February market report: Where’s the demand?

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Dairy markets in the U.S. are still stagnant. And, as we’ve reported for many months now, part of the problem is there’s just too much milk flooding the market.

But there’s a demand problem, too, and demand problems are much harder to solve. That’s especially true when the economy is strong, like it is now.

Past experience tells us people should be buying more dairy products, but they aren’t.

A booming economy

Pick any metrics you want and they all paint the same picture: The economy —in the U.S. and worldwide— is doing very, very well. Consider these highlights:

• At the end of 2017, the unemployment rate held steady at 4.1%. It hasn’t been that low since 2000.

• The last time our GDP dropped was the first quarter of 2014. That’s quarter-to-quarter GDP gains, uninterrupted, almost four years running.
• The Business Confidence Index published by the Organisation for Economic Co-operation and Development is at its highest mark since the Great Recession.
• The U.S. stock market was breaking records seemingly daily until a correction sent prices back to earth earlier this month. In our view, it was nothing more than a recalibration; the economy is still in great shape.

 We can’t see any reason to suspect things won’t improve still further. The ink is barely dry on federal income tax cuts enacted in the U.S., and the economy has already responded positively.

Demand isn’t following suit

Economies ebb and flow, and dairy markets track alongside them. What’s weird this year is that demand has remained sluggish despite a strong economy. Let’s look at some more numbers:

• Natural cheese stocks in storage at the end of December 2017 were up 7% from the year prior, according to the USDA.
• The USDA also reported butter stocks were up 2% from the year prior.
• As we’ve reported in recent months, sluggish demand and low dairy market prices has translated to higher production of powders as a defensive move. Accordingly, nonfat dry milk inventories in the U.S. and Europe have never been higher.

So where’s the demand? Why aren’t consumers behaving the way we predict they would in a good economy? Here are some theories:

Consumer trends are changing. Bottled milk consumption has steadily dropped over the last 40 years. Meanwhile, specialty dairy products —individually-packaged snacks are a good example— are supplanting traditional products in American refrigerators. Consumers may be consuming just as much dairy as they always have, but changes in the way products are packaged may mean they’re probably wasting far less.

Plus, the rising tide may only be lifting some boats. The U.S. jobless rate is down and GDP is up, but wage growth adjusted for inflation has been flat. A Bureau of Labor Statistics report showed that real average hourly earnings increased just 0.2% from November to December 2017. The year-over-year wage growth rate stood at just 0.1%. While the economy in general is seeing some big gains, the consumers who drive dairy markets apparently are not.

If that remains the case over the next year, probably the only chance for consumers to see significant increases in their buying power will come from the federal income tax cuts. It’s only February, so it’s hard to know what kind of impact —if any— that will have on dairy product demand.

Something’s got to give

Meanwhile, milk production remains strong, as data collected from the 23 major milk producing states show collection from December 2017 was 1.2% higher than the year prior. And the problem may not go away any time soon, because milk cow herds keep growing, according to a USDA tally.

We bring that up because the supply problem in the U.S. is just as problematic to the industry as the demand problem. We stated last month that dairy markets won’t turn the corner until we see production taper off. We reiterate the point because it doesn’t look like there’s a switch to be flipped where better demand kicks in overnight.