Gallons of milk at the grocery store
Such longer term trends as the consumer’s shift away from fluid milk may challenge the industry.

Cash receipts for the U.S. dairy sector in 2015 are forecast to tumble 28% from a record high a year earlier, the largest annual decline of any of the major agricultural sectors reported by the U.S. Department of Agriculture’s Economic Research Service. The drop is the result of lower prices more than offsetting higher production, the U.S.D.A. said. 

Dairy producers’ cash receipts were forecast at $35,451 million in 2015, down 28% from a record $49,349 million in 2014 and the lowest since $31,372 million in 2010, according to U.S.D.A. data. It would be the largest percentage drop in dairy income since 2009, when receipts fell 30% from 2008 to $24,321 million, prompting a sell-off of marginal and unprofitable dairy herds the next couple of years. The year-to-year drop is dramatic and reflected in pricing of most dairy products and milk, with prices paid to farmers determined by a formula using butter, cheese, nonfat dry milk and dry whey values. 

In early December nonfat dry milk prices were trading 10% to 20% above multi-year lows set in August but remained 25% to 45% (depending on grade and region) below year-ago levels. Dry whey prices were up 15% to 20% from September lows but were down 60% from a year ago. Cheese and butter, the other two components of the formula, were faring much better. Butter, near $2.90 a lb in early December, was down about 20c, or 6%, from record highs set in late September but was more than 90c, or 45%, above the year-ago value. CME Group cheddar cheese blocks and barrels were down about 15% from summer highs but were down only about 5% from last year.

Prices also have been affected by lower exports and higher imports as the result of a historically strong U.S. dollar, which may strengthen even more when the U.S. Federal Reserve begins to ratchet up interest rates, and ample global supplies, which pushed world prices for some products to 13-year lows in the summer. Milkfat (butter and cheese in milk equivalent) imports were expected to increase by 1.6 billion lbs in 2015 (37%) and skim solids (dry products in milk equivalent) by 400 million lbs (7%), while milkfat exports were expected to decline by 3.6 billion lbs (29%) and skim solids by 1.3 billion lbs (3%). 

Milk production, meanwhile, is forecast by the U.S.D.A. to increase 1.3% in 2015, which is in line with the U.S. population growth, and 2% in 2016, which would be above the rate of population growth, suggesting supplies may remain ample. The price paid to farmers for all grades of milk averaged $23.97 a cwt ($2.06 a gallon) in 2014. The U.S.D.A. estimates the average will be $17.05 in 2015 ($1.47 a gallon) and forecasts an average of $16.40 ($1.41 a gallon) in 2016, using the midpoint of price range forecasts for 2015 and 2016. 

Longer-term trends give mixed signals to the dairy industry. Especially worrisome is the multi-year downturn in fluid milk consumption. But on the positive side is the growing popularity of yogurt, ongoing good demand for cheese and the resurgence of butter. 

Per capita fluid milk consumption was estimated at 159 lbs (18.5 gallons) in 2014, and has declined steadily for at least the last four decades from 247 lbs in 1975 (28.7 gallons). Ice cream (both regular and reduced fat) and sherbet per capita consumption also has declined during that time, while dry product consumption has held about steady. 

Yogurt consumption, meanwhile, has increased from 2 lbs per person in 1975 to about 15 lbs in 2014, cheese (American and other, excluding cottage) consumption has risen from 14.2 lbs 40 years ago to 33.9 lbs per person, and butter consumption has edged up from 4.7 lbs to 5.5 lbs per capita. It takes 21.2 lbs of whole milk to make 1 lb of butter and 10 lbs of milk to make 1 lb of cheese, while yogurt is a one-to-one ratio. 

Per capita consumption of all dairy products on a milk equivalent has increased 14% since 1975, from 539 lbs to 614 lbs, according to U.S.D.A. data.