Falling Milk Production Masks U.S. Dairy Industry’s Growth Potential
The U.S. dairy industry has long relied on monthly milk production data from the USDA to track the trajectory of milk supplies available for processing and to project potential dairy product output. Historically, falling milk production from dairy farms would signal a decline in supplies of both fluid milk and the key solid milk components used to produce cheese, butter and other dairy foods. Production volumes of farmgate milk and the components in that milk trended closely together for decades. As a market indicator, tightening milk supplies could potentially curtail dairy processors’ growth or expansion plans.
That dynamic has changed, however, as the composition of milk produced in the U.S. has evolved to steadily include more butterfat and protein content. While U.S. milk production has slowed in recent years, key milk components used to make many of the most popular solid dairy products have climbed. Recent dairy production data accentuates the trend. Through September 2024, U.S. milk production on a milk volume basis has declined for 14 consecutive months. Meanwhile, butterfat and protein production has grown in 12 of those same months.
According to a new report from CoBank’s Knowledge Exchange, the decoupling of fluid milk production and milk component production represents an important paradigm shift for the industry given growing consumer demand for manufactured dairy products. More than 80% of U.S. milk production goes into dairy food products that rely on milk components while less than 20% goes into the fluid beverage category.
Considering the significance of these changes in U.S. milk composition and consumer demand, the report suggests the dairy industry would benefit from a more comprehensive monthly report from USDA that includes milk, protein and butterfat production levels.
“USDA’s Milk Production reports have been the gold standard for tracking milk available for processing since 1924,” said Corey Geiger, lead dairy economist with CoBank. “However, changes in milk composition have made the report incomplete when it comes to understanding whether production is growing or declining, and by how much. A more robust report including milk components as well as fluid milk production data would be informative to producers, processors and retailers from a planning and risk management standpoint.”
At $76 billion in annual U.S. sales, dairy is the largest category in retail grocery, according to data from Circana. However, dairy product sales look much different than in generations past. Growth in the category is being driven by manufactured dairy products such as cheese, whey, butter, yogurt, ice cream and other products that depend heavily on milk components such as protein and butterfat and not the fluid portion. The shift in consumption patterns means that milk solids, not milk volume, matter more to most dairy processors.
Cheese is a prime example of a product that had benefitted from milk’s growing component yields. In 2010, 100 pounds milk from the typical U.S. dairy farm yielded 10.1 pounds of cheese. Fast forward to 2023, 100 pounds of milk yields 11.2 pounds of cheese. That 10.8% improvement is product yield driven by higher butterfat and protein content.
Domestic markets aren’t the only category experiencing these shifts. Manufactured dairy products dominate the growing export opportunities for U.S. dairy and create more demand for milk components. Opportunities for growth both at home and abroad are among the reasons domestic and international dairy processors are investing over $7 billion in new dairy processing capacity in the coming years.
Several factors have fueled the rising levels of protein and butterfat in the U.S. milk supply, chief among them are the Milk Component Pricing provisions that established values for 92% of the nation’s milk. Combined with soaring consumer demand for cheese, dairy producers have been increasingly incentivized to shift management strategies that would result in higher milk component levels.
Geiger acknowledged that reframing the monthly Milk Production report to include protein and butterfat data would be a difficult and time-consuming endeavor for the USDA, given the complexities of how that data is currently tracked. But given the apparent permanence of shifting dairy production, processing and consumption patterns, the effort would be well-placed and well-received.
“Long-term, the collective U.S. dairy industry would benefit from an updated system that collects more component data and reports that data in a timely fashion,” said Geiger. “That’s important to the dairy industry because consumers both at home and abroad continue to eat more milk solids found in manufactured dairy products and drink less fluid milk with each passing year.”
Read the report, Why Milk Components Matter More than Milk Production.