Is There Light at the End of the Milk Price Tunnel?
Pressure has continued on milk prices with July Class III future closing below $14.00 on the last two days of the first week of July. The July price will be the lowest realized since May 2020. Then, it was the impact of Covid disrupting the industry. Now, it is the result of heavy milk supply and reduced international demand.
Milk production has been running above a year ago for the first five months of this year averaging an increase of 0.7% above the same period in 2022. That may not be an exceptionally strong increase, but with demand relatively stable and exports lower, the impact is magnified.
Cow numbers on the most recent milk production report for the month of May showed the nation’s cow numbers running 13,000 head more than a year earlier. Milk production per cow was 10 pounds higher than a year ago at 2,108 pounds per cow. The dramatic difference in milk prices of the first five months of this year compared to the first five months of 2022 has not yet impacted milk production in a negative way. The low milk prices this year indicates milk production needs to be curtailed for prices to be supported. We would hope that lower prices would stimulate demand but that has not happened to any great extent at present.
I have written previously about lower milk prices not being reflected in the retail sector and thus lower milk prices are not stimulating demand to any significant extent as they are decreasing much more slowly (refer to my article on May 15, “Low Milk Prices Not Reflected at Retail”). The May report of U.S. City Average Retail prices shows lower prices are beginning to trickle down, but certainly not in relationship to the fall of milk prices. The price for a gallon of whole milk in May remained unchanged from April at $4.02 which is a decrease of $0.16 per gallon from May 2022. Natural cheese price in May averaged $5.81, a decline of $0.10 per pound from April, but remains $0.19 per pound above a year ago. The price for a gallon of ice cream declined $0.14 in May but remained $0.46 per gallon above May 2022. However, process cheese price increased a half cent per pound from April averaging $4.7650 per pound compared to $4.34 per pound in May 2022.
Along with higher milk production and retail prices remaining higher than a year ago, exports have been lower. Dairy exports during March, April, and May fell below a year ago with exports for the first five months of the year down 39,897 metric tons or 3.8% below the same period last year. The category that has been the hardest hit has been whole milk powder with a decrease in exports of 47.4% in May with year-to-date exports down 40.4% (see chart).
Source: U.S. Dairy Export Council
Butterfat is the next category that showed a substantial decline of exports with May exports down 28.1% and year-to-date exports down 38.4%, or 11,536 metric tons below the same period a year ago. Cheese exports, although higher than May 2021, were down 18.4% from May 2022 and the largest year-over-year volume decline since the summer of 2015. So far this year, cheese exports are only down 3.9%. The lower prices of dairy products have resulted in U.S. dairy products being more competitive on the world market which should stimulate export interest over time.
All these things wrapped together are the reasons milk prices are lower and it may take time for the market to sort these out before milk prices can trend higher. Sometimes, this can happen rather quickly and sometimes it will require a longer duration of time. There is no way of telling which could happen. One thing evident is that the attitude of traders is bearish due to price increases in underlying cash being short-lived for much of the year. It may take a monumental effort for that attitude to change. The market will need to prove itself.
Robin Schmahl is a commodity broker with AgDairy, the dairy division of John Stewart & Associates Inc. (JSA). JSA is a full-service commodity brokerage firm based out of St. Joseph, MO. Robin’s office is located in Elkhart Lake, Wisconsin. Robin may be reached at 877-256-3253 or through the website www.agdairy.com.
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