where there are no Federal Orders. This assumption has been used for some time.

Map of the Federal Milk Marketing Orders

Some Federal Orders make fluid milk in excess of the needs in their Federal Order.  Other Federal Orders have a shortage of production compared to sales.   The table below shows where and by how much each Federal Order has a surplus or a shortage.  The Orders with large shortages are the Southeast, Florida, and the Upper Midwest.  The Southeast and Florida Orders are contiguous, so that increases the need for milk in that area of the U.S.  The Southwest Federal Order is also short of fluid milk to match sales, so the demand in Florida, the Southeast, and the Southwest Orders must be covered with milk from the Central and Appalachian Federal Orders.  Some of that milk must travel a long way.

The Upper Midwest is so centered on making cheese that 20 percent of their fluid milk must come from the Central or other Federal Orders.  

The Orders with a surplus amount to 3,954 million pounds or nine percent of the total U.S. fluid milk production.  The Orders that have a shortage amount to 2,626 million pounds or six percent of the total U.S. fluid milk.

Sales and Production of Fluid Milk 
Millions of Pounds

The Class I differential is intended to cover the cost of moving milk to the populated areas for processing.  However, after processing (eg, bottling), the processor, or his customer, is responsible for delivery charges.

Therefore, if the milk is processed in South Carolina, getting it to a store in Florida is an added expense.  The Federal Order system was intended to assure that milk was available in the cities, not for fulfilling shortages in some areas that do not process adequate milk.  The current system may present efficiencies that could provide a more cost-effective avenue for fluid milk.

The Federal Milk Marketing Orders were developed to bring raw milk to the cities where it could be processed and sold.  It was intended to assure that milk was available in the cities where there were no cows.  Today, it is hard to imagine a grocery store that does not carry milk.  If a store did not carry milk, it would probably go out of business.  It would be like a store that did not carry bread.  If the basic foods are not offered, people would not shop there.

When one compares the intended purpose of the Federal Orders to the present situation, the needs are different.  Today, bottled milk must be moved long distances to assure that Florida, clear down to Key West, always has milk on the shelves. Small local fluid milk processors are not a part of today's diary landscape.

That of course brings into question, what would fluid milk production, processing, and distribution be like without the Federal Orders?  Would all grocery stores still carry milk?  Would the logistics of moving milk be different and more efficient.  The quality of the milk is the responsibility of the FDA, so that should not change.

Is There Enough Milk Being Produced to Meet Demand?

Is there enough milk being produced to meet demand?  NO!  In the prior two posts, the growth of cheese production and the decline of butter production were covered.  Cheese production is in great shape, with expansion of nearly three percent annually with wholesale inventories at sufficient levels to meet demand.  Butter production is not in good shape, with declines in production and inventories.  This post will cover the milk supply.  The. milk supply is not growing and in fact declined in the first half of 2022.  This post will provide details on where and how milk production is changing.  Where milk is produced is not necessarily where it is used.  As an example, milk produced in one state may be used to produce cheese in another state.

Chart I shows production of milk in the U.S.  In 2019 to mid 2021, milk production was growing.  It fell to a decrease versus the prior year in September of 2021 and continued decreasing until July 2022.

Chart I - U.S. Milk Production
Percent Change from Prior Year

Table I lists the gains and losses in milk production by the nine largest milk producing states.  In total, in the first seven months of 2022, milk production was down by .64 percent.  The largest losses in both pounds and percent were in New Mexico. Texas had the largest gains in milk production. None of the states that had gains are known for their butter production.

Table I - Increases and Decreases in Milk Production
in the Nine Largest Milk Producing States.

Texas was the only state that maintained consistent growth throughout 2019 to the present (Chart II).  However, the Texas growth in 2022 was less than the strong growth months in 2019 to mid 2021.  

The milk growth in Texas is being used in the cheese plants in New Mexico and Texas.

Chart II - Texas Milk Production

Percent Change from Prior Year

Milk production in New Mexico is declining due to environmental and financial problems (Chart III).

Chart III - New Mexico Milk Production
Percent Change from Prior Year

The Southwest Federal Order is comprised of Texas and New Mexico. The loss of milk production in New Mexico (Chart III) is offset by the increase in Texas.  Milk production for the Southwest Federal Order (Chart IV) in late 2021 and 2022 had decreases in eight of the last 12 months.  

Chart IV - Southwest Federal Order Milk Production
Percent Change from Prior Year 

California is the largest milk producing state.  Chart V shows the changes in milk production.  The changes have been minimal with a small increase in 2020 and some small decreases in 2022.  This is consistent with when California butter production leveled off.

Chart V - California Milk Production
Percent Change from Prior Year.

Wisconsin is the second largest milk producing state.  In 2022, Wisconsin also saw a reduction in milk production growth (Chart VI).  Idaho and New York saw similar trends with no growth.  

Chart VI - Wisconsin Milk Production
Percent Change from Prior Year

Michigan and Minnesota (Charts VII and VIII) show a pattern of significantly declining milk production in 2022.

Chart VII - Michigan Milk Production
Percent Change from Prior Year

Chart VIII - Minnesota Milk Production
Percent Change from Prior Year

The above charts show that the declining growth of the milk supply is very widespread.  With tighter supplies, prices increase, and with higher prices, demand decreases.  Why is there a shortage of producer milk and butter?  There are many reasons cited in published material.  They include tight milk supplies for butter, short staffing, high feed costs resulting in reduced herd size, strong butter exports, smoke from wildfires, regional weather anomalies, supply chain issues, reduced butterfat due to falling fluid milk sales, etc.   In-other-words, the reasons for milk and butter shortages are a bit of a mystery with little specific correlations to specific events causing the shortage of milk and butter.  However, there is no shortage of milk for cheese.

Chart IX shows the Consumer Price Index for the three main uses of milk: cheese, butter, and fluid milk.

Retail butter prices have escalated the most, up 25 percent in one year.  From the recent post on butter, we know that butter production is down, inventories are limited, and commercial disappearance is lower.  Producer milk prices have benefited from higher butter and butterfat prices.  However, the higher producer butterfat values have also driven higher retail butter prices.  Butter is a commodity and with higher prices, consumption is decreasing.

By comparison, the price of cheese has a retail price increase of 14 percent, about half the increase for butter.  Cheeses are less of a commodity, which will soften consumption changes with higher prices.  Fluid milk's 11 percent price increase will accelerate the declining fluid milk category.

Chart IX - Consumer Price Index

Next up will be a post on fluid milk in non-Federal Order areas.

Butter Production is a Problem!

The prior post covered how cheese production was doing.  The conclusion is that cheese production is growing nicely and seems to have a good balance of wholesale disappearance and inventories.  By contrast, butter production is shrinking, wholesale butter disappearance is declining, and inventories are low.  As result, butter prices continue to rise to record highs.

As shown below in Chart I, butter production (the blue line) began falling in early 2021 and has continued to fall through June 2022.  Prior to that, butter production was tracking very nicely with significant increases of two to three percent annually.  Since the beginning of 2021, production has fallen by five percent.

Disappearance from butter wholesale inventories (the red line) began declining in early 2022.  The decrease in production is significantly more than the butter disappearance from inventories.  That is depleting butter inventories.  

Chart I - Butter Production and Domestic Disappearance

Wholesale butter inventories have tightened by 17 percent based on 12-month averages in the last year as shown in Chart II below.  There is a clear relationship between the inventory levels and the price of butter.  As butter inventory decreases, the price increases.  

The combination of lower production, tighter inventories and higher prices is likely influencing domestic consumption.   The annual report on consumption of dairy products will be available at the end of this month and will be covered in an upcoming blog post.

Chart II - Butter Inventory and Price

The current monthly price of butter has increased to a 23 year high of $2.98 per pound and the increase has happened in a matter of months.  From April 2020 to August 2022 butter increased in price by 136 percent.

Chart III - Twenty-Three Year Butter Price

As a result, the butterfat price has hit a record high of $3.40 per pound in August.  That is a 157 percent increase in Since April 2020!  The price is a record, but the speed at which it increased is also a 23-year record.

Chart IV - Twenty-Three Year Butterfat Price

This is the reason for high producer milk prices.  This is a time when butterfat is like a gold rush.  Producers who quickly increase butterfat content in their milk will receive a very healthy check for their milk.  Every producer in a Federal Order gets paid for butterfat content, and those not in a Federal Order are also typically paid for butterfat content.

With the high domestic butter prices, it is surprising that butter exports are increasing (Chart V).  While butter exports remain a very small percent of total butter production, the increased exports do put additional pressure on butter inventories.

Chart V - Butter Exports

Nonfat Dry Milk (NDM) is a co-product of butter churning.  So, when less butter is churned, there is less NDM produced.  NDM is the largest export product.  In July NDM exports decreased by nine percent versus the prior year.  

Chart VI - Butter and NDM/SMP Production

California is by far the biggest butter producer in the U.S. with a market share over 33 percent.  In 2021 and 2022 California has been able to maintain butter production at 57 million pounds per month (Chart VII).  Prior to 2021, butter production was growing rapidly in California.  The total U.S. decline in butter production, shown in Chart I above, is coming from states other than California.

Chart VII - California Butter Production

The huge change in butter production and pricing is not over.  It is not showing any changes that would bring butter inventories or pricing to more normal levels.  

In the July 3 post to this blog, it was predicted that butter prices would continue to climb and cheese prices would decline.  That prediction still holds.  That will continue to increase the value of butterfat and lower the value of milk protein.

The next post to this blog will cover U.S. milk production.  Cheese is receiving adequate milk to grow the business.  Butter is not.  What is happening to the milk supply?

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Cheese Production is growing fast! Where? How Much?

As a reader of the MilkPrice blog, you probably noticed that the email announcing a new post looks different.  Google closed the software that this blog was using for notices on August 15.  The blog now uses a different software for informing subscribers of new blog posts.  In the changeover, some subscribers were lost.  If you know of someone who could use the information in these blogs posts, please forward the link to this blog and remind them that filling in the subscription block in the upper right corner will allow them to get emails for all new posts.  There is no charge and a subscriber can unsubscribe at any time.

This post will review how cheese and milk for cheese is growing.  Milk for cheese is the largest usage of U.S. milk.  In the prior post, the decline of Class I milk for drinking was covered.  In 2021, 40 billion pounds of drinking milk were produced in the U.S.  By comparison, somewhere around 100 billion pounds of milk was used to make cheese.  So, what drives the demand for milk?  CHEESE.

Cheese production in the U.S, is growing at close to three percent annually.  In 2020, the growth of cheese fell to less than one percent vs. the prior year.  This was caused by the COVID "stay at home" policies that changed consumer dining habits.  Cheese made for food service (think restaurants) is packaged differently from retail (grocery stores) and the overnight change made cheese scarce in grocery stores.  By 2021, production of cheese returned to a more normal rate and in the first half of 2022 production has been robust.

Chart I - The total USA is seeing a very consistent growth
 in Cheeses Production averaging 2.8 percent annually.

Table I below shows the major cheese producing states for the first half of 2022.  Wisconsin is the largest with California in second place.  Both have very large volumes of cheese production and together make up 43 percent of the U.S cheese production.  The six states listed in Table I make up 68 percent of cheese production.

Table I - Six largest Cheese Producers in the First Half of 2022

The USDA which tracks production of products like cheese has a disclaimer for their data.  It reads "States not shown when fewer than 3 plants reported or individual plant operations could be disclosed."  Recently South Dakota, which was growing with new and expanded cheese plants was recently eliminated from the USDA list as well as Oregon.  Texas which has some significant cheese production is also not in their list and therefore is included in "all other."

Tables II and III show the three-year and current year comparisons for the first half of the year.  Table II expresses the change in million pounds of cheese and Table III expresses it in percent.  They both tell the same story.  The growth in cheese production is not coming from the six largest cheese producing states.  From 2019 to 2022, 82 percent of the growth came from states other than the six largest cheese producing states.  Comparing 2021 to 2022, 70 percent of the growth came from states other than the six largest cheese producing states.

A partial listing of new and expanding cheese plants include Zumbrota, Minnesota, Menomonie, Wisconsin, Nampa, Idaho, Amarillo, Texas, Hiram, Ohio, Franklinville, N.Y, and Willows, California.

Table II - Three Year and One Year Growth in Million Pounds
for the first Half of 2022

Table III - Three Year and One Year Growth in Percent
for the first Half of 2022

There are only two of the six largest cheese producing states that have any major changes.  California had major losses in 2019 and 2020 but started making a comeback in 2021 and 2022 (Chart II).

Chart II - California Cheese Production

Minnesota has seen some very nice growth in the last three years and especially in the first half of 2022 with a 4.6 percent annual increase over 2021 (Chart III).  The growth has come from many new and expanded facilities. 

Chart III - Minnesota Cheese Production

Overall, the U.S. cheese business is in very good health.  As shown in Chart I above, production is growing consistently and significantly.  The Agricultural Marketing Service (AMS) price of cheese used for pricing Federal Order milk has grown steadily as shown in Chart IV.  There was volatility in 2020 when COVID "stay at home" policies upset normal eating habits.  The current price of $1.98 per pound is not a record price, but it is a price that reflects a good dairy sector properly responding to increasing consumer demand.  The AMS price of cheese is the most important parameter in Class III milk pricing and milk protein pricing.

Class III Milk = 9.6 x Cheese Price +5.9 x Dry Whey Price + 0.4 x Butter Price - $3.20

Milk Protein = 3.2 x Cheese Price - 1.3 x Butter Price - $4.43

Chart IV - Federal Milk Marking Order Cheese Prices

The Federal Order prices for cheese are based on the wholesale price of Cheddar cheese.  As shown in Chart V below, production of Cheddar cheese has increased at about two percent annually filling the needs for Cheddar cheese inventories.

Chart V - Production of Cheddar Cheese

Cheddar cheese inventories are not available publicly, but Cheddar makes up about 70 percent of American cheese.  Chart VI shows the inventory levels of American cheese which are growing at about three percent annually providing adequate inventories.

Chart VI - American Cheese Inventories

Overall, the U.S. cheese business is in great shape.  This is creating a need for milk.  Can the U.S. milk producers meet these needs?  Milk for cheese requires high component levels of protein and butterfat and low Somatic Cell Counts. This is the largest usage of milk in the U.S. and producers supporting cheese production need to produce milk that meets the characteristics needed for cheese making, high components and low Somatic Cell Counts.

The next post to this blog will cover the production of butter in the U.S.  Butter and butterfat prices are at record highs!