U.S. Stocks of Dairy Products Remain Large But Begin to Dip

Milk production during 2018’s final quarter is projected to post the smallest year-over-year increase since 2015. November output was up 0.8% year-over-year, and the quarterly tally should come in below that increase, assuming milk cow inventories and cow productivity maintain recent trends. A consequence of moderating milk supplies has been reductions in burdensome frozen stocks of dairy products.

End-of-November inventories of butter were down 6 million pounds from 2017’s, the first decline from a year earlier since March. Butter inventories started November up 13 million pounds over the previous year, which followed September’s jump, which was the biggest increase of the year (up 27 million pounds from a year earlier). Butter prices (wholesale, AA Chicago Mercantile) averaged within a penny of $2.25 per pound from September throughout November. According to USDA’s Economic Research Service (ERS) calculations, domestic butter use was up 1% from a year ago during September and October. November dairy product production data was not released as scheduled due to the government shutdown, but butter production in the latest reported month was down a fraction of percent from a year earlier. The decline in butter inventory during November hints at production falling short of a previous year by a wider margin than in October.

Similar, but more pronounced, trends are occurring in the milk powder market. Non-fat dry milk inventories at the end of October dropped to the lowest levels since March 2017, a decline of 20% from a year earlier. Inventories of non-fat dry milk during the last quarter of 2017 were record-large, surpassing year earlier volumes by about 50%. Even with this year’s decline in milk powder storage, inventories will still be the second largest volume ever for the fourth quarter of the year; exceeding stocks in years prior to 2017 by at least 15-20%. To curtail stocks, non-fat dry milk prices have averaged below 90 cents per pound since September of last year. Low prices have discouraged production (down by at least 10% from a year ago in since July) and encouraged exports (on a pace to be up 20% from a year ago for 2018). Non-fat dry milk prices have approached 95 cents per pound in December, the highest values since June 2017.