More Milk This Winter and a Somber Price Outlook

The nation’s dairy herd continues to expand in early 2018, even though milk and dairy product prices are dipping back to the lowest values since the Spring of 2016. Milk production in February was up 1.8 percent from a year earlier, similar to the increase in February (data per USDA-NASS monthly Milk Production report).

Improving milk cow productivity accounts for most of the increase, running 1.3% ahead of the prior February. The dairy herd increased 1,000 head in February from January. Milk cow numbers in January were revised upward from the initial estimate a month ago to show a 9,000 head gain from December 2017. The 10,000 head increase in milk cows during the first two months of the year compares to an 11,000 head increase during the first two months of 2017 when milk prices were 15% higher. The lack of a downward adjustment in milk cow numbers in the face of lower milk prices is a little surprising, as is the magnitude of milk cow productivity improvement.

Low milk prices are the consequence of milk production exceeding usage and depressed prices in global dairy markets. Fluid milk product sales volumes in 2017 were down 2% from a year earlier. Fluid milk sales volumes in January came up short of the prior January by 0.6%, providing some encouragement relative to a moderating pace of decline. This is a small consolation considering that it still implies that more milk is being forced to be marketed as processed dairy products such as cheese and butter. The additional production of these dairy products is tending to end up in cold storage instead of being consumed. Cold storage holdings of cheese at the end of February were up 7% from a year earlier. Non-American or Swiss cheese inventories (mostly Italian cheese varieties) were up 15% from a year ago. Prospects for a reduction in these inventories are not encouraging based on milk production and fluid milk sales volume trends in the near-term.

Milk destined for cheese production will be price sensitive to cheese inventories in cold storage, limiting the potential for price improvement until the second half of this year when changing milk supply or demand dynamics can take hold. Given that perspective, Class III milk prices (milk for cheese production) could post the lowest annual average since 2009.