Strong Dairy Prices Overshadowed by Farm Operating Expenses

By prices alone, the past year or so has gone well for dairy producers. In March, USDA reported the highest-ever average all-milk price at $25.90 per hundredweight, 20 cents ahead the previous record set in September 2014. The all-milk price represents the gross price farmers receive, sold at an average fat test, before deductions for items such as hauling, advertising, stop charges, promotional costs and cooperative membership dues. Between May 2021 and May 2022, the base Class I (fluid milk) price increased by $8.35 (49%), the Class II (soft products like ice cream and yogurt) price increased by $9.65 (59%), Class III (hard cheeses and whey) prices increased by $6.25 (33%), and Class IV (butter and powders) prices increased by $8.83 (55%) per hundredweight. These prices, as displayed in Figure 1, have been on a seemingly unstoppable climb until the last two price reports, which indicated stable prices or marginal drops. The frequent and volatile price spreads between classes that defined the onset of COVID-19 in the marketplace appear to have receded. The four class prices, for now, are moving in a more clustered and correlated manner.

These high prices are a result of factors on both the supply and the demand fronts. Declines in the national herd, or total inventory of milking cows, and an accompanying decline in milk production defined much of 2021. Since the beginning of 2022, however, the dairy herd has marginally recovered, moving from 9.37 million head in January to 9.405 in the latest report for May; this is in line with the previous five-year average for May of 9.39 million head. Quarterly national milk production between quarter one of 2021 and quarter one of 2022 dropped 0.86% or 489 million pounds, with quarterly milk production per cow down 3 pounds per cow, or 0.05%, during the same timeframe. Dairy cow slaughter in early June (Figure 2) was 6% lower than the prior five-year average but 3% higher than last month. The slight recovery in the milk herd and comparative decline in slaughter suggests production may slightly increase as we deepen into the flush months – though not proportionally to the magnitude of high prices.

On the demand side, prices originally lifted as various facets of the economy such as restaurants, schools and leisure travel rushed back, bringing demand for large quantities of dairy products with it. May butter stocks in cold storage in 2020 were 17% above, and in 2021 were 28% above, the 2015-2020 average, when drops in food service orders led to increases in stored product. The May 2022 Cold Storage Report shows butter stores have dropped back to the 2015-2020 average exactly at 322 million pounds with markets foreign and domestic quickly consuming the cumulated excess. Natural cheese cold stocks, which initially experienced a strong decline as consumers looked for cheeses via retail outlets in 2020, have since recovered on the backs of increased processing capacity. May cold stores of natural cheese were 15%, or 196 million pounds, higher than the 2015-2020 average and 4%, or 54 million pounds, higher than last May. Domestic consumption of cheese has continued to increase with 123 million additional pounds consumed between January 2022 and April 2022 over the same period last year, a 5% jump. Time will tell if the range of new cheese processing plants will outpace demand and hamper Class III prices.

Exports remain relatively strong across the board for U.S. dairy products. In the first five months of the year (January-May), the U.S. sent $3.860 billion worth of dairy products across borders, a 25%, or $761 million, increase from last year. This translated to 1.162 million metric tons of dairy product exported from U.S. borders, about 15,000 metric tons more than last year, which is only a 1% increase in volume. The discrepancy between value increase and volume increase reveals the magnitude of price increases year-over-year. Mexico continues to lead as our top export customer, purchasing $915 million worth of dairy products in the first five months, including $485 million in non-fat dry whey (+37% YOY) and $233 million in cheese and curds (+36% YOY). Canada retained its second-place spot in terms of value with $424 million in purchases including $52 million in butter and milkfat (+25% YOY). China claims the third-place spot in value with $298 million worth of dairy products, including $99 million in whey (-16% YOY), but outpaced Canada in volume by 81,000 metric tons. Given that high prices explain the majority of increases in dairy products export value so far, any future increase in domestic production could risk those increases unless volume demand picks up internationally – which appears unlikely as a potential recession looms.