May 10, 2019

Milk Components Up In First Quarter

 |  By: Fran Howard

A flat to contracting U.S. milk supply likely is good news for many dairy producers because it could hasten a milk price recovery. And because producers get paid on components, today’s high milk component levels could mean losses are not as severe, at this time, compared to if components were lower, according to Sara Dorland, analyst for the Daily Dairy Report and managing partner in Ceres Risk Management, Seattle.

“While changes in milk production are important, it is equally vital to monitor the components in milk because most of the milk in the United States heads to cheese, butter, and nonfat dry milk powder—not into a bottle,” Dorland says.

For the first quarter of 2019, the U.S. milk supply was nearly unchanged, up only 0.2%, compared to the same quarter in 2018, but the components in the milk were higher than the previous year, according to USDA-Agricultural Marketing Service data. 

“For bottlers in heavy Class I regions, a contracting milk supply means that less milk is available to bottle, which often requires Class I processors procure milk from other locations—a situation that has been playing out lately on the East Coast,” Dorland notes. “While consumption of fluid milk continues to decline, the rate of decline in the East Coast’s milk supply for first-quarter 2019 was greater than the demand losses. As a result, milk from states like Michigan and Ohio had to offset shortages from Pennsylvania to Florida.”

For other types of processors, however, a contracting milk supply does not necessarily translate into lower dairy product output. “That’s because cheese, butter, and milk powder facilities all function on components,” Dorland notes. “They effectively are water removal operations.” 

During the first quarter of this year, butterfat tests averaged 3.97%, compared to 3.94% a year ago. That might not sound like a significant difference, but it is, Dorland says. For instance, she calculates that in the first quarter of 2018, 100 lbs. of milk could produce 4.73 lbs. of butter at 80% butterfat. But this year during the first quarter, that same 100 lbs. of milk would have produced 4.76 lbs., or 0.7% more than last year. The same holds true for the solids nonfat in the milk, which was 8.99% this year, compared to 8.94% during the same period a year earlier. “This year’s higher protein level translates into more nonfat dry milk and cheese,” she notes.

Based on this year’s increased component levels, a flat to slightly lower milk supply could still yield more cheese, butter, and nonfat dry milk, according to Dorland. “In March, U.S. milk production fell 0.4% below the prior year, but this year’s protein tests were 2.4% higher than last year’s and this year’s butterfat tests were  0.42% higher.”

What exactly does all this mean? “Looking at March, the higher butterfat levels likely offset the lower milk output, and the protein gains in the milk more than compensated for March’s milk production decline,” Dorland says.
Even so, demand appears to be strong enough to soak up this year’s extra components, and that likely will continue to push milk and dairy products higher through spring.