Higher prices beginning to impact consumer consumption of dairy products
Dairy farmers and the entire industry continue to deal with a high-price, high cost environment unlike any seen for at least a decade, and in many ways, not in the past four decades. March and April set consecutive all-time highs for the monthly average all-milk price in the U.S., while the four federal order class prices set a collective record in May.
Monthly retail prices of whole and lowfat milk, butter, ice cream and yogurt also reached all-time highs. Meanwhile, monthly U.S. dairy exports posted a strong recovery in April from a recent low in January, amounting to 18.7 percent of U.S. milk solids production, the third highest ever for a single month by this measure.
The combination of continued lower U.S. cow numbers, milk production and record-high milk and retail dairy prices is beginning to show signs of impacting domestic dairy product consumption at retail and also food service. However, since retail price inflation is occurring for all food and beverages, and throughout the entire economy, it is unclear how or whether this will play out differently than if higher dairy product prices were an exception in an overall non-inflationary economy.
Commercial Use of Dairy Products
Domestic yogurt consumption growth was almost entirely robust during the first two years of the COVID pandemic, but it has turned negative during 2022. Consumption of other than American-type cheese has been generally stronger than for American types during the past year. Year-over-year changes in domestic consumption of most skim milk ingredient products, including dry skim milk, dry whey and lactose, has been mostly negative during the months of the pandemic, with whey protein concentrate an exception. Domestic use of milk in all products was about 2 percent lower than a year earlier during February–April.
U.S. Dairy Trade
18.71 percent of U.S. milk solids production was estimated to have been exported in April, the third-highest ever for a single month by this measure, potentially positioning the industry for another strong calendar year of exports following an uncertain start and a sign of how export demand may be structurally higher than in the past, given that the strength is occurring in spite of high prices. April exports represented a more than 5 percentage-point increase from the recent low of 13.63 percent in January this year. Over half of this net volume recovery was contributed by lactose, skim milk powder, dry and modified whey.
U.S. dairy imports were moderately higher than a year ago during February–April, with the major product categories of cheese and dairy proteins mostly increasing between 6 and 8 percent year-over-year.
April U.S. milk production reported by USDA shows production continuing in contraction territory, with little indication of when it might return to growth. Total dairy cow numbers in the country also continued to decline from year-earlier levels in April. Very modest growth occurred during February–April in milk production per cow as well as in production of total milk solids. The only real supply-side expansion to take place during this period was total U.S. milkfat production, which was 1.3 percent higher during these three months than a year earlier.
Butter production was close to flat during February–April, indicating some recovery from several prior months of annual reductions. Continued lower dry skim milk production would indicate that reduced milk production is still being claimed preferentially by cheese production at the expense of butter-powder.
However, higher milkfat production would suggest that cream supply was not necessarily the primary cause of earlier tighter butter production. Cheese supply growth is still noticeably greater for other than American types of cheese, used heavily in food service. Upticks in American-type cheese use in summer grilling had not yet shown up in production data as of April.
Dairy Product Inventories
Cold storage stocks of other than American-type cheese, and stocks of all types of cheese, reached record single-month levels at the end of April. Manufacturers’ stocks of dry skim milk and dry whey also showed some tendencies toward excessive, although not record levels, at that time.
Dairy Product and Federal Order Class Prices
None of the four NDPSR-reported dairy product prices attained anywhere near an all-time high level in May, but the four federal order class prices narrowly missed setting such a record collectively. It was widely expected, based on the futures markets, that the May Class I, II, III and IV prices, quoted at the standard 3.5 percent fat level, would each exceed $25.00/cwt for the first time ever. However, the May Class IV price just missed this mark by coming in at $24.99/cwt. Nevertheless, that was still the highest minimum level ever for all four class prices.
U.S. average retail prices reported by the Bureau of Labor Statistics for May were the highest ever, in nominal terms, for whole milk and for ice cream. And although there are some gaps in their BLS data, they were also likely the highest ever for lowfat milk, butter and yogurt.
The annual rate of retail price inflation has rapidly accelerated in recent months into double digit percentages throughout the entire dairy product spectrum, including whole milk, lowfat milk, butter, and the dairy category as a whole. By comparison, the overall rate of inflation in May was 8.6 percent. Of the BLS-reported dairy products, cheese has consistently shown the slowest rate of retail price inflation, at 8.7 percent for May.
Milk and Feed Prices
The USDA/NASS-reported U.S. average all-milk price is busy setting records. First in March, by beating the prior highest monthly price, in 2014, by $0.20/cwt, and then by blowing away that short-lived record a month later when it jumped above March by $1.20/cwt to hit $27.10/cwt for April.
The April DMC margin was $12.29/cwt, $0.74/cwt higher than in March, as the April DMC feed cost rose $0.46/cwt that month. This increase was driven entirely by a higher corn price, while the soybean meal price dropped, and the premium alfalfa price showed a very small increase.
USDA’s World Agricultural Supply and Demand Estimates (WASDE) monthly update for June lowered the Department’s estimate of calendar year 2022 U.S. milk production from its May estimate, which it had raised from the prior month. This illustrates the difficulty of foreseeing how much longer U.S. milk production will be constrained in the current unique environment of record high milk prices paired with extremely high production costs and supply chain disruptions.
The Department’s June CY 2022 forecast is marginally higher than CY 2021 actual production. January through April production is down this year from 2021 by 1.0 percent. Together, this indicates USDA expects U.S. milk production to grow by about half a percent from a year earlier during the last eight months of the year.
USDA also expects dairy demand to stay strong and accordingly raised its 2022 outlook for most dairy product and milk prices from May to June, with the exception of dry whey. In particular, the Department raised its calendar year 2022 forecast of the U.S. average all-milk price from May to June by $0.45/cwt, to $26.20/cwt. This was still about $0.40/cwt below where the dairy futures indicated this annual price would come in but was also about $0.15/cwt above where the DMC Decision Tool on the USDA website was projecting at the same time. All forecasts are currently indicating that the DMC margin will not drop below $9.50/cwt during any month of 2022.