Dairy Market Update: May 2005

Looking at the first quarter this year, there have been some definite patterns to date in the 2005 dairy markets. After two sluggish years, milk production growth has returned, while demand for dairy has been strong for some products, weak for others.

U.S. milk production grew less than 0.2% in 2003 and actually declined slightly (less than 0.1%) in 2004 after adjusting for the extra day due to leap year. (All data used in this analysis includes this adjustment.) For January through April this year, production is up 2.4% over last year. There was generally poor production early last year, so it is also helpful to compare this year's production so far to the same four-month period two years ago, in which case it is 0.7% higher.

On the demand side, the data shows mixed results depending on the product. Due to a longer time lag, the U.S. Department of Agriculture (USDA) has only published commercial disappearance data for the first three months of 2005 to date. Total fluid milk product sales are estimated to be down 1.2% so far this year. Within this category, the bright spots are fat-free and lowfat fluid products, where sales have increased by 2.4% and 2.0%, respectively. On the other hand, sales of whole milk and reduced-fat milk are down 4.8% and 0.5%, respectively, and flavored milk sales are down 0.1% compared to last year.

Among manufactured dairy products, commercial disappearance of total cheese is up 3.2% in the first quarter, driven by a 5.1% increase in other-than-American cheese (American cheese is up just 0.4%). Spurred on by overseas demand, nonfat dry milk commercial disappearance is up 7.2%. This number would likely be even higher if not for the fact that USDA disposed of more than 130 million pounds of its nonfat dry milk stock in March 2004 (through sales, exchanges for other products, donations and drought assistance). The stockpile had been built up from all of USDA's Commodity Credit Corporation (CCC) purchases of nonfat dry milk under the Dairy Price Support Program the past few years. Meanwhile, commercial disappearance of butter is down 2.7% so far in 2005.

In summary, milk production so far this year has grown stronger as compared to 2004, but only modestly compared to two years ago. Overall demand is being led by domestic cheese sales, overseas demand for nonfat dry milk, and sales of lowfat and fat-free fluid milk products. However, sales of whole and reduced fat fluid milks and butter are well below last year's levels.

Posted May 31, 2005