Milk Production is Decreasing. – Is it Enough?

John Geuss

In 2018, there was more milk being produced than was needed.  A lot of that excess milk went into cheese, bloating inventories and making wholesale cheese prices fall.  That directly affected producer prices.  Six months of 2019 milk production data is now available.

Cow numbers are now falling, and milk production is now growing at a slower rate.  Will this reduction in milk allow inventories to decrease and milk prices to increase?  See the June 12, 2019 post to this blog for a review of dairy inventories.  This post will review the past and current analytics of milk production to see if there is a basis for higher future milk prices.

Typically, high milk prices have brought increases in milk production that has in-turn reduced milk prices.  This is a cycle of boom and bust that has been standard in the dairy business for a very long time.  The current low milk prices have a few factors not previously encountered. Fluid milk consumption is decreasing, population growth is falling, and diet changes are including more plant-based products and less dairy.

In 2014, Class III milk prices (Chart I) reached above $24/cwt.  They hit $24.31/cwt. in April 2014 and then fell back a little.  They then shot back up to $24.60/cwt. in September 2014.  At these prices, everyone was making money and much of that cash flow was plowed back into expansion.  Prices started dropping in 2015, but the expansion continued.  Cow numbers increased and milk production was strong.

There were also Class III milk prices above $20/cwt in 2011 and 2012.  In each case, there were low prices following the high prices.  However, the 2014 Class III prices were extremely high and the lows following 2014 were lower and longer.  The current depressed prices were the result of too much milk, causing bloated inventories, and the changes in consumer consumption.

Chart I – Class III Milk Prices

Chart II shows the milk production increases which brings decreases in milk prices.  Volume increases surged in 2015 following the high 2014 prices.  When there appeared to be some recovery starting in 2017, milk production again surged in 2018.  Currently production increases are down to .56 percent.  However, as shown in 2013 and late 2016, the decreases in milk production had to fall further, to nearly “0” percent to help bleed out the excess inventories.  That would suggest that the current rate of increase needs to fall further before excess inventories are reduced.

 

The production data in Chart II is based on 12 month moving averages and shows the year over year changes in production.  This is the same technique used in the June 5, 2019 post to this blog for measuring demand.  That analysis showed that the growth in demand from U.S. consumption is around .5 percent, the same as the current rate of milk production.  However, production must fall below the demand level to bleed out the current high inventories.  Only then can a balance between supply and demand exist.  Chart II shows the 12 month moving averages falling to near zero percent in 2013 and 2015, following the 2011 and 2014 high prices.  However, in 2018 expansion began growing again before inventories could be reduced.

As of the end of the first half of 2019, production decreases have not yet reached the levels of 2013 and 2015.  To shrink the bloated inventories, milk production must continue to decrease.

Chart II – Percent Change in Milk Production

Chart III below shows the monthly increases and decreases in milk production.  In three of the most recent months there have been production declines vs. the prior year.  This must persist for some time before the excess inventories are eliminated.  The good news is that production growth is continuing to decline to zero growth to help reduce inventories.  To reduce inventories, production growth must go negative for some period.  This is starting and must continue to deplete inventories and gain sustainable milk price increases.

Chart III – Monthly Milk Production vs. Prior Year

Chart IV shows the dairy cow numbers for the last ten years.  From 2010 to 2018, cow number grew from 9,089,000 to 9,438,000, an increase of four percent.  From the start of 2018 to June of 2019, cow numbers have fallen from 9,438,000 to 9,333,000 or about one percent.  That represents a loss of 105,000 cows over 17 months.

Chart IV – U.S. Dairy Cows

Chart V shows the increasing productivity of dairy cows.  Due to genetics, nutrition, automation, and management advances, each year for decades, cow productivity has increased.  From 2000 to the present, the increase in production per cow has averaged 1.4 percent per year.  The analytics in Chart V show that this trend is continuing.  Therefore, cow numbers going forward will probably need to decline by at least 100,000 cows per year.  This represents an accelerated decrease in cow numbers.

Chart V – Cow Productivity

More productive cows follow the trends of the last 50 years.  Trends in U.S. consumption indicate very little to no growth in milk production is needed.  The dairy products of tomorrow need components, not milk volume.  Improvements in component production have also been improving.  To remain financially sound, producers need to be very oriented toward profitability.  Advances in nutrition, like amino acid balancing, need to be implemented to increase the valuable components of milk protein and butterfat with fewer cows.

Dairy pricing and production hace always been changing, and those that survive are the ones that can move to the next plateau of productivity.  There has to be an overall effort to reduce cow numbers to match production to consumption.

With production levels moving to a new lower level, any increases in production could be disastrous.  This is not a time to expand.

Editor’s Note:  John Geuss is a dairy consultant based in Florida. This information appears in his Milk Price blog column sponsored by Addiseo and is published here with permission.  He may be contacted at [email protected]

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