Industry Insights


Date November 2018


  • U.S. milk prices are in the fourth year of a slump due to chronic oversupply
  • Federal Reserve Banks in the Midwest are reporting the renegotiated United States-Mexico-Canada Agreement (USMCA) trade agreement between the United States, Mexico, and Canada is of little use to dairy farmers due to marginal trade increases and slow implementation


Approximate Net Recovery on Cost


Current Trends


  • U.S. milk prices are in the fourth year of a slump due to chronic oversupply
  • Federal Reserve Banks in the Midwest are reporting the renegotiated United States-Mexico-Canada Agreement (USMCA) trade agreement between the United States, Mexico, and Canada is of little use to dairy farmers due to marginal trade increases and slow implementation



U.S. fluid milk production by year


CME Cheese - Grade A 40# blocks


New policy pending: Canada, Mexico, and the United States have reached a new trade deal known as the USMCA, which is expected to be signed on or before November 30, 2018. The agreement replaces the North American Free Trade Agreement, the 1994 pact that governs trade between the United States, Canada, and Mexico. Though many of the key provisions will not take effect until 2020, one key change is that Canada will eliminate its pricing scheme for what are known as Class 7 dairy products, allowing for more dairy products to be exported to Canada including milk protein concentrate, skim milk powder, and infant formula. Prior to these re-negotiations, the Canadian government restricted how much dairy could be produced in the country and how much foreign dairy could enter in order to keep milk prices high. Previously, Canada kept strict import quotas on dairy products and applied steep tariffs on imported products that exceeded those quotas, with tariffs ranging from 200 to 300 percent. Under the new agreement, which still needs to be approved by Congress, Canada has agreed to drop restrictions, allowing U.S. producers to supply up to 3.6 percent of Canada’s dairy market.

There are mixed feelings on how this agreement will affect the U.S. dairy industry as a whole, and dairy farmers have indicated that how it will be implemented is key to their success. Proponents feel the expanded 3.6 percent market access to the Canadian domestic dairy market and elimination of competitive dairy classes will shrink the Canadian industry. For that reason, Canadian dairy farmers have criticized the renegotiated trade deal, saying the new agreement will undercut the industry by limiting exports and opening up the market to more American products. The Chicago Federal Reserve Bank reported in the latest Beige Book issued by the Federal Reserve Board on October 24, 2018, which is the central bank’s periodic report on economic conditions across its 12 districts, that gains from the new agreement are seen as “too small and too far in the future to help dairy farmers.” The Minneapolis Federal Reserve Bank reported that “a substantial number of dairy operations have exited the business since the beginning of the year” due to unfavorable conditions. How the new agreement affects pricing and export volume will be a key factor as to how the industry performs in 2019 and 2020.

Milk consumption down: U.S. Whole milk per capita consumption has tumbled by 78 percent since 1970, due to health concerns related to growth hormones, antibiotic use in dairy cows, trends toward lower fat intake, concerns regarding lactose intolerance, skepticism regarding the health benefits of milk, and the rise in the use protein supplements, with the most pronounced declines occurring in the 2-11 year old and 12-19 year old demographics. In recent years, the growth of non-dairy milk substitutes has been a new competitive factor with the advent of products like almond milk and other plant-based milk substitute products coming to market. The 2017 sales level of non-dairy milk products of $2 billion is expected to increase by 10 to 15 percent annually through 2020, likely taking further market share away from milk products. While the dairy industry has been fighting back against these products through regulatory and labeling restrictions, these actions will likely not impede the growth in this sector materially.

Pricing fluctuations continue: Over the past five years, the price of raw milk has been highly volatile and this trend will likely continue due to various issues of supply and demand. The price of milk rose 19.4 percent in 2014 to a period high; however, prices dropped almost 29 percent in 2015, causing revenue to decline accordingly. In 2016, an oversupply of dairy products caused a further decline of 5.5 percent. Although milk pricing rebounded somewhat in 2017, looking at year-over-year trends for September 2018, the Consumer Price Index for dairy and related products was flat. Increases for cheese and ice cream products were offset by declines in all milk categories, particularly fresh whole milk (-1.7 percent).

Butter may warrant special analysis: Butter is a seasonal product. Prices almost always go up in the fall and winter, related to holiday cooking and baking. While sales volumes may be moderately impacted, rising market prices for butter can more greatly impact sales dollars. A lot of creameries will start building supply in anticipation of fall demand. Lenders should discuss with appraisers whether a high-low analysis to account for seasonality makes sense for companies in this sector.

Private label products may warrant modifications to exit strategies: Many dairy products are manufactured under a private label. Lenders should beware that manufacturers may not be permitted to sell private label product unless it is repackaged. While in certain instances, repackaging may be possible, it will incur extra time and expense in a liquidation.

Perishability: Due to the perishability of dairy products, the age and integrity of the goods is critical to recovery value. Product that is at or near its sell-by date will have a lower gross recovery value than fresher product. Most customers seek delivery of fresh products to stores or distribution centers within days of packaging, maximizing salability. The short shelf life of fresh product necessitates rapid turnover in finished inventory levels as part of the normal course business to avoid losses. For those who lend against milk or other dairy assets, it is important to pay close attention to how an appraiser modifies the exit strategy to accommodate perishability. Depending on the product, there may be a couple of weeks or possibly just days to sell. It is also important to be aware of the strict regulations governing the sale, pricing, and production of milk.

Market risks: As the industry is heavily overcapitalized, there is significant default and consolidation risk in the sector currently. The industry at the farm level is heavily subsided through a variety of federal- and state-level programs, so the risk that some of these price-support and other programs shift in the future is real. In addition, the current trade war that is brewing between the U.S. and China has been negatively impacting U.S. commodity exports, and the expected escalation of this war in early 2019 may directly impact major dairy exports such as dried milk and whey powders, casein, and other products. While the risk of disease in the form of hoof-and-mouth disease, mad cow, Listeria, and E-coli is always present, given the de-centralized nature of these threats and the regulatory structure in place to guard against these issues, these disease-related factors, though they exist and should be monitored, are likely not a material threat to the industry.