With Higher Milk Prices, Milk Production is Growing. Will Over-Production Result?

John Geuss

Milk production and cow numbers for the first half of 2019 were reviewed in the July 15, 2019 post to this blog.  Data for the third quarter is now available.  Class III milk prices have increased (Chart I), and expectations of improved dairy pricing are showing in the futures market.

Chart I – Class III Milk Prices

Inventories of cheese have fallen a little to a 36-day supply in August (Chart II).  However, the inventories are still well above the 2014 levels which reached a 30-day supply.

 

Chart II – Days Inventory of Cheese in Cold Storage

With the higher milk prices, milk production is already heating up. There are clear warning signs of possible over-production of milk on the horizon.  With cheese inventories already relatively high, excess milk could quickly bloat the cheese inventories and impact pricing.

MILK PRODUCTION

With the Class III milk prices above $20/cwt. in 2012 and 2014, there were significant increases in milk production as producers had the cash flow and desire to increase capacity.  The increases in capacity brought milk production increases that resulted in over-production, and inflated inventories of cheese in cold storage.  With the inflated inventories, cheese and milk prices dropped.

With the current higher milk prices and forecasts for even higher milk prices, the 2019 decrease in milk production (Chart III below) has changed to an increase in milk production in the third quarter.  The change in milk production was a decrease of .35 percent in May 2019 and by September 2019, that had changed to an increase of 1.27 percent.

Chart III – Milk Production Changes vs. Prior Year.

Chart IV below shows the same milk production data expressed as 12-month moving averages.  The 12-month moving averages smooth monthly fluctuations and seasonal changes.  With the lower milk prices that started in 2015, production increases dropped to zero growth at the end of 2016. While milk prices were very low in 2018, the 12-month average milk production began to decrease.  It slowed to .25 percent.  However, the 12-month average milk production increases have not dropped to zero and have now plateaued at .25 percent.  With the September increase at 1.27 percent, the 12-month averages will soon start to grow.

Chart IV – Milk Production Percent Changes -12 Month Moving Average

COWS

The number of dairy cows is down by 1.3 percent from its peak of 9,428,000 in January 2018 (Chart V).  Cow numbers had grown quickly following the high milk price periods shown in Chart I.  The decline from the high has occurred steadily for the last 21 months and is now at 9,315,000.  That would be a decline of .7 percent annually or about 65,000 cows annually.

Chart V – Number of dairy cows in the U.S.

Chart VI shows the percent change from the prior year in cow numbers.  The growth rate of total cows turned negative in mid 2018 as cow numbers declined.  The decline reached an annual rate of about a one percent in early 2019 for a few months.  As milk prices have improved, the rate of decline in cow numbers has fallen from 1.06 percent in March 2019 to .57 percent in September 2019.  The current rate of decline is not adequate to avoid an over-supply of milk.

Chart VI – Percent Change in Number of Cows

The rate of decline in cow numbers does not correlate directly to a reduction in milk volume.  For decades, the milk productivity of cows has increased by about one percent per year (Chart VII).

Chart VII – Annual Milk per Cow

As covered in a recent post to this blog, component levels are also rising, especially butterfat (Chart VIII).  Butterfat productivity grew by 1.6 percent in 2018, from 3.82 percent of milk to 3.88 percent of milk.  Protein levels are also up in 2019 with higher protein prices.  Only components are needed for every dairy product except fluid milk.  Therefore, the increased component levels also reduce the milk volume needed for processors.

Chart VIII – Monthly Butterfat Content for all FMMOs

The combined increases of cow productivity delivering more milk and higher component levels in the milk, the equivalent milk supply will grow by about two percent annually.

SUMMARY

As covered in the June 5, 2019 post to this blog, the overall demand for milk, driven by domestic consumption, is growing at about .5 percent annually.  Fluid milk and a few other dairy products are declining, and cheese is growing.  Considering increases in both cow productivity and component improvements, the same number of cows can deliver about two percent increase annually in the equivalent milk supply.

By the chain of logic linked in this summary, cow numbers need to decrease by over one percent annually.  Cow numbers were going down briefly at an annual rate of one percent in early 2019.  However, the current higher milk prices have provided an incentive to slow down the reduction in cow numbers.  As there are still excesses in dairy inventories, a depletion level above 100,000 cows per year is needed to reduce existing cheese inventories.  That would require an accelerated reduction in cow numbers to relieve the current excesses.

John Geuss, Dairy Consultant

Some “industry buzz” suggests slowing the growth in cow productivity of milk and components.  That will not make milk production lower cost.  The key to the capitalistic system that has made the U.S. a low-cost dairy producer is to manage the business to produce efficiently.   Only fewer, but more productive cows will achieve this.

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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