Analyst Warns Milk Production Expansion 'Has Returned for Good'
Published: Friday, November 1, 2019
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
Some called it a September surprise. Others called it fodder for the bears. The USDA's latest Milk Production report showed preliminary output at 17.6 billion pounds, up 1.3 percent from September 2018. Output in the top 24 states totaled 16.8 billion, up 1.6 percent. Revisions added 10 million pounds to the original 50-state Au-gust total, now put at 18.29 billion pounds, up .2 percent from August 2018. Revisions added 32 million pounds to the top 24 states output.
Cow numbers continued to slip. The head count in the 50 states totaled 9.315 million, down 2,000 from August, which was revised lower by 1,000 cows, and 53,000 head below a year ago. Output per cow averaged 1,891 pounds, down 72 pounds from August but 34 pounds above a year ago.
California output was up 1.6 percent, thanks to a 35-pound gain per cow offsetting 5,000 fewer cows milked. Wisconsin was up .6 percent, on a 20-pound gain per cow. Cow numbers were down 6,000 from a year ago.
Virginia had the biggest loss, down 7.3 percent on 8,000 fewer cows, followed by Arizona, down 4.9 percent on 11,000 fewer cows. Texas showed the biggest increase, up 9.3 percent, thanks to 30,000 more cows and a 70-pound gain per cow. Michigan was up 3.8 percent on a hefty 50-pound gain per cow and 6,000 more cows.
The overall increase came on milk-per-cow gains, even when forage quality and quantity are questionable, says the University of Wisconsin's Robert Cropp and Mark Stephenson in their monthly podcast. The two remain optimistic on milk prices and don't see a major downfall in the near term, assuming there is not a collapse in cheese demand.
HighGround Dairy (HGD) says, "It is unlikely that U.S. milk output will see declines in the near term" and warned that "production expansion has returned for good and will become the new normal yet again, ending the declines seen in three different months earlier this year and contributing to a return to global milk production expansion."
Matt Gould, analyst and editor of the Dairy and Food Market Analyst newsletter, said the Milk Production report "represents the fastest growth rate in milk supply in about a year," in the Oct. 28 "Dairy Radio Now" broadcast.
He warned that milk output is also growing in Europe. "So we're exiting a period where milk production was negative worldwide and entering, or maybe we're already in, a period where milk production is positive." That will put downward pressure on prices, though we are entering "the demand season of year." "Volatility is probably the one thing you can predict will continue," he added.
He doesn't see a freefall in prices and says next year's lows "are probably going to be the highest lows that we have seen in several years." He also said it's possible that prices may be even higher. "The big difference is, we started this year with a mountain of milk powder in European inventories and now it's all gone. We don't have buffer stocks to insulate markets from volatility."
Demand will also continue to play a big role. U.S. cheese at retail has been growing 2-3 percent, he concluded, "and we're still growing per capita consumption."
FC Stoned stated in its Oct. 24 Early Morning Update, "In a broader view, a generally tighter milk production situation coupled with Class IV prices running above Class III early in the year (and, to some extent, California moving into the Federal Order) has tightened the availability of fresh Cheddar (to say nothing of several production hiccups we've heard about in the past few months). This has partly led some users to whittle down, rather than building inventories for the holidays as they had last year."
Dairy farmers culled fewer cows in September than they did in August but more than a year ago. The Agriculture Department's latest Livestock Slaughter report shows an estimated 255,700 head were slaughtered under federal inspection, down 10,900 from August but 8,300, or 3.4 percent, above a year ago. The nine-month cull count totaled 2.417 million head, up 81,100 head, or 3.5 percent, from a year ago.
The September Milk Production report fed the bears and the September Cold Storage report likely added a little more fodder. September butter stocks totaled 302.1 million pounds, down 2.2 million pounds, or .7 percent, from August but were 19.8 million, or 7 percent, above September 2018.
HGD says September is when holiday orders would typically be pulling product from storage. "The 2.2 million pound stock decline paled in comparison to the five-year average of 25.5 million pounds." "At 302 million pounds, September's ending stock is the highest level for the month since 1993."
American cheese stocks totaled 771.4 million pounds, up 5.5 million pounds, or .7 percent, from August but were 32.3 million, or 4 percent, below a year ago.
Stocks in the "other" category climbed to 571.6 million pounds, up 2.1 million pounds, or .4 percent, from August but were up 26.5 million, or 4.9 percent, from a year ago.
The total cheese inventory crept up to 1.369 billion pounds, up 6.4 million pounds from August but 10.5 million pounds, or .8 percent, below September 2018.
HGD says, "While the increase in total cheese in storage was less than last September's climb, the 6.4 million-pound monthly increase was well above the five-year average 10.9 million drawdown. Total cheese stocks have climbed higher in September in just three of the past 10 years (2010, 2018 and 2019). On a positive note, total cheese stocks dropped back slightly below prior year levels after eclipsing 2018 levels at the end of August."
Traders appeared to ignore the bearish reports and took the Cheddar blocks to a Friday close at $2.1225 per pound, up 15½ cents on the week and 60¾ cents above a year ago. The barrels caught fire this week and closed at $2.25, up 25 cents on the week, highest barrel price since Sept. 26, 2014, and $1 above a year ago, and with an inverted spread of 12¾ cents. Twenty-one cars of block traded hands on the week at the CME and only nine of barrel.
Midwest cheesemakers continue to report a lack of spot milk, says Dairy Market News, but keep a close eye on how much to take on due to production capacity and potential resale concerns. Demand reports continue to be steady but slower than a few weeks ago and inventories in the region are "mostly in balance."
Western cheesemakers have found comfort in the narrowing block-barrel spread and firming prices. Western cheese output is active and cheese demand is "steady, but not phenomenal," said DMN. Holiday orders are starting to come but are not impressive. Some contacts suggest government purchases could be helping support cheese prices. Fiscal 2019 purchases of cheese products are up about 14 percent from 2018 and processed cheese buys are up nearly 40 percent.
CME butter fell to $2.0575 per pound last Thursday but closed last Friday at $2.06, down 5½ cents on the week and 17¼ cents below a year ago on 13 sales.
Butter producers are reporting varying production methods, says DMN. Cream is slightly less available and some suggest it may soon be out of reach for churning. Demand is steady, meeting seasonal expectations, but market tones are, relative to their typical steadfastness, "slightly in flux." Analysts tell DMN they expect a slightly bearish 2020 butter market as higher imports and stocks put a bearish slant on the overall tone. Still, butter is expected to remain in its range-bound status.
Retail butter orders in the West have been strong the past days, says DMN, but stockrooms are full and, so far, incoming orders for the holiday seem lower than usual. Butter output is steady to up a bit due to readily accessible and reasonably priced cream.
FC Stone points out that 2019 will likely mark the seventh year that National Dairy Product Sales butter prices have averaged above $2.
Grade nonfat dry milk closed last Friday at $1.1525 per pound, down 1¾ cents on the week but 28½ cents above a year ago, on 11 trades for the week.
Dry whey finished at 28¼ cents per pound, a quarter-cent lower on the week, lowest CME price since April 4, 2018, and 18¾ cents below a year ago. A lot of product continues to flow to the CME, 75 loads; 273 loads since Oct. 1.
Class I milk prices will move higher. The Agriculture Department announced the November federal order Class I base price at $18.14 per hundredweight, up 30 cents from October, $2.62 above November 2018, and the highest Class I since January 2015. It equates to $1.56 per gallon, up from $1.33 a year ago. The 11 month average is at $16.78, up from $14.82 a year ago and $16.41 in 2017.
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