Rising input costs keep tight lid on milk production growth
Both dairy supply and demand are being driven by unusual factors in mid-2022, with little immediate respite in sight. Severe cost inflation and limited availability are affecting virtually all inputs necessary to produce milk, keeping a tight lid on milk production growth and thereby generating record-high milk prices.
Sustained tight production is spreading high milk and dairy product prices to retailers; that, in turn, is starting to soften domestic consumption and thus ease wholesale prices.
U.S. dairy exports, meanwhile, are now on track to potentially reach record volume this year after a slow start during January and February. In May, a new monthly record was set with 19.4 percent of U.S. milk solids production shipped to foreign markets.
Commercial Use of Dairy Products
Total domestic dairy product use has been down from a year earlier in recent months, most likely reacting to increasing inflation that’s steadily pushed up prices for food and many other items for the past year. Contributing to this have been yogurt and American-type cheese, while fluid milk has continued its longer-term decline.
Because retail prices have only recently begun to spike for dairy products, it’s too early to gauge the probable longer-term impact that inflation may have on dairy demand; retail price inflation is relatively uncommon for dairy products, leaving little historical data on which to base reliable predictions.
U.S. Dairy Trade Monthly
U.S. dairy exports as a percent of U.S. milk solids production established a new record of 19.4 percent in May, the first time monthly exports have exceeded 19 percent by this measure. Despite a slow start during the first two months, exports are now on track to potentially establish a new annual record this year.
January through May exports totaled 17.3 percent of solids production during those months, which matches 2021’s calendar-year record. Tight world market conditions are holding U.S. dairy imports to relatively modest increases compared with year-earlier volumes, despite near-record price levels in the U.S. market.
USDA reported there were 102,000 fewer dairy cows on U.S. farms in May 2022 than in May 2021. This was the largest year-over-year drop in national dairy cow numbers since May 2010, twelve years earlier.
The milk production situation during March–May was roughly similar to how it’s been for the past half year of consecutive rolling three-month periods. Basically, this is: cow numbers steadily declining year-over-year, from half a percent to one percent down; milk production per cow staying relatively flat, ranging from 0.3 percent lower to 0.3 percent higher; total milk production consistently lower but inching slowly up from over one percent lower to just over half a percent lower; and flat to barely growing total milk solids production.
In short, the past year has witnessed an unusually extended period of relatively stagnant milk production, made more striking because it has been accompanied by extremely high milk prices but also extremely high costs of production and input supply disruptions. This situation is also quite widespread among the states. Of the 24 states for which USDA reports monthly milk production, 17 had lost production from a year earlier in May, while only six had grown. More than three-quarters of all 50 states reported lower production during the first quarter of 2022, while only nine reported higher production this year.
The significant drop in U.S. milk and milk solids production over the past year has had varying impacts on production of the major manufactured dairy products. Monthly production growth of other than American type cheese has been positive since the beginning of 2021.
Production of whey protein concentrate and lactose has followed much the same pattern except for a recent dip, from which they are now recovering. Production of American-type cheese has been mostly lower than a year earlier since later in 2021, as has dry whey, except for a rapid switch to strongly positive growth starting this past March. Monthly butter and dry skim milk production have also been mostly below year-ago levels for the past year.
Dairy Product Inventories
End-of-May cold storage stocks of other than American-type cheese, and stocks of all types of cheese, reached record single-month levels for the second month in a row, based on USDA data extending back more than 100 years.
American-type cheese stocks reached their highest level since January 1985 at the end of May. However, cold storage dairy stock data includes both government and private-owned stocks.
Accordingly, stocks of American type cheese, one of the products purchased under the discontinued dairy price support program, had previously reached higher levels than at the end of May this year, specifically during a continuous 26-month period in the early 1980s, including all months of 1983 and 1984, when inventories reached a maximum level of 1,141 million pounds at the end of September 1983.
Butter was also a price support purchase product with an even more extensive history of excessive stock levels. Month-ending butter stocks exceeded those at the end of May this year as early as 1953 and did so extensively during the early 1980s and early 1990s, and somewhat less so during 2016-2021. Inventories reached a maximum level of 756 million pounds at the end of July 1992.
Manufacturers’ stocks of dry skim milk and dry whey have been increasing in recent months, but both remain below levels reached during the early months of the COVID pandemic.
Dairy Product and Federal Order Class Prices
The federal order announced price for butter in June was the highest such monthly price since the federal order pricing formulas were first adopted for determining order class prices in January 2000. The same was the case for the June federal order butterfat prices and the July advanced Class I butterfat pricing factor.
The June Class IV and Class II prices and the June and July Base Class I prices also reached records over the same period, while the June Class III price receded from the record it set the month before.
Lofty wholesale dairy product prices have generated a relatively sudden onset of retail price inflation this year. Between December 2021 and this past June, during which the annual rate of general inflation rose from 7.0 to 9.1 percent and the food and beverage inflation rate increased from 6.0 to 9.7 percent, overall dairy product price inflation went from just 1.6 to 13.5 percent.
Among individual dairy product categories, the inflationary rises over these six months ranged between -0.6 to 9.7 percent for all cheese and from 0.8 to 21.3 percent for butter, with fluid milk increasing from 4.2 to 16.4 percent.
Significant retail price inflation is relatively uncommon for dairy products, with much of the past decade representing an extreme of that phenomenon. During the seven years between the beginning of 2012 and the end of 2019, the overall dairy consumer price index increased by just 0.6 percent.
Milk and Feed Prices
The USDA-reported national average all-milk price set a third consecutive monthly record in May. It came in at $27.30 per cwt, topping the April price by $0.20 per cwt for the new record. March also held this record for just a single month, at $25.90 cwt.
The May Dairy Margin Coverage (DMC) feed cost eased back by two cents from April’s record to $14.79 per cwt, boosting the May DMC margin by $0.22 per cwt to $12.51 per cwt, the highest monthly margin since the DMC program began in January 2019.
USDA’s July World Agricultural Supply and Demand Estimates (WASDE) monthly update does not foresee any near-term significant change in the current dairy market situation.
The department in recent months has steadily reduced its estimates of both 2022 and 2023 milk production. It now effectively projects June–December milk production will be 0.5 percent higher this year than production during the same seven months in 2021. It further estimates 2023 production at just 1 percent higher than both 2021 and 2022 production.
USDA currently foresees that calendar year average milk prices will achieve both first and second all-time high levels, respectively, this year and next. Meanwhile, CME dairy futures at the time of this latest USDA estimates report were broadly consistent with its milk price outlook for this year but were about $1 per cwt lower than its 2023 estimate.
The CME mid-July dairy and grain futures anticipated the DMC margin would average more than $13 per cwt for June through December this year, with a low just over $12 per cwt in August. Due mostly to a much lower milk price outlook, the DMC Decision Tool on the USDA website at the same time projected the June-December average margin at $10.70 per cwt, reaching a low of just under $10 per cwt, also in August.
In sum, it currently appears that the U.S. dairy industry is still in a period of statis on the supply side, with the only major moving piece being further, as yet difficult to estimate, price-driven erosion of domestic, as well as international, dairy product demand, and its attendant softening of milk and dairy product prices.
However, absent any resumption of milk production growth, any such price softening will find a floor that’s still high by historic standards, but not necessarily in relation to continued high costs.