Robust demand driving milk prices toward record highs

Even as milk prices climb, rising feed costs and more continue to eat into farm margins.

The U.S. milk production lagging behind year ago levels, combined with robust demand for dairy domestically and overseas are driving milk prices toward record highs. Even as inventories remain relatively balanced, higher feed costs continue to eat into farm margins.

U.S. milk production was 1.7% lower than a year ago earlier in January, but this moderated to just under 1% lower in February. Cheese production and seasonably increasing ice cream and frozen dairy products are claiming a growing portion of available milk at the expense of butter and dry skim milk, the traditional supply balancing products.

Domestic commercial use during the first month of the year, was robust for butter, all major types of cheese and total milk equivalent, both fat and skim solids. Meanwhile, US dairy exports rebounded in February to 16.6% of us milk solids production, following two months at 14% or below. Wholesale dairy product prices continue to increase, but some retail prices are increasing much faster, particularly for fluid milk and just recently butter.

U.S. average milk prices are expected to reach roughly $27/cwt. during the second half of 2022, according to current futures. However, feed costs will likely reach the same high levels they did during the drought period of 2012-2013. Tat will restrain DMC margins, but still at rates above the maximum coverage level of that $9.50/cwt.

Commercial use of dairy products

The pandemic not only boosted fluid milk sales, but also produced wide divergences in sales of different types of fluid products. For example, during the pandemic's first year, Mar. 2020-Feb. 2021. Total Organic fluid milk sales were almost 12% higher than during the same month a year earlier.

While total conventional milk sales dropped by 1%. Year over year, during the same period, sales of whole milk both conventional organic were almost 3% higher, while total reduced fat milk was almost 4% lower than a year ago. However, during the next 12 months, Mar. 2021-Feb. 2022, these differences had largely disappeared. Organic sales were down by 4.5% conventional by 3.8%.

From a year earlier, whole milk sales were 4.6% lower, and reduced fat 5% lower. These recent fluid sales last few years were all lower than pre-pandemic trends, largely because they were in comparison to higher than pre-pandemic sales volumes during the first pandemic year.

Domestic commercial use during the Dec. 2021-Feb. 2022 period was robust for butter, all major types of cheese, and total milk equivalent for both fat and skim solids.

U.S. dairy trade

The US dairy industry exported 16.6% of U.S. milk solids production in February. This followed two months during which this percentage was 14 or below. Those two months represented a pause from the 10-month period Feb.-Nov. 2021. Where monthly exports vary between 16.9 and 18.8% of U.S. milk solids production, with declining milk and dairy production from most other major dairy export suppliers, including the European Union and New Zealand, this year's monthly exports may remain at these recent higher levels. Driving the February return to previous total export levels were dry skim milk and all the products within the broad whey complex. Butter and some cheese types also contributed to the increase.

Total U.S. dairy exports during February were equivalent to just under 3% of U.S. milk solids production. Monthly imports have been below that benchmark during about one-quarter of the 326 months since the beginning of 1995 and have averaged 3.5% during those 27-plus years.

Milk production

The deflation of us milk production growth, which is approaching a full year and duration, appears to have hit another pause, or perhaps the state of a reversal in February. Following a pause around a no-growth level early last fall, annual growth went decisively negative, reaching minus 1.7% in January. But this then moderated to just under 1% In February. Among indications of what this portends, USDA is latest forecast does not foresee an increase in U.S. milk production over a year ago during all of 2022.

This, together with continued high cost and short availability of feed, replacement cows, hired labor, construction materials and machinery, as well as continued dispersal auctions of large dairies, provides no suggestions ever returned to strong milk production growth in the near future.

However, four of the 10 largest milk-producing states showed slowing rates of growth declined in February. Year-over-year changes and total U.S. milking cow numbers have declined steadily since last May through February, but annual change of production per cow has been positive for over half of those months, including February.

Year-over-year changes in us milk solids production have averaged 0.8 percentage points higher than the corresponding changes in U.S. raw milk production during the past 12 months.

Dairy Products

Production of butter and dry skim milk products continues to drop as cheese claims a growing portion of available milk, and seasonably increasing ice cream and frozen dairy products draw additional volumes. Total cheese production was 6.3% higher in February than a year earlier, the largest annual increase for a single month since last April. Total American and total Italian cheese showed particularly large annual gains, compared with recent months as did cheddar as a single variety. The whey streams from growing cheese production are going entirely to further processed products. WPC, WPI, modified whey and lactose, while dry whey production continues to drop.

Dairy Product Inventories

Based on several metrics for evaluating individual dairy product inventories, namely volumes and days of total commercial use and stock, and both in relation to trends, stocks of American-type cheese, lactose and, given its seasonal pattern, butter are balanced as of February.

February stocks of other than American-type cheese, dry skim milk, and dry whey were trending towards excessive, as were whey protein concentrate stocks by volume, but not by days of use and stock.

Dairy product and federal order class prices

The Federal order Class III milk price rose more from February to March than the other three milk classes, but it remained the lowest of the four, ensuring another month of high producer price differentials, and full pooling of Class III milk. The gap between Class III and Class IV prices narrowed a bit in March, but remained large enough to cause substantial depooling of Class IV milk for yet another month.

At the product level, all  NDPSR prices rose in March from February levels, but the monthly gains for butter, nonfat dry milk and dry whey were smaller than for several previous months. Cheese prices have generally alternated in recent months between flat to lower prices one month and strong gains the next.

March saw the largest one-month increase in the U.S. average retail price of butter since the Bureau of Labor Statistics resumed reporting retail butter prices in May 2018 - 30 cents a pound or 8%. Overall inflation in March increased to 8.6%, year-over-year. Food and Beverage inflation has caught up with this overall rate, and dairy price increases are catching up, with overall dairy retail prices 7% higher than a year ago in March.

Some individual dairy products are increasing considerably faster than the general consumer price index, with fluid milk prices up 13.3% and butter up by 12.5% from a year ago in March.

Milk and feed prices

The second highest monthly surge in feed costs since the emergence of margin protection as the main federal safety net for farmers lowered the Dairy Margin Coverage Program margin by $0.34/cwt. $11.20/cwt. in February. Steady increases in costs. feed costs for the past year and a half were kicked into a yet higher gear by the developing Russia-Ukraine situation, raising fears of reduce global grain production. The February DMC fee cost was $13.50/cwt. up $0.84/cwt. from a month earlier and the highest in since the introduction of margin protection in 2014.

Two-thirds of this increase came from a jump in the price received by U.S. farmers for corn. Partly offsetting the higher feed cost was an increase of the U.S. average all milk price by $0.50/cwt. to $24.70/cwt.

Looking ahead

The dairy and grain futures markets currently indicate the DMC margin will gradually increase during the rest of the year. Following several months of steady reductions in its forecast of calendar year 2022, U.S. total milk production, USDA has reversed itself and raised its projection slightly, based on higher dairy cow numbers. Its March estimate was 226.0 billion pounds, which it raised to 226.3 billion pounds is April World Agricultural Supply and Demand Estimates (WASDE) forecast update.

The April forecast is essentially the same as the 226,258 million pounds the department has reported for 2021 U.S. milk production.

In its latest was the update, USDA further raised its forecast of the 2022 U.S. average all-milk price to $25.80/cwt. from its March estimate of $25.05/cwt. At the same time, the recently reactivated DMC Decision Tool forecast the 2022 average all-milk price is at $25.30/cwt., while dairy futures indicated it would be about $26.45/cwt. The previous highest U.S. average all-milk price for the entire calendar year was $24/cwt. in 2014, and the next highest was $20.10/cwt. in both 2011 and 2013.

By all measures, therefore, U.S. milk prices will be relatively uncharted territory this year. In "normal times", this would lead to explosive growth of milk production. But cost and availability of many, if not most, of all the resources needed to fuel such growth are also in uncharted territory.