The latest US milk production data shows an increase of 2.9% when compared with October 09. We have been anxiously watching milk production trends with the general view that excessive production out of the US, Europe and Oceania will kill the commodity price recovery that we have seen in the past 6 months. At first glance the latest figures did nothing to allay our fears but in the true tradition of Xcheque.com Dr Hauser has turned conventional wisdom on its head.
A deeper analysis of the latest data shows that milk production has moved back towards the long term trend. That is good news for global export prices (if you are a farmer and dairy processor). It may well be that we are seeing the first signs that the brakes are being applied. Now read on ...
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The e-mail from the USDA popped into my inbox and I thought ... 'Oh dear, that doesn't look good' ... but the Hitchhikers Guide to the Dairy Galaxy(1) tells me on the screen icon "Don't panic!" ... so I didn't. I plugged the numbers into the trusty database, looked at them this way and that, and came to the view ... 'well that's not so bad'.
You might ask 'What is he on about?'. Well it is simple really. For some time we have been saying that the comparison of milk production with last year data does not tell you much about industry trends. Firstly monthly data can jump around (the USDA often adjust data after the event). Secondly, and more importantly, the results need to be viewed in the context of longer term trends. The October 2010 data is perfect example of this.
USA milk production in October 2009 was pretty close to the nadir of the production downturn that followed the GFC. A 3% rise seems like a lot but not when you compare this with a low reference point.
At Xcheque we like to do two things with milk production data.
(1) Standardise the data back to an annual reference point:
We take the seasonality out of monthly supply so that you can more easily see the production trend from month to month. When production is increasing and decreasing, as part of a natural seasonal milk supply, it is difficult to judge the trend other than by reference to the prior year. Fortunately the natural seasonal cycle is reasonably predictable. By applying a standard correction to the monthly results we can see whether production is above or below expectations. We also get a sense of what that variation means in terms of annual production output.
(2) Compare the monthly result with the long term trend:
Milk demand and supply in the US has been growing at about 1% per annum for just on 30 years. Production varies around this trend on a month to month and year to year basis but it is none-the-less incredibly consistent. Taking history as our guide, we don't get excited about US milk production data unless it is deviating a long way from this trend line.
Here's a chart that illustrate these points:
This shows our calculation of standardised US milk production in litres per day (with apologies our US readers - I just can't my head around pounds of milk). One way of interpreting this chart is to multiply the calculated daily production by 365 and you have a sense of the annual milk production in the US at that point in time. Yes I know it is a strange concept but trust me - it tells us a lot more than the actual monthly production.
The chart clearly shows the consistent growth trend over a 15 year period. It also shows how this is being achieved - that is via increases in milk per cow. The charts of US cow numbers in our library section show that numbers actually declined over the period.
Getting back to the October 2010 milk production data, you need to zoom in a little closer on the chart above to see what is happening. You can do that with the zoom feature of our flash charts but here is a better view:
What we are looking for here is a sign that milk production is moving back towards that long term trend line - and it is. As you can see the trend moves about a bit on a month to month basis so we are not getting too excited but things do look better than a month ago.
It may well be that the view of the Rabobank and others is right. A higher feed:milk price ratio will have the effect of dampening production. (Structural shifts in the global dairy market: Rabo, Stock & Land, November 17 2010). One of our spies in the US also suggest that it could also be the run on effect of financial pressure on some US dairy operations (Mortgage company takes control of mega-dairies, Associated Press. November 19 2010). It is always a worry when businesses go bust at the top of the price curve.
It is just about summer here so I can say that one swallow does not make a summer. As it turns out the swallows have been nesting around our place for months - it might be a sign.
On a final note, if you are a buyer of dairy products, and are looking for lower prices, then I'm afraid this news might be tough love. Most of Xcheque's constituency falls into the supply side and we do tend to look at things from their point of view.
(1) 'The Hitch Hikers Guide to the Dairy Galaxy' is also known as 'Xcheque Data & Charts'. An interesting fact about Dr Hauser's copy of THGTTDG is that its screen icon "Don't Panic" is right alongside a link with the title "Google is my friend".