MRV BLOG: MRV Market Commentary October 10, 2023

Check-in here to see the MRV commentary on what we have seen and are seeing in the dairy market.  These insights have been developed from MRV’s proprietary data, industry experience, and industry reports referenced below. Here’s our latest:

Domestic

Over the last month we have seen some big shifts in the industry. Commodities have almost flipped, butter now has a 26 cent increase from the beginning of September to the end of the month, whereas same period in August had a 4 cent increase. From the beginning of September to its end, block and barrel cheese saw a decrease of about 6 cents while August’s month saw block cheese increase nearly 30 cents and barrel increase 20 cents.

Butter and Cheese

Butter production faltered in August, according to USDA’s Dairy Products report, output for the month was 2.1% less than August last year. This was the largest YoY decline since September 2022 versus 2021. Churns felt the tight cream supply in the west, where 33% of butter was manufactured in 2022, which resulted in butter production being 8.7 million pounds less than August 2022. That is a decline of 3.7% in August, and there was another decline of 5.5% in July (YoY). Some of the lower butter production in the west was offset by the Central region’s ability to increase their production by about 15%. However, this was not enough, as high demand for class II and other high-fat items (this summer) as well as light production were all key drivers for CME spot butter’s new record high.

August butter inventories were seen well below the five year average value of 329.2 million pounds. Warehouse levels have seen their largest decline since 1993, shrinking 78.8 million pounds since May, which helps elaborate on the current state of the market’s tightness. Milk yields in California have declined for August versus 2022, and with margins being as low as they are, herd size has also seen some decline further limiting the fat available for butter.

Once the holidays pass it is very likely butter prices could plummet.

(Graph from USDA)

Cheese prices slowed as supplies became readily available. Total cheese stocks increased in August according to USDA’s Cold Storage report. A new monthly record was accounted for and the number was above 2022’s levels which supported the fall from block’s price last week, which was its lowest price since July 2020 when it rebounded from the July cheese squeeze in early summer. Whey output remains strong for most high protein products even with lower cheese production.

Dairy Producers and Margins

Dairy producer margins remain tight and continued to hit new lows this past summer, which has resulted in many producers culling the low end of their herds. According to USDA’s Agricultural Prices report, the mailbox milk price in July averaged at $17.40/cwt. This was lower than June’s price at the time and significantly lower the $25.70/cwt price from July 2022.

There is a new MLP (Milk Loss Program) run by USDA’s Farm Service Agency, which dairy producers and processors who dumped milk without compensation, due to select weather disasters, could receive reimbursement for. With today’s tight farm margins these funds are negligible, however, it is still better than receiving nothing on lost product. Based on a formula used in the DMC (Dairy Margin Coverage) program, the average dairy producer had $3.52/cwt left to cover all other bills after paying for feed (in July). This is the lowest income-over-feed margin since 2012, which has resulted in some culling.

Exports

On an MSE (Milk Solids Equivalent) basis, volume was down 10.8% in August versus same month last year. While year-to-date through August, export volume is down 6.9% and its value trails behind it at -13%. August emulated July’s trend with NDM and SMP increasing while nearly all other product categories fell short of last year’s levels. The weakest link here which is reflected in much of the decline is the 41% drop off of low-protein whey to China due to their low feed demand caused by China’s struggling pig sector.

(Graph from USDEC)

Summary

The current market has tight cream supplies and low margins for dairy producers and processors. Exports are weaker and trailing behind last year’s levels with the exception of NDM and SMP. Based on these, we expect November prices on higher fat items to remain elevated while lower fat items will stay relatively neutral or decline.  Given the low availability of supplies for many items, we expect butter prices to remain high until later in the year or the passing of this holiday season before declining.

This information cited by MRV Marketing, LLC is for informational and reference purposes only. It is not intended to be a conclusive statement of future market conditions. It is not legal advice or legal documents. The data used in these documents contains references to information created and maintained by other organizations or agencies. Please note that MRV Marketing, LLC does not control and cannot guarantee the accuracy of these outside materials.

Statistical data referenced here is gleaned from reports by MRV Proprietary Data, Daily Dairy Report, Dairy Herd Management, USDEC, and USDA.