Lighter Milk Supplies Help Keep Upward Pressure on the Markets

Monica Ganley

October 25, 2021

The T.C. Jacoby Weekly Market Report Week Ending October 22, 2021

USDA’s Milk Production report, released Wednesday, suggested that national milk supplies are growing at a slower rate than many analysts previously believed. Lighter milk supplies have likely helped to keep upward pressure on the markets this week.

USDA’s Milk Production report, released Wednesday, suggested that national milk supplies are growing at a slower rate than many analysts previously believed. According to the report, milk production grew by just 0.2% year over year in September, rising to 18.075 billion pounds. This represents the slowest growth since May of last year when the pandemic was sending shockwaves through the industry, and producers were directed to drastically cut production. Previous month estimates were decreased as well. August milk production, which was originally estimated as up 1.1% year over year, was reduced to a 0.6% increase in the September report.

Most of the slowdown was due to a decline in the national milking herd. Cow numbers dropped by 25,000 head between August and September, marking the fourth consecutive month of contracting cow numbers. Revisions played a key role in cow numbers as well. USDA revised downward the August herd size estimate by 33,000 head. Despite the consecutive declines, at 9.422 million head in September, the national dairy herd remains 27,000 cows larger than at the same time last year. Yields remained virtually unchanged in September compared to prior year.

Lighter milk supplies have likely helped to keep upward pressure on the markets this week as all spot products finished the week higher than last Friday. In the Cheddar markets, despite giving up 3¢ during Monday’s spot trade, blocks added a penny on Thursday and a nickel on Friday to end the week at $1.81 per pound, up 3¢ from last week, though only one load moved. Barrels demonstrated a bit more action, ending Friday’s session at $1.8625 per pound, up 7.25¢ from last week with 19 loads changing hands. The block-barrel spread stretched as wide as 10¢ on Thursday before narrowing to 5.25¢ on Friday. Cheesemakers are running busy schedules but continue to be plagued by labor and logistical challenges. Despite the headwinds, cheese inventories built significantly during September, rising to 1.46 billion pounds by the end of the month and setting a new monthly record.

Whey markets have become increasingly enticing and USDA’s Dairy Market News suggests that some cheesemakers are producing generic, non-specification cheeses to get access to the whey stream, particularly for use in higher protein products. Market stakeholders describe robust interest from both domestic and international buyers, though sustained port congestion is preventing whey from moving offshore as quickly as exporters would like. In Chicago, the spot market took a small dip on Tuesday before moving convincingly upward on Thursday and Friday to end the week at 61.75¢ per pound, up 1.5¢ from last Friday. Though prices still have far to go to break the 70¢ barrier and set a new record, market tones are firm.

The fat market was a bit less settled this week as butter prices jostled to and fro. Demand for butter is purportedly strong with most churns anticipating a strong holiday season. However, most market participants also describe inventories as sufficient to meet buyers’ needs. Butter stocks declined seasonally during September, falling by 9% versus August to 330.1 million pounds. At the CME, spot butter prices moved up on Monday before shrinking on Tuesday in an active trading day where 13 loads moved.

Prices found traction on Wednesday and Thursday but ended the week by giving up a penny on Friday. After the dust settled the spot butter price finished Friday’s session at $1.835 per pound, up 6¢ from last week with a total of 30 loads trading hands.

After headlining the dairy markets recently, movements in the nonfat dry milk (NDM) market were more subdued this week. Nevertheless, the market retained a strong tone, setting a new seven year high on Monday at $1.54 per pound, before retreating modestly in the middle of the week. Gains on Thursday and Friday delivered a final price of $1.5375 per pound for the week, a half cent higher than last Friday’s close. Though some customers are balking at the higher prices, demand remains robust, especially from international sources. Dairy Market News reports that exports to Mexico are moving at a steady clip.

While procuring drivers can be a challenge, moving product south of the border at least allows exporters to avoid the pileup at the ports.

The action in the spot markets later in the week worked to push the futures markets for milk upwards. Activity in the Class III market was mixed early in the week, but convincing gains on Thursday left most contracts higher than last Friday’s settlement and above their Class IV counterparts. Class IV futures perked up on Monday but found resistance on Tuesday and Wednesday. Recovery on Thursday and Friday delivered modest gains across the board compared to last Friday’s settlements.

Corn futures were seemingly on a seesaw this week with alternating sessions of increases and declines. Gains on Monday, Wednesday, and Friday were counteracted by drops on Tuesday and Thursday. The soybean markets were more consistent with gains during the first half of the week only somewhat undermined by losses on Thursday and Friday. Feed costs remain elevated for dairy producers and are likely one of the key factors that is putting pressure on milk production.

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