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Dairy markets capped by limited upside and downside

Michael McCully


August 18, 2021



The author owns The McCully Group LLC, which provides management consulting for dairy and food companies.

For the last two months, dairy markets have been in the summer price doldrums, bogged down by heavy milk supplies and strong dairy product inventories. Higher feed costs and lower margins, which have prevailed throughout most of the year, have not had a noticeable impact on dairy cow numbers until recent weeks. With the U.S. dairy herd at the highest point since September 1994, a strong foundation remains in place for more milk growth into 2022. What does this mean for milk prices?


Global prices are declining and domestic inventories are ample, so U.S. dairy product and milk prices are forecast to remain rangebound near current levels. With more milk than the domestic market can absorb, U.S. dairy product prices need to be below European and New Zealand prices to be competitive in the export market. This effectively limits the upside to U.S. prices.


A four-year margin low

Projected dairy farm margins for this year are the lowest they have been since 2018, which is expected to result in a slowdown in milk growth in the second half of the year. Margins are forecast to recover modestly in 2022 but remain below average.


In the near term, dairy farms have mitigated some portion of the higher feed costs this year, which has delayed the milk supply response. Grain prices have been very volatile since spring and will remain so until the size of this year’s crop is known in the next few months. The western Corn Belt has suffered under drought conditions, while the eastern Corn Belt has enjoyed adequate to ample rainfall so far this summer. High prices cure high prices, and the first signs of grain demand dropping off have appeared over the last month. Barring a surprise reduction in the crop size, the high prices have likely have been set for the year. However, even if those values hold at current levels, prices are expected to remain well above historical averages well into 2022.


U.S. milk production remains strong and cow numbers are at a multi-decade high. June milk was 2.9% above last year, double the long-term average rate near 1.5%. Cow numbers fell by a modest 1,000 head in June, the first reduction in one year. However, the May number was revised up 4,000 head, and the 153,000 head gain versus the prior year is the most since May 2008. Bottom line — there are a lot of dairy cows in the U.S., and any contraction in the national dairy herd will likely be modest.


After a short-lived rally in cheese prices, CME blocks are back in the range between $1.50 and $1.65. CME barrels have plummeted to $1.31 (August 5), the lowest point since May 2020. At first glance, the June cheese production number is disappointing, up only 0.2% versus last year. But when factoring out last year’s huge surge in cheese production for USDA cheese boxes last June, this year was up 55 million pounds (+5%) compared to June 2019. With strong milk production growth in the Midwest, that milk is finding its way to cheese plants, helped along by the new cheese plant in Michigan.


Exports have moved some of the supply growth off-shore. Cheese exports were record high in April but fell back in May, down 13% versus last year. Domestic demand is good, with retail sales of cheese up 10% in July versus 2019 and food service demand recovering. Cheese stocks fell 23 million pounds in June, the second largest May-to-June drop since 1996. However, stocks remained 1.3% above last year’s elevated levels and nearly 4% above June 2019. A drop in milk and cheese production later this year would push prices higher. However, with ample production and stocks, only modest improvement in cheese prices is possible for the rest of 2021.


Butter builds

The U.S. is awash in butter. June stocks hit 414 million pounds, the most for any month since August 1993 . . . back during the days of large government purchases of butter. Butter production in June posted another solid gain, up 7.8% versus last year as cream supplies were ample across most of the country. Butter production in May was up 7.6% from last year as cream supplies have been ample across most of the country. Butter exports in May remained strong, up 190% versus the same time last year. However, those sales were down 11% from April. These export sales have helped take some of the pressure off the domestic market.


Retail butter sales have been good, with July up 10% versus the nonpandemic 2019. Food service demand is recovering but still has a way to go to get back to pre-COVID volumes. Butter prices are at multi-month lows with only modest gains forecast going into the peak demand period in the fourth quarter of the year.

Not too many years ago, 300 million pounds of butter was adequate to meet second-half demand. At over 400 million pounds this year, it’s hard to get bullish on butter prices, and the burdensome stock levels will likely carry over into 2022.

Milk powder production has been strong given the milk growth across the country. Thankfully, exports have been able to move a lot of powder out of the country. In fact, March and May were the two record high months for milk powder exports.


CME nonfat dry milk (NFDM) prices have traded in the $1.20 range since mid-June in balanced market conditions with strong exports offsetting solid supply growth. Global prices continue to weaken, which limits the upside to any U.S. price rally.


China has been key to milk powder demand this year, but signs point to a slowdown in buying in the second half of the year. Chinese milk powder import volumes remain high, which should support milk powder prices near the current range.

The milk price outlook for the rest of 2021 and into 2022 will be driven by several factors. First, feed costs and dairy farm margins are still evolving and will be key to predicting next year’s dairy price outlook. Milk production is expected to grow, but less robustly than in 2021 due to below average dairy farm margins.


Global markets are expected to be in balance with average growth from Europe and above average output from New Zealand. As a result, U.S. dairy prices in 2022 are forecast to be near 2021 levels. COVID is still a wild card, but hopefully, the worst is behind us.


Limited potential

While the downside to milk and dairy product prices is likely limited, so is the upside. Above average U.S. milk production growth is resulting in ample supplies of most dairy products. Prices for cheese and butter are expected to remain near current levels through the third quarter with some seasonal gains forecast for the fourth quarter, but not guaranteed.


With U.S. supply outstripping demand, exports will be needed to clear the market. Therefore, U.S. prices will have to remain below prevailing global prices to be competitive in the export market.


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