U.S. farm milk prices are impacted by two factors: the value of dairy products sold and the availability of milk to make those dairy products. This year, export markets are driving the value of dairy products sold and as such the overall level of milk prices. But, depending on where you are in the country, you may also be facing other price pressures like the availability of milk in your region, which has impacted local premiums and is changing the tilt of milk values across the country.
We can argue about when we entered world markets as a significant exporter, but it was about 2005. Prior to that time, the milk solids exported were a relatively small proportion (2-4 percent) of milk production. We also imported about the same volume of milk solids. Since 2005, the percent of milk solids produced has grown significantly and some folks have said that our cows are now working one day a week for customers overseas. We are the third largest exporting country after the European Union and New Zealand.
Export growth has allowed us to expand milk production quite a bit over the last decade. But, export opportunity also comes with some costs. In the global recession of 2009, overseas customers did not want as much dairy product as we had been selling to them, and when that product stayed home, inventories grew and milk prices fell.
Figure 1 shows that every significant downturn in milk prices that we have had over the last decade and more was accompanied by export sales that were off trend or declining. We build up our production momentum to expected sales that can be soft at times.
Figure 1.
Tilt
We have also seen shifts in regional patterns of milk production. In the last several years, major western milk producing states have been down in milk production. As an example, California milk production has declined about 6 million pounds of milk per day since 2014, equivalent to one large processing plant. On the other side of the country, states like Michigan have doubled their milk production in the last 18 years while states on the other side of the Great Lakes — New York and Wisconsin — have expanded their production significantly as well. These three states alone are up more than 15 million pounds of milk per day since 2014. That suggests that the capacity of another three large dairy plants are needed to handle the new milk in that region.
The Midwest has not constructed three large new plants or added that much capacity to existing plants. However, existing plants in the Upper Midwest and the Northeast have managed to squeeze most of that milk through pre-existing stainless steel. Some milk has periodically been dumped, but most of it has found a home.
As milk has moved around the northeastern quadrant of states looking for a home, a fair amount of it has been sold at distressed prices. This additional milk has put downward pressure on over-order premiums that I don’t think will change until we see more capacity for processing and the customers who want the extra products. This has changed the “tilt” of milk prices by flattening the incline that we used to see from western states to eastern states — it isn’t flat, but it isn’t as steep as it used to be either.
What’s ahead?
Unfortunately, I think there is enough dairy product and milk production around the globe to keep milk prices depressed throughout much of 2018. I expect the bottom of prices to be in the first quarter of the year and then begin to rise. But, unless we hear of production declines in Europe or surging demand from China or other countries, it is going to take some time to work down our stocks and restore a better milk price at home.
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