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Milk, Dairy and Grain Market Commentary

By Sarina Sharp, Daily Dairy Report

Milk, Dairy & Grain Markets

Despite signs of continued contraction, the dairy markets just keep dropping. CME spot Cheddar blocks led the retreat. They fell 7.75ȼ this week to $1.3925 per pound, a nine-month low. Barrels slipped 1.75ȼ to $1.425. Cheddar output has fallen below year-ago volumes since October and overall cheese production was lower than prior-year output in December and January. Nonetheless, cheese supplies are burdensome, and the industry remains concerned about the capacity to make more. Anecdotal accounts suggest that cheese output has rebounded from the mid-winter lull. USDA’s Dairy Market News reports that some Midwestern processors turned away spot milk loads at $6 under class because they were already running at capacity. Industry stakeholders describe domestic demand as “lackluster,” but they hope it will perk up for Easter. Cheap cheese has attracted a few export contracts, but most foreign buyers are deterred by the shape of the futures curve, which persistently offers pricier product later this year.


CME spot whey dropped a nickel this week to 39.5ȼ, within a penny of the year-to-date low. Demand for high-protein whey products remains strong, but, with cheese vats full, there is more than enough whey leftover for the drier. Chinese demand for U.S. whey is in decline. Amid financial strain in its hog sector, Chinese whey imports fell 24% from last year in January and February. The U.S. accounted for an unusually small share of the shrinking pie, and U.S. whey shipments to China in February plummeted to a four-year low.


Chinese milk powder imports also disappointed. China imported more whole milk powder (WMP) in January and February than it did last year, but that was a very low bar to clear. Chinese imports of skim milk powder (SMP) fell short of 2023 volumes in February. Comparisons to previous years are skewed by changes to tariff policy. Before 2023, tariff structures incentivized Chinese milk powder buyers to stock up early in the year before low-tariff quotas ran out. Now that tariffs on Kiwi milk powder are no longer in play, there is no new year’s rush. Even after adjusting for that context, Chinese WMP and SMP imports look light. With China on the sidelines, milk powder prices turned south. WMP values fell 4.2% at the Global Dairy Trade auction this week and SMP dropped 4.8%. On LaSalle Street, CME spot nonfat dry milk lost 5.5ȼ and closed at $1.1075, a six-month low.


Even butter lost ground this week, although the setback in the butter market was modest and felt much different from the significant lows notched in the rest of the dairy complex. CME spot butter fell 1.5ȼ to a still lofty $2.8075. USDA reports that cream is “readily available” but “not overwhelming.” When combined with a healthy dose of demand and a dash of anxiety about butter supplies later this year, that’s a recipe for stubbornly strong butter prices.


Despite the steep decline in milk powder prices, Class IV futures didn’t go anywhere at all this week. Nearby contracts settled on either side of last Friday’s close, and deferred futures settled a penny or two higher than last week. April and May Class IV finished in the high $19s, while all other Class IV contracts stood above $20 per cwt. That’s more than enough to pay the bills for the minority of dairy producers who benefit from Class IV revenue.

On the other hand, Class III futures are low and falling. The April contract plunged 27ȼ this week to a devastating $15.74. With both cheese and whey in decline, all second quarter Class III futures finished at life-of-contract lows. The market promises better prices later this year, but it’s going to be a rough spring flush for many dairy producers with low Class III prices and steep discounts besides.


Financial pain is sure to translate to an uptick in sellouts and a decline in cow numbers. But USDA estimates that the dairy herd grew slightly in February, after dropping hard in October through January. Still, at 9.33 million head, the herd is 89,000 cows lower than it was in February 2023. Milk production continued to slip. After adjusting for leap day, output fell 1.3% below prior-year volumes, the steepest year-over-year deficit since January 2022.


Milk output is inching lower in the Southwest as dairy producers there combat a mysterious illness. Herds in the Texas Panhandle and in nearby states have seen a small share of their cattle – particularly later-lactation cows – struggle through fever and respiratory distress, stop eating, and produce a thick, colostrum-like milk. The illness is not fatal, and many cows bounce back after treatment. But some produce little or no milk even after other symptoms abate. Regional milk production declines so far have been incremental, and milk powder plants in the Southwest, which would be the first to go without milk, are still running at nearly typical volumes. Dairy producers are restricting cattle movement and adopting stricter biosecurity measures. The Texas Animal Health Commission, USDA, and veterinarians are working furiously to determine a diagnosis. The industry will be watching closely to see if this illness can be contained.


Despite numerous reasons for concern about milk production potential, lackluster demand continues to weigh on dairy product prices and dairy producers’ incomes. But financial losses are deep and widespread which will likely keep a firm lid on U.S. milk production. Eventually, that will add up to higher prices.

Grain Markets

Feed prices continued to rebound this week, but momentum seems to be slowing for the grain market bulls. May corn settled at $4.3925 per bushel, up 2.5ȼ from last Friday. May soybeans climbed 15.25ȼ to $11.925. May soybean meal jumped $10 to $339.10 per ton. The market was leaning heavily short of row crops a few weeks ago, but the funds have been trimming their short position – and pushing prices higher – as they face the uncertainties of next week’s Prospective Plantings report and as they rebalance their investments ahead of the end of the quarter. Worries about the weather in South America have also enlivened the bulls, but there are big rains on the way in central Brazil which should help to alleviate some of those concerns. It’s also going to be wet or snowy in much of the central United States. Winter storms are bringing a welcome shot of moisture ahead of spring planting.


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