November market report: Why milk production needs to go negative


If the topic we’re covering this month is proof of anything, it’s that we were right several months ago when we stated the only way dairy markets would improve was if there was less milk.

Not that we’re taking credit for calling this out. We were far from the only ones. This is no big secret.

Of course, it could be worse. In February, when we stated the obvious problem of too much milk, we also worried that demand for dairy products was mysteriously weak. As it stands now, demand isn’t all that bad—especially for powders.

But there are a few problems leading us to believe that the positive effects of decent demand are being erased because the market is out of balance.

Cheese prices and inventory

Seasonal cycles are important markers in the dairy industry. Over the last two years or so, though, the normal ups and downs have been rather wacky.

It’s happening right now with cheese prices. This time of year, cheese demand usually rises and purchases usually increase as consumers prepare for upcoming holiday meals. Instead, those numbers have slouched.

Meanwhile, back in July, we noted a buildup of fresh cheese inventories. Each month from March through June, a new record was set even though milk production was essentially flat. Here’s that same data for the last four months:

  • 414 billion pounds of cheese in storage for July, up 2% from the prior month and up 3% from July 2017—another record.
  • 359 billion pounds of cheese in storage for August, down 4% from the month prior but up 2% from August 2017—finally, the first net reduction in inventory since January.
  • 366 billion pounds of cheese in storage for September, up 1% from the month prior and up 4% from September 2017.
  • Cheese stockpiles dipped slightly in October but were up 8% from October 2017.

Milk production: It’s still too high

The “essentially flat” milk production we mentioned in the last section refers to data from April, May and June. During those months, production increased at 0.6%, 0.8% and 1.3%, respectively. Traditional data tells us dairy demand grows around 1.5% to 2% a year, so this represented a modest slowdown.

Since then, milk production rose 0.4% in July, 1.4% in August, 1.5% in September and 1.0% in October.

This is still too much milk. We need contraction.

Dairy herds keep getting bigger

Prices are low enough that some small and medium dairy farmers are leaving the business. That’s contraction, but not the kind we need. We need a sustained period of reduced milk production, and herds aren’t shrinking at a rate that would suggest lower production is imminent. In fact, they’re not shrinking at all. Consider this:

  • Dairy cow population in the U.S. has increased every year since at least 2013.
  • Over that same period, milk produced per cow has also increased. In 2013, when the dairy cow population was around 9.22 million, each cow produced about 21,800 pounds of milk. In 2017, 9.39 million cows produced 22,900 pounds of milk each.

Obviously, herds need to shrink (or farmers need to collectively find a way to make their cows less efficient). So why aren’t they?

For the most part, it’s because the smaller farms are just selling off their cows to bigger farms. The folks running large dairy operations are well-aware of the current price weakness. They know that less milk means prices will rise. But they’re finding it hard to argue against buying quality dairy cows at prices no one’s seen in 40 years.

What’s a bad year to a 3,000-cow dairy? They can withstand the lower prices in ways the smaller farms cannot.

We’ve said it before: We don’t like when some players in the industry are in dire straits. And we certainly don’t enjoy saying that the cure for low prices is lower prices. These are people’s livelihoods, after all.

But until the situation gets bad enough to spur more farmers to reduce dairy herds and send milk production downward, we’ll be stuck where we are.

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