NDM Pricing is Important!

Based on a few questions from the prior post "Where are Milk Prices Headed in 2023," this post will detail the direction that nonfat dry milk (NDM) pricing is going.  Cheese is the most important parameter for producer skim milk pricing as it controls the skim Class III price and half of the Class I price. NDM controls all the skim Class IV, Class II, and half of the Class I price.

The domestic commodities butter, cheese, and dry whey are used to price butterfat, milk protein, and other solids. Their prices are primarily influenced by domestic wholesale inventories of these commodities.  The inventory levels are readily available.  NDM is primarily an export product and global inventory levels are not available.  That makes estimating future NDM prices more difficult.  

The pricing of NDM is also complicated by the fact that there are two very similar produces, NDM and skimmed milk powder (SMP).  Only NDM is used to price milk.  While the two products are similar, there are important differences. 

Some of the available data combines NDM and SMP.  The differences were defined in detail in a prior post.  NDM is defined by the USDA and is only a U.S. produced product.  SMP is defined in the "Codex Alimentarius" or "Food Code."  The Codex is a collection of international standards used to define products to ensure fair practices in food trade. The Codex standards are used by the World Trade Organization to settle disputes and assure uniformity in products.  The U.S. Agricultural Marketing Service (AMS) determines the price of NDM for use in pricing producer milk.  

The U.S. is primarily a producer of NDM with SMP making up less than ¼ of the total volume of NDM and SMP (Chart I).

Chart I - SMP as a percent of NDM/SMP

When the current Class and Component pricing system was developed prior to 2000, there were no significant exports of NDM/SMP.  By 2005, 22 percent of the NDM/SMP was being exported.  Today, over 70 percent of U.S. produced NDM/SMP is exported (Chart II).

Chart II - Percent Exports of NDM/SMP 

Therefore, to determine where the price of NDM is going, one must turn to international data.  Chart III below shows the 2021 through September of 2022 pricing of NDM and SMP from Europe, Oceania, South America, the West coast of the USA, and the prices determined by AMS.

Chart III - International prices of NDM/SMP and the AMS Price

While there are some differences in the lines above, there is consistency with lower prices through the first three quarters of 2021 followed by steep increases from the later part of 2021 though the first quarter of 2022.  Since then, all international and domestic price have dropped.  Will they continue to drop?

As shown in Chart IV, it is unusual to see price spikes for NDM as high a as they were is the first quarter of 2022.  In fact, there have been only two other high price spikes for NDM in the last 23 years and they both dropped back quickly.

Chart IV - AMS Pricing of NDM

NDM has the least volatility in its pricing compared to the three other commodities used to price milk.  That means it is less likely to make large pricing changes routinely.

Table I - Volatility Indexes

U.S. production of NDM/SMP has dropped in 2022 as shown in Chart V.  This has occurred because of the decrease in butter churning which was discussed in the September 11 post to this blog.  Lower production often means tighter inventories.

Chart V - U.S. Production of NDM/SMP

However, despite the decrease in butter churning and the decrease in production of NDM/SMP, NDM/SMP domestic inventories are not low.  The August 2022 inventories are larger than the August inventories of the prior two years (Chart V). 

Chart V - Inventory levels of NDM/SMP

What does this mean for the 2023 pricing of NDM and the pricing of skim Classes 1, II, and IV?  While international events can influence these prices, the above analysis indicates that NDM is already decreasing in price and will continue to decrease in 2023.

It is unusual for Class IV milk to be priced well above Class III milk.  In September 2023, Class IV skim milk was $4.98 per cwt. higher than Class III skim (Chart VI).  Further decreases in Class IV skim are very likely.

Chart VI - Class III and Class IV Skim Milk Prices

Where are Milk Prices headed in 2023?

This post will review the current and historical prices of Federal Order milk.  Based on the past, this post will predict where they may be going in 2023.  Class I base prices are currently at $22.71 per cwt., down from $25.87 per cwt in July 2022.  Class II milk is the smallest category and the highest priced at $26.51, close to its all-time high.  Class III milk is at $19.82 per cwt., down from its record price of $25.51 in May 2022.  Class IV milk is at $24.63 per cwt., near its record high of $25.31 in May 2022.  All Classes of milk hit record highs in the middle of 2022.  While some of these milk Classes are down from their record highs, they are still all good prices compared to historical prices.    

Classes I and III have dropped the fastest. Class III prices have dropped with the decrease in cheese prices.  Because Class I is linked partially to the Class III price, Class I milk also decreased.

Milk prices by Class since 2000

Commodity prices since 2000

The commodities used to price milk are cheese, butter, dry whey, and nonfat dry milk (NDM).  Prices of cheese, dry whey and NDM have dropped significantly since their mid-year highs.  Only butter continues to increase in price.

Cheese (Chart V) at $1.95 per pound is almost exactly at the long-term trend line.  As covered in a prior post, cheese production and inventories seem very much in line.  Through the yearend holidays and into 2023, cheese will likely stay near its current price.

Chart V - AMS Price of Cheese

Butter prices continue to rise, setting new record highs monthly.  The current price of $3.12 per pound is a significant high, nine percent higher than the prior high of $2.85 per pound set in September 2014.  The butter price impacts all classes of milk and is the most significant factor for the current high milk prices.  Through 2022 butter prices will likely set new record highs but in 2023, the price will likely begin to fall and when butter prices fall, they fall quickly (Chart VI).

Chart VI - AMS Price of Butter

Dry Whey is used to price "All Other" solids in Class III pricing.  Exports of dry whey to China, the largest dry whey importer, have doubled in 2022.  Unfortunately, in a matter of months dry whey prices plunged by 38 percent to $.49 per pound.

Chart VII - AMS Price of Dry Whey

NDM is primarily an export item.  Mexico and Southeast Asia are the main importers.  Sales to Mexico have increased in 2022 while sales to Southeast Asia have dropped.  Prices have dropped by 12 percent from March to September 2022.

Chart VIII - AMS Price of Nonfat Dry Milk

Component prices since 2000

The AMS prices of components are shown in Charts IX through XI below.

Milk protein prices are down for two reasons, lower cheese prices and higher butter prices.  Protein prices have dropped from a high of $5.62 per pound in November 2020 to the current $1.88 per pound, a drop of 67 percent.

Chart IX - Protein prices 

Butterfat is growing from a low of $1.32 per pound in April 2020 to the current price of $3.57 per pound, a 170 percent increase.  Will it fall as fast, or faster?

Chart X - Butterfat Price

Other solids make a small contribution to the Class III price.  The price of Other Solids is down to the long-term trend line growth level.

Chart XI - Other Solids Price

With concerns for declining economics globally, prices for dry whey and NDM are likely to continue to decrease.  A drop in NDM prices would have a significant impact as NDM is used to price Class IV skim, Class II skim and partially for Class I skim.

With butter the lone commodity with tight inventories and high prices, there will likely be a drop in demand and an increase in production.  Either or both will lower the price of butter and butterfat going into 2023.

Per Capita Consumption of Dairy - Up or Down?

Once a year, the US Department of Commence issues a report on the per capita consumption of U.S. dairy products.  It is published annually in mid-September.  The data is an annual summary dating back to 1975.  This post will compare domestic per capita consumption of the major dairy products; cheese, fluid milk, butter, ice cream, and yogurt. Overall, the current picture is mixed.

This is per capita consumption and does not reflect the total U.S. usage.  Population growth will be discussed in the final section of this post.

Cheese consumption has been the leader in growth for a long time (Chart I).  It is the largest use of U.S. milk.  Unfortunately, in the last four years, per capita consumption had been flat.  From 2000 to 2021 per capita cheese consumption has grown from 29.5 to 38.4 pounds per person annually, a 33 percent growth.  However, since 2018 the four-year growth has been only one percent.

Chart I - Cheese per Capita Consumption in the U.S.

By contrast, fluid milk has been on a major decline for a long time.  Since 2000, fluid milk per capita consumption has decreased from 196 to 134 pounds annually, a 32 percent drop.  The decrease has been steady and appears to be continuing at the same rate.  Fluid milk is the highest paid milk for producers and the decreasing volume reduces the "Uniform" or average price of producer milk.

Chart II - Fluid Milk per Capita Consumption in the U.S.

Butter has seen very nice growth increasing from 4.5 to 6.5 pounds, an increase of 44 percent (Chart III).  Over the last four years, butter per capita consumption has been increasing between two and three percent annually.  As covered in a prior post, there is currently a shortage of butter and as a result butter prices have shot up.  This will likely dampen demand at least in the short term. 

Chart III - Butter per Capita Consumption in the U.S.

Sadly, per capita consumption of ice cream is also falling.  In 2000, on the average, 22.7 pounds of ice cream was consumed.  In 2021, per capita consumption had decreased to 18.4 pounds, a decrease of 10 percent.  The decrease appears to be flattening (Chart IV).

Chart IV - Ice Cream per Capita Consumption in the U.S.

Yogurt had a tremendous growth between 2000 and 2013, climbing from 6.5 to 14.9 pounds per person.  Since 2013, there has been no increase in yogurt per capita consumption (Chart V).

Chart V - Yogurt per Capita Consumption in the U.S.

During the 22 years that this post covers, the U.S. population had grown from 282 million to 337 million, an increase of 20 percent (Chart VI).  The population of the U.S. was growing by one percent and that insured a steady growth in the need for milk.  The population growth has now slowed to about about .5 percent annually.  With the changes in consumption of the dairy products covered above, the increases in component levels, and a slowing growth in the population of the U.S., the demand for producer milk is slowing down.  

Chart VI - Population of the U.S.

Here is what we know for sure:

• Fluid milk will continue to decline.  As the need for Class I milk declines, some processing plants will have to be shut down and that will bring more expensive logistics to satisfy demand over a larger area.  In turn, it will negatively impact the "Uniform" average price of milk.
• Ice Cream will continue to slowly decline.  The impact will be minimal.
• Yogurt will remain stable.

Here is what is speculative:

• Cheese has a long history of growth.  The last four years of stable volumes are unusual.  Other European countries have a much bigger per capita consumption averaging around 62 pounds per year.  Growth of two to three percent should return.
• The most complicated area to analyze is butter.  As covered in a recent post, butter is in short supply and the short supply is causing very high prices.  Price elasticity of demand will slow down purchases of butter.  When more butter is available and prices decline, how quickly will consumers return?

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