Dairy Demand Remains Vigorous, Despite Recessionary Tone
Published: Friday, August 5, 2022
The following is from Lee Mielke, author of a dairy market column known as "Mielke Market Weekly."
The U.S. gross domestic product fell .9 percent in second quarter, following a 1.6 percent decline in first quarter. The Federal Reserve announced a second .75 percentage point interest rate hike last week in an attempt to control rising inflation as debate centers on whether we're in a recession or not. Meanwhile, lawmakers in Washington keep spending money the country doesn't have.
Debate in the dairy industry centers on whether supply or demand is in control of the markets. StoneX dairy broker Dave Kurzawski, speaking in the Aug. 1 Dairy Radio Now broadcast, said demand is clearly in control right now.
The fresh milk supply is a "bullish narrative," he said, "and is underpinning global dairy markets, but that's being discounted these days." Seasonally in the U.S., June and July demand tends to dip across the board, he said, ice cream being the exception, and the only time we see price hikes this time of year is due to weather, but that hasn't been a factor thus far.
Recessionary impacts may or may not make their way to the dairy aisle, he said, but one of the main drivers of demand globally the last several months has been China's lack of buying. Down the road we will focus on supply again, he warned, though currently schools reopening will draw on milk supplies and forecasts of severe heat in the Midwest the first half of August will have an impact. Milk output in the Southwest has already been affected, according to Kurzawski, "but we've been able to ignore that for the moment. As we go through August, U.S. buyers will start making holiday purchases so a number of factors will change in the dairy market between now and the end of August," he concluded.
U.S. butter stocks continue to climb but remained well below a year ago, according to the Agriculture Department's latest Cold Storage report. The June 30 inventory climbed to 331.8 million pounds, up 10.2 million pounds, or 3.2 percent, from May, but was down 82.9 million pounds, or 20 percent, below a year ago, the ninth consecutive month stocks were below the previous year.
American-type cheese stocks fell to 847.7 million pounds, down 10.2 million pounds, or 1.2 percent, from May, but were 37.9 million, or 4.7 percent, above those a year ago.
The "other" cheese category climbed to 633.8 million pounds, up 4.6 million, or .7 percent, from May, and 31.1 million pounds, or 5.2 percent, above a year ago.
The total cheese inventory came in at 1.51 billion pounds, down 6.8 million pounds, or .5 percent, from May, but 71 million, or 4.9 percent, above a year ago. The report is viewed as bearish on butter and neutral on cheese.
Dairy prices ended July lower, with cheese down for the fourth week in a row. The Cheddar blocks fell to $1.85 per pound last Thursday, lowest since Jan. 31, but regained 3 cents last Friday to close at $1.88, down 3 cents on the week, 29.25 cents below their July 1 perch, and 24.50 cents above a year ago.
The barrels fell to $1.8450 last Thursday, lowest since Feb. 2, but finished the week and the month at $1.8875, 3.25 cents lower on the week, 31.75 cents lower than July 1, 49.75 cents above a year ago, and .75 cents above the blocks.
Sales totaled 12 cars of block on the week and 23 for the month of July, up from 22 in June. Barrel sales totaled 10 for the week and 29 for the month, down from 57 in June.
Barrel cheese producers tell Dairy Market News there is still a good amount of buyer inquiries and sales for curds and other easily consumed cheese products are strong. Midwest cheese demand is steady, though cheesemakers note a little variability in buyer interest with the ebb and flow of prices. Cheesemakers had plenty of milk but weather may change that. A few discounted loads were available, says DMN, but there's not a strong impetus for plants to take additional loads and build inventory in a market that has the potential to head lower.
Western cheese demand from food service and retail was unchanged from the previous week. Domestic sales are below previously forecasted levels, as higher prices have caused customers to alter purchases. International demand remains steady; with Asian countries continuing to secure loads for second quarter. Milk is available, despite declining output in the region. Cheese inventories are ample.
Cash butter keeps flirting with $3 but closed last Friday at $2.99 per pound, up 8.25 cents on the week, down 2 cents from the July 1 close at $3.01, but is $1.3475 above a year ago. There were 43 sales on the week and 216 for the month, up from 112 in June, highest monthly total since August 2020.
Tight cream supplies in the Midwest and higher multiples for Class IV spot cream has encouraged procurement of butter by manufacturers. While butter stocks align with seasonal sales expectations, loads are being purchased out of the West to counterbalance rather limited new production and inventory levels for future use. Retail sales continue to edge lower while food service saw a solid spike in sales, according to DMN.
Seasonally higher temperatures are reducing milk output in the West and thus cream output while demand for cream is strong from both ice cream and butter makers. Butter output is steady to lower as some plants report labor shortages. The butter shortfall in the June Cold Storage report is contributing to bullishness in prices though demand from retail and food service is softening, says DMN.
Grade A nonfat dry milk saw a Friday finish at $1.64 per pound, 4.50 cents lower on the week, 13.25 cents below its July 1 standing, and 37.25 cents above a year ago. There were 11 sales on the week and 49 for the month, up from 40 in June.
Dry whey closed at 44.50 cents per pound, down a penny the week, down 5.5 cents on the month, and 5.75 cents below a year ago. Only one sale was reported for the week at the CME and 15 for the month of July, down from 47 in June.
As I reported last week, port congestion issues have returned. The July 22 Dairy and Food Market Analyst stated, "Protests by truckers at the Port of Oakland, a port responsible for roughly one-fifth of dairy exports, snarled supply chains. In addition to canceling voyages, the new hiccup created a shortage of containers to move U.S. dairy products overseas and had management teams talking 'contingency plans.' Although we were unable to confirm it, we believe the protests likely freed up cheese last week and was one of the primary catalysts for lower cheese prices," the Analyst stated.
In the week ending July 16, 55,500 dairy cows were sent to slaughter, up 5,600 head from the previous week, and 500, or .91 percent, above a year ago.
The latest from Ukraine is that an agreement was signed July 22 to provide a Black Sea export corridor with joint coordination staffed by all four parties involved to monitor activities. StoneX said, "The three ports it opens account for over 50 percent of Ukraine seaborne exports and analysts expect export capacity to move closer to 5 MMT per month once things are moving."
"The signing was followed shortly after by Russia firing on the port of Odesa, with Ukrainian officials condemning the attack, but also saying the strike will not affect planned exports. Ukraine thinks 60 MMT of grain could be exported within the next eight or nine months if the ports were not blockaded."
The National Milk Producers Federation and International Dairy Foods Assn. praised the House Education and Labor Committee's passage last week of the Healthy Meals, Healthy Kids Act, a bill which reauthorizes federal child nutrition programs.
A joint press release stated, "Dairy farmers and processors across the nation pride themselves on providing nutritious, healthful foods. Milk provides 13 essential vitamins and nutrients, including three of the four deemed to be of public health concern. Milk also is the top source of calcium, potassium, phosphorus and vitamin D in kids ages 2-18. The most recent Dietary Guidelines for Americans highlight the robust nutrient package milk provides and notes that school-aged children do not consume recommended amounts of dairy foods."
"Child nutrition programs are critical to ensuring kids have access to nutritious food. We thank those across our nation who work hard every day to administer these vital programs. The Healthy Meals, Healthy Kids Act approved today by the House Education and Labor Committee includes provisions to provide increased access and maintain existing access to healthful dairy foods."
Back on the farm, milk flows are trending level to lower across the U.S., according to DMN's weekly update. "Summer heat and lack of precipitation in some areas, particularly in Southern states, are imperiling pasture conditions and impacting cow comfort. In the face of high feed and water expenses, there's been an increase in farmers selling cattle into processing across Texas and Oklahoma.
New Zealand Production
Looking globally, the GDT has seen the price for most dairy commodities continue lower in recent week, according to DMN, "with further price volatility expected over the coming months. Reports indicate, among factors contributing to New Zealand's current inflation rate, are higher milk and cheese prices."
But, higher milk prices across most of New Zealand have not encouraged milk production, says DMN. "As producers work through the seasonal production slowdown, sources point out that most are unwilling to produce milk in excess, as they cope with current market dynamics, where surging input costs that include fuel, fertilizer, feed and labor, impact farmers' outlooks for new year profitability."
New Zealand's milk collections for May, the last month of the current production year, posted a 6.6 percent decline, ending the 2021-22 cycle with a 4.1 percent year-over-year reduction in milk collections, according to DMN.
Interestingly, StoneX July 25 Early Morning Update stated, "New Zealand milk production seems to be contributing to the global growth in supply, with milk solids climbing higher than anticipated due to protein and fat levels exceeding year-ago levels."
"Weather continues to be in line with normal historical levels. Meanwhile, the reduction in slaughter of dairy cows in the region last season seems to be supporting milk production levels staying in-line with June levels last year. While we are only through the first month of the season, and weather will have the final say we expect total season production to be up about 4 percent from last season's levels," StoneX concludes.
DMN reports, "Record milk prices are being paid across Australia with the beginning of the new production season. Thanks to dynamic competition at the processor level along with the ongoing strength in dairy prices and a weaker Australian dollar, in Victoria, the largest milk supply region for a major cheese producer, the milk pay price was forecasted to grow 20 percent to 30 percent in 2023. Dairy Australia reported July 2021 through May 2022 seasonal milk output at 7942.1 million liters, down 3.5 percent from July 2020 to May 2021."
Speaking of the Aussies, the Dairy and Food Market Analyst reports, "Australians are on high alert about foot-and-mouth disease. In nearby Indonesia, 400 miles away, which is a popular vacation destination for Aussies, there have been 300,000 cases of foot-and-mouth this year. Indonesia had been declared free of the disease in 1990. Last week, viral 'fragments' of the disease were detected in Australia in Adelaide and Melbourne. If foot-and-mouth were to take hold in Australia, the country would face international backlash from importers that would no longer accept Australian beef," the analyst warned.
Across the pond, "Temperatures across Europe have broken or neared all-time highs, further challenging dairy producers who are already dealing with tight margins," according to the July 25 Daily Dairy Report. "Triple-digit temperatures spread as far north as the Netherlands and Germany, while searing heat and dryness sparked wildfires in the United Kingdom, France, Spain and Greece."
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