Since the beginning of February, there has been much uncertainty over the potential for milk prices. The potential impact of tariffs on exports created much of the uncertainty. The one certain thing was volatility. There were many days during which prices did not move very much yet they trended one way or another. There were other days during which there were violent price movements, sometimes in the opposite direction of what the underlying cash would suggest. After a few days of strong moves, prices corrected to move in line with the underlying spot prices, creating movement in the opposite direction.
As we have seen, there has been little impact on international demand for dairy products as the U.S. prices are competitive with world prices. Some of the threatened tariffs were not implemented or were put on hold. The main impact that has been realized is exports to China, as higher tariffs have been imposed on the country. The recent export report showed dairy exports to China in April were 26% lower than in April 2024. This is the lowest volume since March 2020. China is a large buyer of lower-protein whey, and exports in April fell 37%. Cheese and NDM/SMP fell substantially, but the percentages are skewed due to the small volumes they import. Cheese export to China fell 60%, with NDM/SMP down 50%.
Increasing milk production seen so far this year and increasing cow numbers were anticipated to limit the upside potential of milk prices. Reports were that overall demand was slowed, which might result in higher supplies and lower prices. What is interesting is that it has not materialized, as shown by the recent cold storage and dairy products reports.
The March Dairy Products report showed American cheese production 4.6% above March 2024, and total cheese production up 1.4%. Butter production jumped 8.6% from March 2024, which was not a surprise due to abundant cream supplies, with milk posting record butterfat levels. Churning was active, with butter output running higher. The April Dairy Products report showed butter production up 3.9% from a year earlier. The report showed continued strong cheese production with American cheese up 6.1% and total cheese up 3.1%. These gains were supported by increasing milk production.
Higher dairy product production resulted from higher milk output. The interesting aspect is that inventory increased but did not change much for cheese in comparison to a year earlier, while inventory fell for butter. American cheese inventory in March was 4.0% below a year earlier, while April inventory was 2.0% below. The total cheese inventory in April was 2.0% below. Butter inventory in March was 4.0% above March 2024, but was 7.0% below a year earlier in April. This indicates that demand did well when combining both domestic and international demand.
If the current pattern holds, milk prices may be better than had been anticipated a few months ago. This does not mean that milk prices may move substantially higher, but that prices might see further upside potential. However, we must not become complacent about price protection, as was seen over the past two weeks with nearby Class III futures falling nearly $1.50 per cwt. Demand may not improve sufficiently to utilize the increased milk output, or always a potential for an unforeseen event or scare that could impact the market. Hedging strategies must be implemented to provide downside protection while leaving the upside open to capture higher prices if they materialize.
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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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