Milk prices have trended lower throughout the first three months of the year. Class IV milk prices (milk destined for the butter and milk powder market) averaged $16.19 per cwt. in January and sank to $14.32 in March, an 11% decline. Class IV milk prices were caught in a riptide of poor demand for butter in the U.S. and declining milk powder prices in Western Europe.
Wholesale non-fat dry milk prices in the Midwestern U.S. started the year at $1.02 per pounds and three months later were struggling to hold the 80 cent mark. Meanwhile, U.S. butter usage during the first two months of the year (based on USDA-Economic Research Service calculations) was down 13% year-over-year in January and fell 21% in February. The Leap Year effect was in play in February, with one less day this year being a factor in the magnitude of the decline. The decline in butter usage is a notable difference from the last quarter of 2016, when usage was up 7% from 2015’s comparable quarter.
The slowdown in usage resulted in frozen butter inventories in cold storage accumulating at a rapid pace, as shown in USDA-NASS Cold Storage reports. At the beginning of the year butter cold storage stocks were 11 million pounds above a year earlier, a 7% increase. By the end of March, frozen butter inventories were up 30 million pounds from twelve months prior, a 12% jump.
Wholesale butter prices have moved sideways, even with the build-up in inventory. Average butter prices in February and March were close to unchanged from December 2016. Butter production in January was 1% higher than in the prior January and February production was down 6%, with one less day this year accounting for the majority of that difference.
U.S. non-fat dry milk prices started out the year at an equivalent price to Western European product. At the end of March, U.S. milk powder was priced at a 10% discount to that in Western Europe. Non-fat dry milk prices during the last quarter of 2016 averaged 15% to 20% below Western European prices. That discount supported bigger U.S. exports during the first quarter of 2017. U.S. milk powder exports in January were up 10% from a year earlier and February exports were up 26%. A 10 cent decline in non-fat dry milk prices during March is probably an indication that exports during that month were not as impressive as the first two months 2016. Export data for March will be available in early May.
The discount on Class IV milk to Class III milk (milk used for cheese production) went from 58 cents per cwt. in January to $1.49 per hundredweight in March. The widening discount should have encouraged more milk moving into cheese manufacturing and less into butter and milk powder. U.S. cheese production in February was down 1% from a year earlier, a more modest decline than the 6% decline in butter production for the same month. This suggests that the shift in price relationships between Class III and Class IV milk was working fairly quickly to create a response. Dairy product production during March could show an even more prominent shift towards cheese production. Cheese prices in March were under pressure, with cheddar prices dropping 20 cents per pounds from February to March. USDA data on butter, cheese and milk powder production in March will be available in the first week of May.
