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Milk, Dairy and Grain Market Commentary

By Sarina Sharp, Daily Dairy Report

Milk, Dairy & Grain Markets

Dairy producers are getting pummeled, and the bruises are starting to show. In California and the Southwest, where feed costs are highest, slaughter volumes have been elevated all year. In the Northern Plains and Midwest, slaughter volumes ramped up noticeably in mid-June, not long after the disappointing May milk checks hit the mailbox. May Class III was $16.11 per cwt. and many dairy producers got far less than that as cheap spot milk – and dumped milk – resulted in steep discounts. The June check was even worse, with Class III at just $14.91. The discounts got worse as well. This week USDA announced the July Class III price at $13.77. Discounts on spot milk in the cheese states could take a smaller bite out of the July milk check, but milk revenue will be pitifully small.

Margins were low enough that the income-over-feed margin as calculated by USDA’s Dairy Margin Coverage (DMC) program dropped to just $3.65 per cwt. for June, its lowest reading in more than a decade. Most dairy producers enroll their first 5 million pounds of annual milk production at the DMC’s $9.50 threshold, and they will receive a payout of $5.85 on this portion of their June DMC coverage. About one-fifth of U.S. milk production was covered with a $9.50 DMC floor. Most dairy producers sign up the rest of their milk at the nearly-free $4 tier. For the first time, margins were low enough in June to trigger a 35ȼ payment for this disaster-level $4 protection.

Awash in red ink, dairy producers in the Upper Midwest stepped up cull rates. National dairy cow slaughter reached 255,700 head in June, the highest tally for the month since 2009. Slaughter volumes remained high in July and are likely to climb in August. In the week ended July 22, dairy producers sent 61,242 cows to the packer, the highest late-July head count since 1986, the year of the cow-kill program.

Meanwhile, scorching temperatures stressed the cows in the parlor. Between the heat and the herd dispersals, processors saw milk flows drop significantly in the past few weeks. Components dropped too, and cream values shot higher. That likely means lower butter and milk powder production in July and August. But cheese vats are still full. However, one major cheese plant took some downtime, which temporarily tightened supplies of fresh Cheddar for sale in Chicago.

The summer cheese short squeeze lifted spot Cheddar once again on Monday, and both blocks and barrels notched four-month highs. But the bids dried up Tuesday, and the bulls retreated. CME spot Cheddar blocks held firm into Friday and closed at $1.965 per pound, up 5.75ȼ for the week. Barrels started strong but then petered out. They closed today at $1.775, just 1.25ȼ higher than last Friday.

There is still plenty of cheese to be had. USDA’s Dairy Products report showed cheese production just shy of 1.17 billion pounds, up 0.4% from a year ago. Cheddar output slipped 1.1% year over year in June, which contributed to the steep rise in cheese prices in July. Mozzarella production fell 1.6%, signaling continued weakness in U.S. cheese exports to Asia. Cheesemakers eschewed production of fresh cheeses like ricotta (-9.5% year over year) for hard cheeses like Parmesan (+9.4%). That means the market will have to contend with an abundance of cheese in aging programs for the foreseeable future.

Whey output remains strong. Production of dry whey for human consumption was up 2.7% year over year in June, and whey protein concentrate (WPC) output jumped 10.8% from June 2022. Stocks are burdensome and whey is still cheap. CME spot whey advanced 2.25ȼ this week to 27.25ȼ per pound.

June butter output topped year-ago levels by 2.3%, thanks to plenty of butterfat in the milk supply during the tail end of the flush. Now that both milk flows and components are much lower, churns are sitting idle. Slower summer output helped to lift butter prices to a new plateau, but it wasn’t enough to keep them at last week’s highs. CME spot butter fell 6ȼ this week to a still lofty $2.62.

Lower milk output reduced milk powder production in June. Combined production of nonfat dry milk (NDM) and skim milk powder (SMP) fell 1.5% from June 2022 to nearly 220 million pounds. Manufacturers’ stocks of NDM inched lower in June, thanks to strong demand from Mexico. U.S. milk powder production is in decline and likely to fall sharply over the next six months as a greater share of the shrinking milk supply heads to cheese vats. But that’s not enough, on its own, to lift milk powder prices. Demand matters as well. And on that front, the outlook is a little less sunny. While Mexico continues to import huge volumes of U.S. milk powder, demand from other markets is anemic. At the Global Dairy Trade (GDT) auction on Tuesday, both whole milk powder (WMP) and SMP prices dropped to their lowest level since 2020. The GDT auction was so disappointing that it prompted Fonterra to trim its 2023-24 farmgate milk price forecast by a dollar to a midpoint of NZ$7 per kg of milk solids, a five-year low. CME spot NDM slipped 3.5ȼ this week to $1.125. Class IV futures finished 30ȼ to 50ȼ lower than last Friday, in the high-$18s. Contraction in the U.S. dairy herd is setting the stage for much higher prices down the road, but unless global demand perks up, it could be a long and painful journey.

Grain Markets

The forecast is wet and relatively cool, nearly ideal for the pollinating corn and soybean crops. But while the weather out the windshield is positive for yields, the market remains anxious about the impact of the much harsher conditions in the rear-view mirror. And there are plenty of issues abroad. Drought and heat trimmed potential from crops in Canada and Europe. Flooding reduced India’s rice crop and the Indian government banned exports of certain rice varieties, which will likely push some consumers to wheat as a substitute. Russia continues to destroy Ukrainian grain and the facilities required to move it. But Russian actions also pushed prices lower at times over the past week, as they promised free grain to African nations in exchange for their diplomatic support. Grain and oilseed traders are hopeful that July and August weather will allow for decent U.S. crops, but they are still wary that supplies will feel tight. Feed prices are down considerably from where they stood a week ago, but they remain on edge. December corn futures fell 33ȼ to $4.9725 per bushel. November soybeans finished at $13.87, up nearly a nickel. September soybean meal closed at $422.60 per ton, down $11.


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