by Madeline Schultz, content specialist, AgMRC, Iowa State University, schultz@iastate.edu. 

Profile revised November 2006.

Supply

The United States produced 176.9 billion pounds of milk in 2005. Average production per cow was 19,570. The number of milk cows on farms during 2005 was 9.04 million, most of which were Holsteins. Just 30 percent of the milk is processed into fluid milk and cream products. Total beverage milk in 2005 totaled 6.2 billion gallons.

Milk production has shifted within the United States. During the 1990s, growth occurred in the Pacific Northwest, mountain states and western regions of California. During the same period, there was a decline in milk production in the upper Midwest. California surpassed Wisconsin in 1993 as the number one dairy-producing state. California leads the United States in fluid milk, butter, ice cream and nonfat dry milk production. Wisconsin is the number one producer of cheese.

The U.S. government has provided support to dairy producers through a price support program, federal and state milk marketing orders, and direct government payments. 

The Milk Price Support Program, a part of the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill), continues through 2007. The support price remains at $9.90 per 100 pounds of milk, down from $13 per cwt. in the mid 1980s. The Commodity Credit Corporation has the authority to adjust relative purchase prices of butter, cheddar cheese and nonfat dry milk twice per calendar year.

Federal milk marketing orders, in use since the 1930s to stabilize the marketing relationship between farmers and processors, are based on pooling regions in the United States and pricing milk according to how it is used in a classified pricing plan. The marketing orders were revised in 2000. Class I milk is used for bottling and commands the highest classified use price; Class II milk is for soft manufactured products. Cheese is produced using Class III milk. Class IV milk is used to manufacture butter and nonfat dry milk.

The price paid to producers is also adjusted based on other factors, such as where milk from the farm is delivered. Component levels, or the percentage of butterfat, protein and other solids tested for in the milk, are factored in for Class III and Class IV milk prices.

The National Dairy Market Loss Payment Program, also a part of the 2002 Farm Bill, replaced direct market loss payments, which were made during periods of low milk prices. The program deficiency payments are limited to 2.4 million pounds of milk per farm operation per fiscal year.

The Milk Income Loss Contract (MILC) Program financially compensates dairy producers when the Boston Class I milk price class falls below $16.94 per hundredweight. Payment rates are determined by multiplying the difference between $16.94 and the Boston Class I price for that month by 45 percent. Payments are issued up to a maximum of 2.4 million pounds of milk produced and marketed by an eligible dairy producer per year. The 2002 Farm Bill authorized this program through Sept. 30, 2005. The Agricultural Reconciliation Act of 2005 reauthorized the program through Sept. 30, 2007. More information on the MILC program is available from local FSA offices or at http://www.fsa.usda.gov/.

The 2005 Dairy Disaster Assistance Payment Program provides $17 million in payments to producers who suffered dairy production and milk spoilage losses caused by the 2005 hurricanes or a related condition. Eligible producers are located in counties declared a natural disaster by Ag Secretary Mike Johanns or designated a major disaster or emergency by President Bush in 2005.
 
The dairy industry began a voluntary, producer-funded effort in 2003 called Cooperatives Working Together (CWT) to strengthen and stabilize farm milk prices. The program was launched following a drop in farm-level milk prices that reached 25-year lows. The three-level supply reduction program included a herd retirement program, milk production reduction and dairy product export assistance. It is funded through a 5 cent per hundredweight assessment on participating producers’ milk output.

Demand

According to the National Milk Producers Federation, fluid milk sales make up 30 percent of total U.S. milk consumption. About half of all milk consumed in the United States is in the form of cheese.

Total per capita milk consumption in 2004 was 21.2 gallons. Per capita fluid milk consumption has declined slowly due to competition from other beverages and because of a smaller percentage of children in the United States. According to Dairy Management Inc. (DMI), annual fluid milk beverage consumption among kids ages 6 to 12 reached 28 gallons per capita in 2001, the highest level in 10 years. 

Milk is regarded as a flow commodity because it is produced every day and must go to market at least every other day. Day-to-day milk supply does not coincide with milk demand. Demand for milk for bottling is nearly zero on Sundays and limited on Saturdays and Wednesdays because most plants close those days due to buyer demand schedules.

According to an Economic Research Service study on the milk pricing system, establishing a balance between milk’s supply and demand would require a balance among the following factors:

• For producer prices to remain high enough to maintain production yet not encourage surplus milk production;
• Willing and able consumers to pay for milk and dairy products; and
• For producers, handlers and the public to be interested in the orderly flow of milk and dairy products from producers to consumers.

Processing

The United States has 380 commercial fluid milk bottling plants and 1,081 dairy product manufacturing plants. Due to the perishable nature of milk, it must be marketed promptly as fluid milk or processed into a storable manufactured dairy product.

According to the U.S. Dairy Export Council, more than 80 plants in the United States manufacture milk powder, accounting for 10 percent of the world’s milk powder production, or more than 700,000 metric tons. The U.S. dairy industry is positioned as a primary worldwide dairy ingredient supplier.  

Value-Added Dairy Opportunities

Producers are tailoring their operations to meet consumer demands for dairy products. Some are adjusting production systems to qualify for organic labeling. Others are taking proactive approaches at processing, marketing their own products directly to customers.

Organic

As of 2003, 74,435 milk cows were certified organic. The top five states with organically certified milk cows were Wisconsin, California, New York, Minnesota and Oregon. The number of certified organic milk cows increased by 477 percent from 1997 to 2003. There were 745,273 acres of pasture and rangeland certified organic.

USDA standards for organic food were implemented in October 2002. According to the USDA, certified organic means “agricultural products have been grown and processed according to specific standards of various state and private certification organizations.” Agents accredited by USDA review farm applications and qualified inspectors conduct annual on-site inspections. Farm records track all management practices and materials used in organic production. Processing facilities for organic foods must also be certified by USDA-accredited agents. USDA maintains a list of accredited certifying agents on the National Organic Program Web site (http://www.ams.usda.gov/nop/indexIE.htm). It is currently compiling a list of certified organic processors.

Organic milk accounts for less than one percent of the U.S. milk market. Organic dairy products are being marketed through mainstream supermarket channels and natural foods stores. Two-thirds of the organic milk and cream and half of the organic cheese and yogurt are sold through conventional supermarkets. 

Please see Organic Dairy for additional information.

Fluid Milk

A growing trend is producers marketing their milk using returnable glass bottles. This, coupled with home delivery of milk, is appealing to some consumers. They are assured of a consistent quality product. Consumers know where the milk was produced. They also have the chance to be environmentally proactive by using returnable, reusable glass milk bottles.

Please see the Fluid Milk page for additional information.

Cheese

More than 25 percent of the world’s cheese is manufactured in the United States. Total U.S. cheese production in 2005, excluding cottage cheese, was 9.13 billion pounds. About one-third of the annual U.S. milk production is used to make cheese. Wisconsin was the leading state in 2005 cheese production with 2.35 billion pounds, accounting for 26.4 percent of the total U.S. cheese production. American-type cheese accounted for nearly 42 percent of total U.S. cheese production in 2004.

U.S. per capita cheese consumption was 31.3 pounds in 2005. According to a study sponsored by the California Milk Advisory Board, 8.8 billion pounds, valued at $39.9 billion, were consumed in 2003. Overall cheese consumption continues to increase due to its versatility and adaptability to recipes, more available varieties and the increased interest in ethnic cooking.

Increased cheese consumption can be attributed, in part, to growth in specialty cheese. Specialty cheese is a value-added product of high quality and limited quantity. Some of the unique qualities of specialty cheese include having an exotic origin, distinctive processing, extraordinary packaging, or unusual use and channel of sale. To be regarded as a specialty cheese, nationwide annual production cannot be more than 40 million pounds.

Please see the Cheese page for additional information.

Imports

The United States imported $2.68 billion worth of dairy products during 2005. Cheese imports accounted for $1 billion of all dairy imports. The United States is the largest cheese-importing country in the world. Other imported dairy items were casein, a milk protein used as a food ingredient; milk protein concentrates; butterfat; dairy blends; whey and chocolate preparations.

Importation of live animals is now possible. In recent years, importation of replacement heifers from Canada was banned due to the bovine spongiform encephalopathy (BSE)-related restrictions. The USDA reports that imports of female dairy breeding stock from Canada have totaled 1 to 2 percent of the U.S. heifer herd.

Exports

The United States exported a record high $1.66 billion worth of dairy products during 2005. Exports account for about 8.3 percent of total U.S. milk production, on a milk-equivalent basis. Dairy products that are exported include cheese, whey, lactose protein, ice cream, infant formula, fluid milk and cream, and milk powders.

Most of the export gains were from dairy ingredients. According to the U.S. Dairy Export Council, strong world demand positions the United States as being the world's leading supplier of skim milk powder, whey and lactose.

Primary markets for U.S. dairy exports are Japan, Mexico and Canada. Regions considered as secondary markets include China, Korea, Southeast Asia and South America. Export market potential for the United States also exists in the Middle East and the Caribbean.  

Please see International Dairy for additional information.

Competitiveness

Fluid milk competes with other beverages for sales. While skim milk consumption has increased over time and whole milk consumption has decreased, overall milk intake by U.S. consumers has dropped in the last 20 years. 

Since 1990, carbonated soft drink consumption by men and women has surpassed milk intake. In 2003, bottled water surpassed milk to become the second most consumed commercial beverage. Consumption of fruit and sports drinks has also increased over time. Nondairy milk products made with soy and rice are competing for space in the dairy case and are advertised as having comparable dairy attributes like calcium. Fluid milk is also being outspent on advertising by competing beverages.

Few price incentives currently exist for expanded U.S. dairy exports. Internal prices for U.S. bulk dairy products are substantially higher than world prices. Except for a few products, namely ice cream, specialty cheeses, and dried whey, dairy products from the United States are not competitively priced in world markets.

The United States faces competition from foreign firms that have acquired U.S. dairy and marketing operations. Foreign firms are also taking advantage of shipping in the food ingredient casein to the United States, which is duty free and without quota limits.

The United States faces international competition for dairy export sales. About two-thirds of world dairy exports originate from the European Union (31 percent), New Zealand (22 percent) and Australia (12 percent). Other key dairy exports include Poland, Argentina, Canada, Switzerland and Uruguay.

Long-Term Outlook       

According to long-term projections by USDA, U.S. milk output per cow and total milk production will be boosted by productivity gains. Milk cow numbers are expected to decline at a relatively slow pace. Domestic dairy product demand is expected to grow at a slightly faster pace than the U.S. population growth. Demand for cheese and butter are expected to benefit from increased away-from-home dining and greater consumption of prepared foods. Fluid milk consumption is expected to continue shrinking.

Sources

Beverage Marketing Corp

California Dairy Foods Research Center

The Changing Landscape of U.S. Milk Production, Economic Research Service, USDA, 2002.

Dairy, Economic Research Service, USDA.

Dairy Backgrounder, Economic Research Service, USDA, 2006.
 

Dairy Foods magazine.

Dairy Products, 2005 Summary, National Agricultural Statistics Service, 2006.

Dhar, Tirtha and Foltz, Jeremy, Milk by any other name . . . Consumer Benefits from Labeled Milk, University of Wisconsin-Madison, 2003.
  

Fluid Milk Market Seeking Ways to Grow, Beverage Marketing Corp., 2002.

International Dairy Foods Association

Livestock, Dairy & Poultry Outlook, Economic Research Service, USDA.

Milk Income Loss Contract Program, Farm Service Agency.

Milk Pricing in the United States, Economic Research Service, USDA, 2001.

Milk Production, National Agriculture Statistics Service, 2005.

National Milk Producers Federation

Organic Production, ERS, USDA.

Real California Cheese, California Milk Advisory Board.
 

U.S. Dairy Export Council

USDA Agricultural Baseline Projections, Economic Research Service, USDA, 2006.

U.S. Milk Powders: Abundant, versatile, year-round supply, U.S. Dairy Export Council.

Wisconsin Agricultural Statistics, Wisconsin Agricultural Statistics Service.