It’s all there: increased milk production, higher prices and strong demand.
Both the cheese and butter spot markets have been very resilient, with price dips being short-lived. Demand has been strong and continues to be strong according to the amount of product being traded on the daily CME group spot market. Just last week alone, there were 59 loads of butter traded while price was able to rise 26 cents over the course of the week. Although not quite as many loads of cheese have been traded, activity has been steady with most weeks showing double-digit volumes traded.
There continues to be a disconnect between world prices and domestic prices. Domestic demand is strong as buyers look to satisfy orders for upcoming end of the year demand. Consumers are willing to purchase what they want regardless of price. There seems to be a switch away from the myriads of process and packaged foods available to more of the food staples. Record beef prices have done little to slow demand. Strong dairy prices are experiencing the same thing. Demand is good and supply is less than desired for this time of year.
Milk production continues to improve, with production this year expected to reach a record 206.0 billion pounds, up 4.8 billion pounds from last year. In fact, milk production has exceeded the previous year in 15 of the past 17 years. The two years showing a decrease from the previous year were 2001 and 2009.
With increasing milk production, we have naturally seen an increase in cheese and butter production. This stands to reason as fluid milk consumption continues to decline on a yearly basis.
So, where has, and is, the greatest growth in cheese production taken place? Over the past years, the Western and Central regions have been battling it out for greatest growth in production. The Central region still continues to outpace the West with 45% of the nation’s cheese being produced, compared to 42% in the West. One would think that higher milk production would also be the case in those areas, but that is not the case. Last year, milk production in the West and Central regions ran neck-and-neck at 42% of the nation’s milk in each region.
Butter is a different story as the West far outpaces the Central region by 13%. The West supplied 52.0% of the nation’s butter last year. However, despite increased butter production last year, demand grew at a greater pace. Export demand increased substantially, resulting in the inability of inventory to keep pace with the previous year. Current butter inventory is 40% below last year and the reason price reached $2.66 per pound last week. Buyers are running scared and have been outbidding each other in the attempt to obtain supply for upcoming demand.
Inventory is expected to slow its descent now that the market has virtually been able to severely reduce export interest, especially in light of the Russian ban on dairy products from the European Union, Argentina, Norway and the United States. This does not affect us directly, but will indirectly over time. The U.S. has not exported any dairy products to Russia since 2010 due to certification issues. However, a backup of dairy products in the other listed countries will result in lower prices and the desire of those countries to move more product to different areas of the world.
So, with lower prices in the world compared to our high price, one has to assume that U.S. export business will slow as Argentina, the European Union and Norway move product to other areas of the world. This will eventually allow more to be available domestically and will reduce our market share. This business will be difficult to get back again as we have seen in the past. Right now, the market is focused on our tight supply and reduced inventory, allowing prices to remain high for the time being.
- July Milk Product report on August 19
- Global Dairy Trade auction on August 19
- July Livestock Slaughter report on August 21
- July Cold Storage report on August 22
- Agricultural Prices report on August 28
- August Federal Order class prices on September 3
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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