The U.S. milk cow herd has been expanding at a steady pace (measured in tenths of a percent) since the spring of 2016. That trend came to an end in late 2017. December data is not available yet, but the November herd count was unchanged from October, so the first two months of that quarter showed a decline of 6,000 cows from the summer quarter average. The November milk cow herd was pegged at 9.397 million head by USDA-NASS (National Agricultural Statistics Service). Milk production for the final quarter of 2017 should still be up from a year earlier by about 1%, however, as milk cow productivity is improving at a faster rate than the small reduction in milk cow numbers.
The decline in milk cows late in the year mirrors milk price trends that developed as the year progressed. Milk prices at the farm as reported by USDA-NASS started the year out above $18.00 per cwt., the highest first-quarter average since 2014. Spring quarter milk prices averaged $16.83 and then moved up in a typical seasonal manner to $17.70 in the summer. As such, this was the biggest winter-to-summer milk price decline since 2008 (by $.04 per cwt.). Milk prices during the last quarter of 2017 were holding steady through October and November but were under pressure during December. The Class III Milk price went from $16.88 per cwt. in November to $15.44 in December, foretelling a big decline in the All Milk price reported by USDA-NASS for December, which will be published at the end of this month.
Underlying the recent trend in U.S dairy market conditions is a glut of milk products on a global basis. USDA-FAS (Foreign Agriculture Service) reported in late December that large European Union (EU) skim milk powder intervention stocks continued to increase during 2017, to the point where the continued marketprice support efforts could not be maintained as mandated in the 2013 Common Agriculture Policy agreement. Skim milk powder prices in Western Europe fell over 20% from July to the end of November and prospects for a recovery in early 2018 do not appear likely, given the decision by the EU to limit price support efforts in the milk powder market.
The milk powder price situation in Europe reverberated quickly through the U.S. milk market. Non-fat dry (NFD) milk prices held steady during the summer quarter, but lack of price competitiveness in the world market resulted in exports of U.S. milk powder declining 16% from a year earlier during the summer quarter. Inventories of NFD milk were already a problem at mid-year 2017, up 28% from a year earlier after starting the calendar year up only 12% from the start of 2016. At the beginning of October, NFD milk inventories were up 49% year-over-year, and NFD milk prices started to collapse. The December average price for NFD milk reported by USDA-AMS (Agricultural Marketing Service) was the lowest since before 2000, down 20% from six months earlier.
Given the global scope of the milk powder market imbalance at the onset of 2018, the outlook for the US dairy market is cautionary, at best. Milk prices typically move lower during the first half of the year, and 2018 should be no different. The issue will be how much lower and for how long. A static or declining milk cow population, as well as plateauing milk cow productivity, could provide relief from additional milk supply. Strong economic growth with commensurate gains in consumer spending on dairy products would also help. Prospects for market stability or recovery are reasonable for the second half of the year, but the next six months will be challenging.