MRV BLOG: Dairy Market in Flux

The dairy market continues to be a dynamic one with different aspects of it all seemingly moving in multiple directions at the same time.

The dominant features of the basic U.S. dairy situation continue to be:

• tighter milk production;
• record export volumes;
• increased prices;
• sluggish domestic consumption; and
• decreasing inventories.

Looking back a quarter, total dairy cows and total milk production in the United States were both lower than a year earlier during the September-November rolling quarter. December prices for nonfat dry milk and dry whey were the highest monthly prices since 2014. They, as well as December butter and cheese prices, were among the most observed during all months since the beginning of the year 2000. The long period of difficult market conditions – from 2014 until recently – constitutes a major reason for the production contraction that’s driving the current situation.

Commercial Use of Dairy Products

Growth in total commercial use of milk in all dairy products in all markets, domestic and export, was positive for both milkfat and skim solids; it averaged about 1 percent during September-November. But that growth was due entirely to exports; domestic commercial use during that period decreased by about .5 percent from a year earlier. Fluid milk and American-type cheese were two key categories that showed reduced consumption in the United States.

Milk Production

Milk production was marginally less, by .07 percent, from a year earlier, during the three-month period September through November. U.S. milk production has been steadily growing for decades. But production growth has been negative, on average, during one out of every six rolling three-month periods during the past two and a half decades. Reduced cow numbers were the driver for the latest decline; average cow productivity still showed a small increase.

Looking Ahead

The effects of the current rather-dramatic pullback in cow numbers and production on dairy-product production, stocks and prices has been marked. To no surprise, it’s causing much speculation about how long it will last. Dairy-futures markets signal the trend will last well into 2022. Futures as of mid-January indicated that the 2022-calendar-year average U.S. all-milk price would be about the same as the record $24 per hundredweight average that the price attained during the 2014 calendar year. USDA’s mid-January monthly forecast update predicts U.S. milk production will increase by just 0.7 percent this year from 2021’s estimated total of 226.2 billion pounds. At the same time, USDA increased its forecast for the 2022 U.S. average all-milk price by $1.85 per hundredweight from just a month earlier – to $22.60 per hundredweight – which is still about $1.50 per hundredweight less than the futures were indicating at that time.

The bottom line? Price increases will eat into margins and affect many aspects of business as we face decisions on how to absorb or conquer those increases.  Access to product, including frequency, breadth of portfolio, service, and more are all functions to consider during this tumultuous time.