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Milk, Dairy and Grain Market Commentary

By Sarina Sharp, Daily Dairy Report

Milk, Dairy & Grain Markets

Like the mercury in Phoenix, the dairy markets just kept climbing this week. The heat wave began in the most unlikely of places. CME spot Cheddar staged a torrid rally on Thursday and blazed higher on Friday as well. Cheddar blocks jumped 30.25ȼ this week to $1.7825 per pound. Barrels leapt 26.25ȼ to $1.655. While cheese sizzled, butter smoldered. CME spot butter climbed 3.25ȼ to $2.5825, a new 2023 high. The powders warmed up a little. Spot dry whey rallied a half-cent to 25.25ȼ. Spot nonfat dry milk (NDM) gained 1.5ȼ this week and reached $1.12.

The feverish cheese market gave Class III prices a huge boost. While it was too late to help the pitiful July price, August and September Class III gained $1.62 and $1.75, respectively. Fourth-quarter futures also moved significantly higher. The futures now project a third-quarter Class III average of $16.06 per cwt., with the fourth quarter at a more palatable $18.36. Class IV prices advanced with considerably less drama. Most contracts finished about 30ȼ higher than last week, pushing the third-quarter average up to $18.43.

The dairy markets seem to be caught up in the enthusiasm from the bullish Milk Production report. USDA showed June milk output at 18.916 million pounds, down 4 million pounds from June 2022. The year-over-year difference is almost imperceptible, but it is a deficit, and that marks an important shift in trend. The trade had expected modest growth last month, and it is bracing itself for a steeper decline in milk output in July, as poor margins, high slaughter volumes, and sweltering temperatures continue to exact a hefty toll on U.S. milk production.

Dairy producers in the Southwest are suffering worst, both from the current heat wave and from several months of low milk prices and punishing feed costs. According to USDA’s latest assessment, 15,000 cows left the states of Texas and New Mexico last month alone. The herd is also shrinking on the West Coast. There were 37,000 fewer cows in Washington, Oregon, California, New Mexico, and Texas last month than there were the year before.

Milk continues to gush in the northern dairy states. Steep declines in Southwestern milk output were nearly offset by 1.4% growth in the Northeast, 1.8% growth in the Midwest cheese states, and a strong 3.1% increase in aggregate milk output in the Mideast states of Michigan, Indiana, and Ohio. But even in these areas, growth will likely slow in the second half of the year. Flooding has hampered milk output and disrupted milk haulers and processors in the Northeast. In the Midwest, the mild start to summer is long past, and sweltering temperatures will migrate northward by next week. Producers in the cheese states are exceedingly discouraged after cashing June milk checks that were watered down by the regional milk surplus. All these factors have finally put a halt to expansion in the Midwest. In fact, not a single major dairy state added cows in June. There are still a lot more cows in the heartland than there were a year ago, but growth in milk output will slow going forward now that the head count is no longer climbing. USDA estimates that the national dairy herd shrunk by 36,000 head in the second quarter, including a 16,000-cow drop last month. The dairy herd now stands at 9.408 million head, down 5,000 head from June 2022.

Slower milk output is already curtailing U.S. milk powder production in some areas, which should help to put a floor under the powder market. But there are still concerns about demand. While Chinese whole milk powder (WMP) imports bested year-ago volumes in June, they were still well off the pace necessary to relieve anxieties about China’s diminished appetite for foreign milk powder. Tuesday’s Global Dairy Trade (GDT) auction didn’t calm any fears. WMP prices dropped 1.5% at the GDT and SMP values slipped 0.6%. With China still largely on the sidelines, competition for global milk powder imports will be fierce as New Zealand milk output ramps up seasonally and Europe remains in growth mode. European milk output was 0.8% larger in May than the year before.

Closer to home, the bulls seem to be in charge after news of the June milk production deficit. But it will be a long time before there is a shortage of milk in the cheese states. That suggests that this week’s cheese market rally could flame out rather quickly. The strong recovery in Class III pricing offered a glimmer of hope for disheartened dairy producers. But amid heavy inventories and tepid global demand, it’s too soon to count on continued gains in 2023 prices. The only thing guaranteed is more volatility ahead.

Grain Markets

The grain markets were wild once again this week, led by violent moves in the wheat market. Russia failed to renew the agreement that would allow grain to leave safely from Ukrainian ports on the Black Sea. The Russians added injury to insult with attacks that destroyed both grain and the infrastructure required to move it. Wheat futures jumped sharply higher at midweek but then settled back. Corn followed wheat back and forth, and it got an additional boost from the forecast, which promises hot, dry weather next week. December corn settled at $5.3625, up 22.5ȼ from last Friday. November soybeans closed at $14.0175, up 31ȼ. August soybean meal finished at $442.80 per ton, up nearly $20.


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