The dominating, and even defining feature of the U.S. dairy industry since the summer of 2021, has been the relatively sudden deflation of milk production growth.
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Photo by Courtney Love

From 2015 until then, dairy herd expansion and milk production growth seemed irrepressible despite the generally mediocre to poor milk prices and margins throughout that period.

For example, none of the seven calendar years since 2014 is among the highest four years for average milk prices (those top four are 2007, 2011, 2013 and 2014). Year-over-year production growth hit peaks of 4.2% in September 2014, 2.8% in November 2016, 2.9% in March 2020, 3.5% in November 2020 and 4.7% in May 2021. Between the first four of these peaks, growth had dropped to negative and then bounced back. It averaged 1.5% during that entire period.

Less obvious, but more tellingly, growth in milk solids production averaged 1.9% over the same period. The high price of butter during most of that time, coupled with depressed prices of the products that influence the prices of skim milk, increased the proportion of milk checks derived from butterfat. Increasing the fat content of producer milk became a key strategy for financial survival for many dairy farmers. This boosted the national average fat test from 3.74% in 2014 to 4.01% in 2021, and the national average total milk solids composition from 12.61% to 13% over the same time.

Milk solids production is a better measure of the supply of milk for market analysis purposes because, much more than liquid milk, it determines the volumes of most dairy products that are produced, which interact with demand to determine prices.

The year-over-year growth peaks for U.S. milk solids production that correspond to those cited above for liquid milk production are 4.6% in September 2014, 2.8% in November 2016, 2.6% in March 2020, 3.8% in November 2020 and 5.5% in May 2021. Demand growth struggled to keep up with this supply, keeping a damper on prices.

Then, from June through September 2021, production growth dropped from these high May levels to virtually zero for milk production and 0.5% for milk solids. These were unprecedented rates of production growth collapse within just a four-month period. It was as if, after doggedly and repeatedly bumping up production to successive peaks well above average growth rates, and in the face of generally mediocre returns, producers had reached a collective breaking point. Stories of dairy herd dispersals, including large herds, appeared often in the news during those months. Most states experienced similar drops during that period, with just six states showing continued growth and about 10 states showing little change from prior months.

At the national level, monthly year-over-year milk production has been flat to down slightly since last September, while milk solids production has been mostly about 0.5% higher. The national milking cow herd went from almost 150,000 head higher than a year earlier in May and June 2021, which was the largest annual dairy herd expansion except for a single month during at least the past 22 years, to 67,000 head less than a year earlier in December 2021. This was again an almost unprecedentedly rapid reduction in the number of cows producing milk in the U.S.

Milk production per cow has grown at an average rate of 1.8% per year over the past 50 years. In 2021, it was up by just 0.7% over 2020 and unchanged from a year earlier during the last four months of last year.

The market and price effects of this major pullback on the supply side have been positive for dairy farmers while also varied at the product level. Broadly speaking, available milk has continued to be channeled into cheese and whey production, while butter and dried skim milk production has been most affected by the lower supply of milk.

The outlook for 2022

This detailed description of the major turn of events in the dairy economy during the latter portion of last year is important for understanding the state of the U.S. dairy economy during this year. The current dairy futures markets can tell us what the industry’s collective expectations are for the entire year, but more information is needed to estimate how this outlook might change as this year progresses.

The USDA-reported January monthly average National Dairy Product Sales Report (NDPSR) survey price for butter was the highest monthly butter price since August 2017. The January NDPSR prices for nonfat dry milk and dry whey were the highest since August 2014 and July 2007, respectively. Early-February futures markets were signaling that average prices of butter and dry whey for all of 2022 were predicted to be the highest ever for an entire calendar year. The corresponding 2022 futures forecast prices for cheddar cheese and nonfat dry milk would be the second-highest ever for a single calendar year, both just behind 2014.

Turning to milk prices, the early-February futures markets were also signaling that average federal order Class IV and Class II prices for all of 2022 would both be the highest ever for an entire calendar year, while the 2022 average Class III and Class I mover prices would be the second- highest ever for a single calendar year, again both behind 2014. Those futures prices also indicated that the 2022 national average all-milk price, USDA’s basic measure of the average milk price received by all U.S. dairy farmers, would be about the same as it averaged in 2014, at $24 per hundredweight (cwt). That was almost $4 per cwt above the second-highest calendar-year average U.S. milk price, received in both 2011 and 2013.

When combined with forecasts of corn, soybean meal and alfalfa hay prices, these high milk price forecasts also indicated that the Dairy Margin Coverage (DMC) program would not likely make payments even at the highest $9.50-per-cwt coverage level during all of 2022. This would be in marked contrast to 2021 when the DMC paid out about $1.2 billion, with indemnity payments for every month between January-November for milk covered at the Tier I $9.50- per-cwt level.

Other indications from the early-February dairy futures were that, for the first several months of 2022, producer price differentials in component pricing orders would be positive and high, Class III milk would be fully pooled in all orders, some Class IV milk would be depooled and the Class I price would temporarily fall back below where the previous “higher-of” Class I mover would have established it.

Looming over the historically high price forecasts is the question of how quickly they will stimulate regrowth in cow numbers and milk production. Some very stimulative milk prices can almost certainly be expected to be received during the first part of 2022, prices that surely would have quickly generated additional cows and production just a few years ago.

However, there have been changes in the industry that suggest expansion might be slower this time around. Additional farm labor has become more difficult to attract. Construction materials have become more expensive and difficult to obtain. Lag times for obtaining new machinery and equipment are now longer due to supply chain disruptions. Other factors are at play, such as how much new processing capacity will be coming online to stimulate area milk supply growth and how much the continuing pandemic will affect demand for dairy products in food service.

On balance, there are reasons to expect that increased production may be slower than usual to ramp up this year. At the same time, farmers should be cautious and not resist the temptation to look the gift horse of current price forecasts in the mouth before making major plans.

Global Dairy Trade Event #306 concluded with the aggregate down 2.9%. Cheddar cheese was down 0.1%. Whole Milk Powder was 4.9% lower. Skim Milk Powder fell 0.6%. Butter dropped 1.0%

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