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Why Are Dairy Prices Falling?

There are mixed opinions as to the strength or weakness of dairy prices through this year, with much of the focus being on the first quarter. There are a few fundamentals that could support the market such as American cheese inventory being 2% below a year earlier, according to the November Cold Storage report. This indicates good demand in relation to production that has kept inventory from building. Cheese exports have also been strong in 2022 with the first 11 months showing record exports. Cheese exports over that duration of time have been 11.8% above the same period in 2021.

Butterfat has been the leader with exports in November, up 101.4% over a year earlier with year-to-date exports up 47.9% compared to the same period a year ago. Whey has also done well with November exports, up 15.5% with year-to-date exports up 8.9%. This should be supporting the market as increasing demand should be supportive. But we can clearly see that positive exports and demand has not had a bullish impact on the market and is currently not providing support.

To better understand the market, one needs to look at the market as a whole and not just domestically, but internationally as well. Domestically, we have seen milk production higher than the previous year for 5 consecutive months through November. Milk per cow has exceeded the previous year 9 of the last 11 months. Thus, good demand has been met with strong production.

Total cheese inventory has been at record levels overall and at new records for each month in 10 of the past 11 months. Strong demand has not been able to deplete inventory. World prices have been declining, posting substantial losses over the past few months. The Global Dairy Trade auction average price reflects weakening world prices with the latest auction average price down 33% from the peak price reached in March 2022. Butter in the European Union was at a peak in September with prices now nearly 34% lower and cream prices nearly 44% lower since that time. Cheese prices have also been declining with some varieties showing more weakness than others. Prices have been falling in New Zealand and the United Kingdom as well.

Spot prices have been declining in all categories with some more than others. Butter price has declined significantly over the past week, with cheese prices falling steady over the past two weeks with a large rebound on Monday. In fact, block price has shown unprecedented prices swing in a short period of time (see chart).

Dry whey and nonfat dry milk have been in a steady downtrend for months. Milk futures have been influenced more by the decline of dry whey and nonfat dry milk than the weakness of cheese and butter. At the end of last week (January 20th), block cheese prices fell to the lowest level since September 6, 2022; barrels to the lowest price since November 29, 2021; butter to the lowest since December 27, 2021; Grade A nonfat dry milk to the lowest since March 25, 2021; and dry whey to the lowest price since August 25, 2020. Even though there are reasons why it seems milk futures should not be declining as much as they have, traders are anticipating milk prices based on the current domestic and international fundamentals. The attitude is bearish at the present time. Until the market can prove otherwise, the trend may remain sideways to lower.

It has been difficult for many to look into the futures and hedge milk prices due to the variable costs of production. There was fear of hedging milk only to have other costs escalate. But as a result of the fear, there has been substantial opportunity that has been given up. That is why option strategies or Dairy Revenue Protection insurance were utilized to set a floor and leave the upside open to take advantage of higher prices if they were to develop. Those who employed option strategies or DRP insurance benefited greatly from having the price protection. There is too much at risk to leave the farm open to whatever the market will pay. It does not make any difference what your debt load is or even if you are debt free, risk management works. Please contact us if you would like help with managing your risk.

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

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Hypothetical or simulated performance results have certain inherent limitations. Simulated results do not represent actual trading. Simulated trading programs are subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. There is risk of loss in trading commodity futures and options on futures. It may not be suitable for everyone. This material has been prepared by an employee or agent of JSA and is in the nature of a solicitation. By accepting this communication, you acknowledge and agree that you are not, and will not rely solely on this communication for making trading decisions.


January 24, 2023

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