What is the Current Grade of Dairy Conditions in 2023?

The 2023 calendar year is off to a fast start and 90 days into the New Year leading economists say that milk production has been weaker than anticipated.

Ben Laine, a senior dairy analyst with Terrain, shares that margin pressures persisted more stubbornly than he would have hoped for. 

“With the milk production data we have at this point, January and February saw year-on-year growth of 1.3% and 0.8%,” he shares. “In a normal year, those would be pretty unexciting growth rates, but we’re comparing them against easy-to-beat numbers from 2022.”

Although, we are still producing less milk than we were at this point in 2021.

“Aside from 2022, milk prices are the highest we have seen in the January-March period since 2014,” Laine notes. “Unfortunately, high production costs aren’t leaving much room for celebration.”

Phil Plourd, president of Ever.Ag Insights, says the first quarter is off to a mediocre start. 

“It wasn’t surprising to see dairy product and milk prices coming down. The March cheese rally, however temporary, was a pleasant surprise for dairy producers. Butter pricing held up better than some anticipated,” he says. “We didn’t think Q1 would be especially good for U.S. dairy producers, and it wasn’t. But the downside price movement wasn’t epic or disastrous.”

An Edgy Pulse

According to Plourd, one word to describe the pulse of the industry 90 days into the New Year is edgy.

“There’s a sense that markets are vulnerable given that the world’s three major producing regions are in positive territory after spending a lot of time in the red last year,” he says. “With prices in the EU and New Zealand moving lower over the past several months, the U.S. doesn’t have the same export opportunities we enjoyed last year.”

For example, mozzarella cheese pricing in Europe sank below $1.40 per pound during the first quarter.

“That makes it difficult for U.S. marketers to move products out of the country. If we cannot get exports rolling at last year’s levels (about 83 million pounds per month), we’re not going to see much price upside. At the same time, we don’t see world production surging to unmanageable levels and lower prices are going to start to weigh on production potential here and elsewhere. That probably means prices don’t crater or linger at extremely low levels for an extended period of time,” Plourd explains.

Laine notes that on a regional scale, we’re seeing oversupply with a strong spring flush in the Upper Midwest, which is holding Class III prices back despite strong demand for cheese. In California, meanwhile, continued wet weather and flooding are leading to cows being displaced and feed shipment disruptions.

“I expect that there is more upside potential for prices as we move into the summer months,” Laine says. “Milk production growth should stay fairly muted and already-strong demand for dairy products should pick up seasonally. The major downside risk at this point remains any kind of meaningful recession, especially one resulting in a major reversal of the strong job market. That would potentially impact consumers enough to have a negative impact on dairy demand.” 

Market surprises and challenges

Plourd says that domestic cheese demand strength counts have been mildly surprising so far this year.

“While everyone’s worried about overall economic conditions – appropriately so, in my estimation – consumers remain resilient,” he says. “They are still eating out. They are still buying cheese even though retail prices are up 5-to-10% versus last year.”

Moving forward in 2023, Plourd says the big thing to watch in the coming months is exports.

“If we see cheese shipments running at 70-to-75 million pounds instead of 80-85 million pounds, we’re going to have trouble igniting durable rallies.”