The financial health of dairy producers has weakened in 2023. The April 2023 Dairy Margin Coverage (DMC) margin falling below the $6 level provides insight into dairy producers' tight margin situation. Uncertainty remains regarding what financial headwinds producers may face for the remainder of 2023. Developments impacting both receipts and production costs could make the second half of 2023 better or worse from a dairy margin standpoint.
Demand for dairy products has slowed. Although wholesale cheese prices started the year more than 30% above their 2016 to 2019 average, as of May they had fallen to near the 2016 to 2019 average. These lower prices highlight how strong domestic dairy demand was in 2022 and that we could be returning to a period similar to what was experienced before COVID-19. International demand growth for U.S. dairy products has also slowed, as shown by USDA's latest monthly supply and demand report estimating lower U.S. dairy exports on a skim-solids basis and fat basis for 2023 relative to 2022.
Meanwhile, milk production costs have remained high. The April DMC feed cost is more than 70% above the 2016 to 2019 average. Although there is still time for rainfall before this fall's corn crop matures, dry weather is popping up in larger areas of the country that could keep this year's corn yield below trend levels.
June 12, 2023
Scott Brown
hoards.com
