The first official confirmed cases of highly pathogenic avian influenza (HPAI) in dairy cattle in the state of California came in the second half of August. In 2023, California produced 18.1% of U.S. milk, 17.5% of the cheese, 32.2% of the butter, and an estimated 50% of the combined nonfat dry milk (NFDM) and skim milk powder (SMP). You would expect a disease outbreak that reduces milk production in California would push dairy prices higher, but instead, the U.S. dairy markets have generally trended lower during the second half of September and first half of October. The price of butter even hit the lowest level since January at a time of year when the market is typically very tight. So, what’s going on?
Anecdotally, the HPAI outbreak in California is horrible. Just two months in, there are 105 confirmed cases on dairy farms, the highest case count for any state at this point. There are rumors that there are another 400 suspected cases that could be confirmed in coming weeks. With a little over 1,000 licensed dairy farms in California, that would suggest about 50% of the farms are being affected by the virus. The only other comparable state, based on officially confirmed cases, is Colorado, where 59% of the dairy farms were infected over the summer. However, Colorado and California have been the most aggressive in testing for the virus, so it makes sense that they have both found a large percentage of herds infected. To be fair, Massachusetts has also been aggressive and did mandatory statewide testing as a precautionary measure over the summer, but zero cases were found.
How will production be impacted?
We know at least 59% of the herds in Colorado were infected at some point between May and August, and milk production per cow was down 2.7% year-over-year in June and 2.3% in July before improving to being down just 1% in August. Idaho and Texas were also hit hard with the virus. The number of confirmed cases in Idaho is only 9% of the total dairy farms in the state so far, and in Texas, the confirmed number of cases is 19% of the farms. But based on anecdotal comments, I’m willing to bet that more than 50% of the dairy farms in both states were infected at some point this year. In those states, we also saw milk production per cow down between 0.9% and 2.6% during the worst of their outbreaks. So, in states where the virus was widespread, meaning likely impacting at least half of the farms, milk production per cow fell by 1% to 2.5% for two or three months.
With the California dairy herd down about 0.3% from last year, if we see production per cow fall 2.5% below last year, that would put California milk production down about 2.8% in October and possibly November as well. There are some arguing that the impact in California will be larger because the illness was combined with still-hot temperatures in September. Maybe we’ll see California down in the range of 3% to 4% for a month or two. The recovery in production in other states has been relatively swift, with most moving back to positive growth in production per cow within three months.
Since California makes about 18% of U.S. milk production, a 3% to 4% drop for California dents the national number by 0.54% to 0.72%. With HPAI burning out in other parts of the country, profitable margins, and new processing capacity coming online, improved milk production in the rest of the country may offset some of the decline in California. But the impact of the disease in California should be noticeable in the U.S. level milk production data for October and November.
Product pricing
Why hasn’t HPAI in California been supportive for dairy prices? This is a good question. The butter story is pretty clear at this point. We started the year with butter stocks below year-ago levels, milk production was weak, and milk was expected to flow toward cheese, so there was a lot of concern that we could have a shortage of butter in the lead-up to the year-end holidays. That kept the CME spot butter price above $3 for much of the year. It has been a surprise, but butter production has been running ahead of last year every month this year, with August up an amazing 14.5%. Butter stocks have also been up year-over-year every month since February. Now we find ourselves in the lead-up to the holiday season again, and there is more than enough butter available even with milk production in California taking a hit.
It is harder to explain the recent weakness in spot cheese prices. Stocks have turned out lower than expected this year and were down 6.4% year-over-year in August. Until we get more data, I think we have to attribute the recent weakness in cheese prices to softening demand.
With California producing about half of the NFDM plus SMP in the country, that is the product most at risk with the weakened milk production. Still, the CME spot NFDM price has been well supported around $1.35 despite SMP prices globally being 5 cents to 10 cents per pound cheaper. It’s possible HPAI in California is still helping to keep NFDM supported.
