Dairy Outlook Sees Milk Margins Improving Sometime in Late 2024
Published: Friday, September 29, 2023
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The Livestock, Dairy and Poultry Outlook warned, "With continued erosion of dairy margins and the average milk cow inventory reported through July, projections for the milking herd in 2023 were lowered 5,000 head to 9.405 million." The outlook added, "The milk supply typically responds to changes in prices with a lag of several months. The low margins experienced in 2023 are expected to contribute to further contraction of the dairy herd in the first half of 2024." However, some rebuilding of the milking herd is expected in late 2024 as milk prices improve and feed costs moderate."
The Sept. 19 Global Dairy Trade auction weighted average headed higher for the second event in a row, up 4.6%, following the 2.7% rise on Sept. 5. Traders brought 82.4 million pounds of product to the market, down from 83.2 million on Sept. 5. The average metric ton price climbed to $2,957, up from $2,888 on Sept. 5.
Skim milk powder led the gains, up 5.4%, following a 1.6% decline on Sept. 5. Whole milk powder was up 4.6%, after leading the gains last time with a 5.3% advance. Anhydrous milkfat was up 5.3%, after a 2.7% rise, and butter was up 3.8%, following a 1.1% gain. GDT Cheddar was the only negative, down 1.7%, after slipping .6% last time.
StoneX says the GDT 80% butterfat butter price equates to $2.0902 per pound, up 6 cents from the Sept. 5 event. That compares to CME butter which closed last Friday at $3. GDT Cheddar, at $1.8343, was down 2.7 cents, and compares to last Friday's CME block Cheddar at $1.78. GDT skim milk powder averaged $1.0887 per pound, up from $1.0367, and whole milk powder averaged $1.2694 per pound, up from $1.2255 (4.4 cents). CME Grade A nonfat dry milk closed last Friday at $1.17 per pound.
Analyst Dustin Winston said, "North Asia, which includes China, increased purchases substantially in this event." Broker Dave Kurzawski pointed out in the Sept. 25 "Dairy Radio Now" broadcast that North Asia includes South Korea and Japan and Japanese milk output has been down about 4%. He said Japan could have been buying though it typically buys via tenders rather than the GDT.
Assuming most of the increase was China, Kurzawski asks why? StoneX offices in Singapore and contacts in China are not indicating that end users there think they've "missed something." Milk prices in China have been heading lower quite aggressively, he said, but there's no shortage of milk, so he suggests that physical traders may have got caught short in futures and to mitigate their exposure, bought physical. He adds that is not a good sign for long-term demand but "It's just Chinese traders doing what they do."
The other consideration is that most of the GDT volume was in the November and December contracts, according to Kurzawski, which will clear customs in January. After Jan. 1, there is zero tariffs on product brought into China from New Zealand so perhaps there was demand enough to get product in, he said.
HighGround Dairy says China's total dairy imports were the lowest for July since 2017, the biggest drop coming in purchases from the U.S., especially in whey products. And, while China purchased the highest volume of whole milk powder since November 2018 in the Sept. 19 GDT, August imports were down 3% after rising the previous three months.
Skim milk powder imports were down 36%, following six consecutive months of year-on-year gains of 20% or more, according to HGD. Unfortunately, the biggest drop was in product purchased from the U.S., down 71%.
Whey product imports were down 20.9% from a year ago, but butter was up 19.4%. Cheese imports were up 25% and HGD stated, "Chinese cheese demand continues marching to its own beat relative to other imported commodities as August's total set a record for the month. Product from New Zealand jumped to highs not seen since March 2021, up 40%," according to HGD.
Meanwhile, the Federal Reserve left interest rates unchanged last week, but dairy margins deteriorated the first half of September as lower milk prices more than offset a decline in projected feed costs, according to the latest Margin Watch from Chicago-based Commodity and Ingredient Hedging LLC.
The Margin Watch detailed highlights from the latest Dairy Products report, stating, "USDA reported lower output of dairy products during July as oppressive heat and humidity impacted milk production." It detailed production data for cheese, butter, powder and whey, along with the latest U.S. export data. The Margin Watch also stated that, "Corn and soybean meal prices slipped following a bearish USDA World Agricultural Supply and Demand Estimates report which offset a lower yield projection with increased harvested acreage for both crops."
Cheese Prices
CME cheese prices weakened for the third week in a row. The Cheddar blocks fell to $1.77 per pound last Thursday, lowest since July 20, but closed last Friday at $1.78, down 10 cents on the week and 18 cents below a year ago.
The barrels finished at $1.60, 21 cents lower, 58.50 cents below a year ago when they were trading at $2.1850, topping the blocks. Three cars of block were sold and 35 of barrel.
Dairy Market News reports that above-class milk prices continue in the Midwest and Class I pulls are keeping loads snug, with some plants finding milk unavailable. Cheesemakers in the West are also pulling strongly on milk. Cheese production is steady with current seasonal milk volumes while some are short.
Cash butter kept heading higher, seeing a Friday finish at $3 per pound, up 28.25 cents on the week, highest since Oct. 28, 2022, but still 13.25 cents below a year ago. There were 23 CME sales put on the board last week.
Midwest butter plants report cream availability is not ample but not out of reach. Butter demand is strong to meeting expectations. Retail customers are showing mixed interest as prices continue to push higher. Some say $3 is possible. Regional loads are being spoken for by a steadily active food service market, despite retail channels being up and down, according to DMN.
Western cream is less limited in some areas but still tight despite the heavier bottling and flatter seasonal milk output decreases. Some anticipate further near-term tightness however, some report cream multiples on the bottom of the range. Producers are looking to add inventory for anticipated fourth quarter demand. Some churns are running as strong as current cream volumes can accommodate while others say output is below planned volumes. Most retail and food service demand is strong to steady, while export demand is moderate to light, says DMN.
Grade A nonfat dry milk closed last Friday at $1.17 per pound, up 5.75 cents on the week, highest since June 2, but still 41 cents below a year ago. Sales totaled 13 loads on the week.
The Sept. 15 Daily Dairy Report says, "Mexico has been importing U.S. powder at a record-breaking clip, bolstered by an exceptionally strong peso." U.S. exports to Mexico were up 35.7% the first half of the year, says the DDR, and U.S. prices would likely have slipped much lower without them.
The outlook remains cloudy, warns the DDR. "Bearish sentiment about the global economy, and especially China, continues to build, potentially undermining global demand for milk powder the world over. International prices are in the doldrums, and a remarkable convergence in prices across the major supply regions has left U.S. product without a clear advantage," according to the DDR.
Dry whey closed a quarter-cent higher last Friday, at 30.25 cents per pound, 14.75 cents below a year ago, with 30 CME sales reported on the week.
The Agriculture Department announced the October federal order Class I base milk price at $19.47 per hundredweight, up 57 cents from September and the second highest October Class I since 2014, but is $3.24 below a year ago. It equates to $1.67 per gallon, down from $1.95 a year ago. The 10-month Class I average is $19.09, down from $22.73 a year ago but compares to $16.48 in 2021.
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