What factors are driving milk prices higher?

by Calvin Covington

Current dairy market indicators, as well as many price forecasters, project 2022 milk prices to be the highest since 2014. USDA’s January 2022 Livestock, Dairy and Poultry Outlook projects the average all-milk price at $22.60/cwt., $3.95/cwt. higher than the 2021 estimated average. A combination of lower supply, both milk and products, and above-average demand are moving milk prices higher. Let me explain why:  

Declining milk supply

A small change in milk supply makes a larger change in milk price. USDA reports milk production during the fourth quarter of last year 0.1% lower than the same quarter in 2020. The decline is due to fewer cows and a below-average increase in milk per cow. From May to December, dairy cow numbers dropped 134,000 head, a large decline in a relatively short period.

Low or negative margins have resulted in a large exit of dairy farmers. Higher feed, labor and other production costs have lowered milk production per cow. The current USDA forecast only has milk production increasing 0.7% in 2022. In Oceania and the European Union, the world’s other two large dairy exporters, there is little change in 2021 milk production compared to the previous year. Milk production in 2022 is projected to only increase slightly in these regions.

Butter and dry products

Butter, nonfat dry milk powder (NDM) and dry whey are leading the way in moving milk prices upward. The National Dairy Products Sales Report for the week ending Jan. 15 reports the butter price at $2.5640/lb., NDM at $1.6319/lb. and a dry whey price of $0.7015/lb. Compared to a year ago, these prices are 72%, 45% and 59% higher, respectively. Yes, the cheese price has increased as well during this period (block cheddar up 18%), but much less than the other products. At the end of December, the butter inventory was 27.3% below a year ago. NDM inventory at the end of November was down 21.4% from a year earlier.

In production, the volume of butter produced has been below a year ago since July, with November production down a hefty 9.6%. Strong cream demand in products other than butter has meant less cream churned into butter. Like butter, NDM production has been below a year ago since July. October and November production was 12.8% and 15.0%, lower than a year ago, respectively. Less NDM production means less cream available for butter.

Above-average demand

Through November, commercial disappearance of dairy products, measured by total solids (milk fat plus skim-solids), is 3% above a year ago. This is well above the 10-year annual average increase of 1.7%. Breaking demand down between domestic and export, domestic demand is 1.4% above a year ago, while export demand is up a hefty 10.8%. American cheese disappearance leads the way, up 3.2% while demand for other cheese (mainly Italian) is 2.6% above a year ago. Butter demand is 1.9% higher than last year, and butter exports are almost 124% greater than last year. Through October, skim/ nonfat milk powder (SMP) exports are 10% higher than the same period in 2020.

The SMP supply outside of the U.S., especially in the EU is tight, which has lifted prices and increased more export opportunities for the U.S. The U.S. is expected to pass the EU as the world’s leading SMP exporter in 2021. It looks like 2021 will be a record year for U.S. exports, responsible for about 17% of total dairy demand.

As stated at the beginning, USDA projects the 2022 average all-milk price $3.95/cwt. higher than 2021. What does this mean in milk component prices, the way dairy farmers are paid? Dairy farmers can expect higher butterfat and other solids component milk prices compared to 2021 due to stronger butter and dry whey prices. Converting USDA projections to milk component prices results in a 2022 average butterfat price of $2.58/lb., about $0.70/lb. higher than 2021. Other solids are projected to increase by $0.07/lb. to $0.46/lb. in 2022. On the other hand, protein is projected to decline by about $0.08/lb. from the 2021 average to $2.68/lb. Even though USDA projects the 2022 average cheddar cheese price about $0.20/lb. higher than 2021, the Class III formula reduces the protein price as the producer butterfat price increases.

The bottom line: a lower milk supply due to fewer cows and above-average demand, especially exports, is the reason milk prices are moving higher. Looking ahead into 2022, I see high production costs keeping a lid on milk production. The big unknown in 2022 is dairy demand. How will inflation impact consumer dairy product purchases at both retail and meals eaten away from home? Will exports continue to remain at these levels? The U.S. dairy industry keeps becoming more dependent on the export market. Unfortunately, we cannot overlook the impact on dairy demand caused by the continuing coronavirus pandemic and supply chain challenges.

Only time will provide answers to these questions. In the meantime, I am optimistic for better milk prices in 2022. 

Calvin Covington is the retired CEO of Southeast Milk, Inc.  He remains involved in the dairy industry by writing and speaking on dairy issues.