Signs of fall are beginning to creep into the air, with memories of a fun-filled summer fading into the background as students return to school. As classrooms fill, a Class I pull ensues to make sure cafeterias are stocked with milk. Cooler weather might mean fewer ice cream sales, but cheese is in demand as football season kicks off. At the farmgate, recent milk checks have been downright ugly for many producers across the U.S., with revenues well below production costs in a challenging year. But what’s ahead for the remainder of 2023?
Price trends have varied among dairy commodity in recent weeks, with cheese and butter prices catching a bid while nonfat dry milk and dry whey remain weak. Demand signals are mixed, but a tightening milk supply situation both domestically and globally has lent some welcome support to dairy markets, even if the outlook is still not overtly bullish.
Cow Numbers
June milk production was unchanged versus the prior year, bringing an end to an 11-month year-over-year growth streak and reflective of negative profitability that began to impact dairy farms in Q2. Milk output was lower versus two years ago as well, with volume not able to improve after 2022’s weakness.
Cow numbers declined by 16,000 head in June, driven by higher slaughter rates in recent weeks as farmers cull less productive cows to reduce production costs. June marked the third consecutive month of weakening cow numbers, with the herd size down 36,000 head versus the March peak. Cow numbers will likely continue shrinking in the coming months, limiting milk production’s growth potential over the near term. Dairy cow slaughter rates have hit multi-year highs in recent weeks, helped by firm cull cow values that are helping farmers drive revenue opposite milk prices that are lower than production costs.
A Demand Perspective
From a demand perspective, the fresh cheese market tightened quickly into late summer, providing a needed price boost at the CME spot market. In butter, data showed that stocks peaked in May, falling 20.4 million pounds into June in a slight surprise to the market. The May zenith was not unusual but has caused prices to rally in recent weeks as supply concerns persist.
While certain shipments to Mexico have shown strength so far this year, total dairy exports have struggled in recent months as weaker demand from China and Southeast Asia negatively impacts overall volume. On a year-to-date basis, exports of most products are lower versus the prior year, including nonfat dry milk, cheese, and dry whey, with weakness expected to persist in the coming months.
Healthy demand coupled with availability concerns will likely keep cheese and butter prices supported in the near term, with cheese providing a needed boost versus the anemic Class III settlements this summer. However, nonfat dry milk and whey prices will likely continue to struggle, negatively impacted by poor export expectations and plentiful supplies in the coming months.
