Managed dairy news: Not fixed anytime soon

I once was told that if your wife waits until you’ve eaten a well-prepared meal to tell you about a dented fender — that’s “managed news.”

Well, I hope that you just had a good meal because I am about to tell you some “managed news.”

The supply side

Some people don’t realize this, but the U.S. government has little to do with milk prices anymore. The current system is mostly based on the simple market economics of supply and demand.

On the supply side, a few important facts must be understood. First, supply is slow to adjust to changing prices. When milk prices drop, there is generally a significant lag before we see a reduction in the supply (or more correctly stated, a reduction in the rate of increase in the supply). Because of the normal increase in population and consumption, an increase of 1 to 1.5 percent in the U.S. milk supply is just about equal to the average increase in demand.

The U.S. milk production increased by less than 1.5 percent in 2015. Thus, the issue of low milk prices is not due to runaway increases in domestic production.

Second, the total dairy supply is not made up of just domestic production. The balance of imports and exports plays a role. Our imports of dairy products have been very flat and are far less than what we have been exporting: we cannot blame low milk prices on increased imports.

Our exports, however, have dropped from a high of 16-17 percent down to 12-13 percent of total national dairy solids production. This 3 to 4 percent difference represents a lot of milk that piles up in the form of dairy products in warehouses. The latest news from the USDA was particularly bad in this regard.

A pretty big pile

At the end of January, the USDA estimated that the U.S. had 1.18 billion pounds of cheese in storage, a figure that is 12.8 percent greater than a year ago. To put this number in perspective, this is the greatest amount of cheese in storage that we have seen in the U.S. since 1985 … when the government was giving away cheese in an attempt to reduce the amount in storage.

In short, we have a mighty big pile of cheese in U.S. warehouses.

Butter, which until recently was still highly priced from a historical standpoint, has seen its price going south. Based on the USDA report, we haven’t seen the bottom of the downside yet. At the end of January, butter inventories were 41 million pounds greater than at the end of December. The January amount of butter in storage was nearly 32 percent greater than at the same time last year.

The butter pile is also substantial. Hence, if I’m a buyer of dairy products, and I see that the amount of cheese and butter in storage are high and increasing, then I am not be buying aggressively because I expect prices to drop, or at least not to increase.

Where is the milk from?

If the increase in U.S. milk production has been somewhat small over the last 12 months, then where’s all this “new” milk coming from? It would be tempting to blame Oceania, particularly New Zealand, a country that has contributed to much of the increase in world dairy supplies in the last decade.

But New Zealand dairy producers receive no direct form of government support, have an insignificant domestic market, and end up receiving the lowest prices for dairy products traded on the world market. In fact, New Zealand dairy production is down this year (the “dairy year” in New Zealand starts in mid-calendar year because of the opposite seasons in the Southern Hemisphere), albeit not as much as what some people anticipated.

A pretty significant event occurred April 1, 2015 — the quota system that had shackled European milk production since the late 1980s was finally abandoned. Predictably, European milk production has gone up.

Just this last December, milk collection in the 28 countries that form the Eurozone was up 4.9 percent from 2014, totaling around 27.4 billion pounds of milk (compared to 17 to 18 billion pounds in an average month in the U.S.). A 4.9 percent increase in one month amounts to nearly 1.4 billion pounds of additional milk from a single month.

Not all European countries have jumped on the “dairy bandwagon,” with much of the increase coming out of the Netherlands (lets face it, they love cows), Ireland (what else can you do in a country where it rains two days out of three?), and more recently Germany (to provide work for all the people that Volkswagen had to lay off).

What’s to come?

I keep saying and writing that I cannot forecast milk prices any better than everybody else. But at least I am honest in declaring my incompetence. This being said, I see nothing in the fundamentals that would indicate a significant upswing in U.S. milk prices for the next 6-8 months.

So the managed dairy news for this month is that the dented fender is not about to be fixed. This should not improve your mood as you watch the next presidential debate and conclude with me that our country needs more soil conservation and not so much soiled conversation.