While the American dairy industry is collectively obsessed with trade wars and tariffs, that's not the biggest elephant in the room. Ted and T3 look past the headlines to discuss the trend that could have a far greater impact on markets over the long term.

Anna: Welcome to The Milk Check, a podcast from T.C. Jacoby and company, where we share market insights and analysis with dairy farmers in mind.

Toby: We welcome you back to The Milk Check. It's July 17th, 2018. I'm Toby Wall, I'm in for Anna Donze, she is out today. And with me today is Ted and T3. And we're here to talk about what we think is the biggest problem or at least the biggest challenge right now, in the dairy industry, and it's not what you think it might be. So the conversation about tariffs has occupied everybody's mind lately, but it's not necessarily the biggest issue, right? Since these have been announced, prices have come down in dairy markets. They've come down significantly. But is that the result of tariffs? Or is there something else going on here?

T3: The first thing that we need to keep in mind when it comes to price is markets are not just a matter of math, they can be emotional as well. And I think that one of the things that's happened in the last month and a half is that, as we kept hearing over and over again, about the retaliatory tariffs and how China and Mexico have put tariffs on cheese, and China's put tariffs on whey and other dairy products, the emotional side of the market has really come to bear. Fear. People are afraid that those markets, we're gonna be...our demand is gonna be reduced because we're going to be exporting less to those markets when prices come down.

To me, there's an underlying issue that is a bigger issue than the tariffs. But the talk and what everybody's talking about is what's going on with the tariffs. What concerns me though, is milk production over the last three months has only been up about 0.8%. That is below the natural growth rate in demand in this country. The assumption has been over the last 30 years, the demand for dairy products tends to grow at an annualized rate of somewhere between, 1.5 to 2%. That correlates very closely with increases in population in this country. But it also correlates with a slow and steady increase in dairy consumption on a per capita basis.

So if we're only up about 0.8% in terms of milk production, we should start seeing our inventory numbers stagnate, if not go down a little bit, as we are continuing to consume at an increasing rate, but we're supplying less milk. That's not happening. We've seen our cheese inventories continue to increase this year at a faster rate than they did last year, and at a faster rate than they did before. Inventories are up, for cheese are up this year, relative to last year, even though milk production is down. And the fact of the matter is, even though right now, that all the discussion is about the tariffs, the truth is, for the first five months of the year, January through May, exports have actually been excellent. They've been way better than last year, way better than the year before. So why is our cold storage...why are inventory numbers going up?

That's what has me concerned. Somewhere, whether it's we're producing more cheese or we're producing less of other dairy products because they're not being consumed, somewhere in the domestic demand data, and we haven't been able to pinpoint exactly where it is, we suspect there's been some decreases in domestic demand for dairy products that really isn't coming to the forefront, that's not obvious to people who really studied the numbers.

Ted: I tend to believe that only the most isolated segments of the industry attribute the current problem to trade and exports. Demand goes up 2% a year and milk production goes up 2% a year. Up until the last year or so,