Are Commodity Inventories Impacting Producer Milk Prices?

The most important commodities for pricing producer milk are butter and cheese.  Butter prices are very high.  Cheese prices are stable, trading within a close range.  Butter prices since the start of 2018 have ranged from $1.51 to $2.87 per pound, a 90% difference.  Cheese prices have ranged from $1.51 to $2.12 per pound, a 40% difference.  Wholesale inventory levels are key to the Agricultural Marketing Service (AMS) prices used to value producer milk.  (See this post for information on the pricing formulas).

This post will review the impact of inventory levels on pricing.  All data used in this post is based on 12-month moving averages to reduce monthly volatility.

BUTTER

The wholesale price of butter has varied tremendously (Chart I). The prices in 2018 and 2019 were very stable around $2.30 per pound.  In 2020 and 2021, with COVID protocols in place, prices dropped by one third.  In 2022, prices rose peaking at $2.87 per pound.  Retail sales dropped with these high prices and inventories increased. Sales recovered in 2023 as prices declined but remained relatively high.  In 2023 and 2024 YTD, butter prices dropped by about 8% and remained at near historical highs.

Chart II shows the wholesale inventories expressed in days of supply.  Chart II is the mirror image of Chart I on butter prices.   As inventory levels increase, prices go down and as inventory levels decrease, prices go up.  The current inventory levels are in the range of 2019 levels, but the prices are significantly higher. 

Chart I - AMS Butter Price per Pound

Chart II - Wholesale Inventory Levels

Chart III below shows the total inventory levels.   They follow the pattern of Chart II but show increasing inventory levels in 2023 and YTD 2024, higher than those in 2018 and 2019.  

The higher inventory levels have not reduced prices because as shown in Chart IV below, domestic disappearance has increased significantly as consumption of butter has recovered.  Domestic disappearance has increased by 18% compared to 2018 and retail consumption has increased by 15%.

Butter inventory levels and domestic disappearance have very strong annual fluctuations with inventories building during the Spring and Summer months and demand increases in November and December due to the year-end holidays.  To minimize monthly volatility, this data is presented in 12-month moving averages.

Chart III - Butter Inventory Stocks

Chart IV - Domestic Disappearance

Exports and imports are a small factor compared to domestic demand.  The lack of domestic inventories keeps exports low, and a combination of competitive brands and domestic needs has increased imports to 6% of domestic production.   The net of imports and exports is shown in Chart V and current amount of imports exceeds imports by  5.2 million pounds.

Chart V - Net Exports of Butter

CHEESE

The prices and supply of Cheddar cheese are shown below in Charts VI and VII.  Analyzing changes in cheese prices in more complicated than butter because cheese is composed of both butterfat and milk protein.  The AMS price of cheese is based on Cheddar cheese only but wholesale inventories levels are not publicly available for Cheddar cheese.  This section is partially based on American cheese inventory data as it are consistently composed of about 70% Cheddar cheese. 

The charts below on cheese prices and inventories are not the exact mirror of each other as the butter charts above are.  Currently the days of supply is in a midrange position and the price of cheese is also in a midrange.

Chart VI - Wholesale Cheddar Cheese Price per Pound

Chart VII - Days Inventory of Wholesale American Cheese

Production of American cheese has grown nicely over the span of these charts to meet demand, but the growth has recently slowed as shown in Chart VIII.  Cheese consumption fell by 6% in 2022 causing a pause in the growth of American cheese production.

Chart VIII - Production of American Cheese 

With the reduction in production in 2022, American cheese inventories fell (Chart IX) causing AMS cheese prices to escalate (Chart VI above).  The lower production is keeping inventories beneath their peak in 2022 (Chart IX).

Chart IX - Wholesale Inventories of American Cheese

American cheese domestic disappearance (Chart X) has flattened out to compensate for the drop in consumption in 2022 and bring the days of supply (Chart VII above) in balance.

Chart X - American Cheese Wholesale
Domestic Disappearance

As with butter above, American cheese exports are minimal.  Exports are currently just 4% of domestic disappearance and imports are less than 1% of domestic disappearance.

Chart XI - American Cheese Net Exports

WHAT DOES IT ALL MEAN?

It's very clear that wholesale butter prices move with the wholesale supply of butter.  Butter domestic consumption is growing and the dependence on imports indicate that domestic inventories will remain tight.  Therefore, butter and butterfat prices will remain high and will likely continue to grow.

Cheese prices fluctuate with changes in butterfat prices and milk protein prices.  As has been covered in prior posts to this blog, as butterfat price rise, milk protein prices decline.  The days of supply of American cheese is not high or low and prices of cheese should remain stable.