Dairy Reports Provide Market Direction, Not Reaction

Published on: 12:08PM Jun 25, 2012

The numbers point to slowing milk production and herd growth, suggesting a tightening milk supply. But demand will be key.

A number of USDA dairy reports for the month of May were released last week. The industry and traders look to these reports for market direction even though these reports are released after the fact.

Milk production has already been absorbed into the market in one way or another by being consumed or manufactured into some type of dairy product. Either way, the industry has already done something with the milk, and it is somewhere in the system. The general public will not find out until the cold storage, fluid milk sales, exports and commercial disappearance reports are released for the month of May. These reports will not be through the system until mid-July. Then what is the purpose of these reports and what can they tell us?

The milk production report provides an indication of trend. Yes, the milk is already in the system, but looking at the progression of milk production over consecutive months and comparing cow numbers can indicate market direction.

May milk production increased 2% over the same month last year. This is the slowest percentage growth so far in 2012. This production growth is somewhat similar to 2009. The industry was feeling the effects of high-priced feed, resulting in heavy culling and lower production. However, milk prices were very low, not as a result of that but the result of the economic situation which affected demand. We are still facing high feed costs and the lowest milk/feed ratio on record.

Milk production continues to outpace last year, but the growth is slowing. Growth in cow numbers has been a bit slower this year than last year for the first five months. Cow numbers on a month-to-month basis, however, fell in May for the first time this year. The indications are that production and herd growth are slowing, giving the perception that milk supply could tighten as the year progresses. This has been one of the fears in the market that has turned it from the bearishness seen in April to the bullishness seen today. Milk futures have rallied over $3 per cwt. in some contracts as market sentiment changed.

Dairy cattle slaughter in May increased significantly. Although slaughter numbers were not the highest seen in any one month, 251,000 cows were culled, an increase of 31,000 head over last year. This was an increase of 11,000 head from April.

This trend may continue if milk prices cannot keep pace with a rising feed price. Exceptionally dry weather across the Midwest so far this year is becoming critical. Lower yield potential is being factored in due to declining crop conditions. Buyers are becoming more aggressive, resulting in corn futures increasing nearly 80 cents per bu. in a little more than a week. This means there may not be much change in the milk/feed ratio, and a stronger milk price outlook is being met with higher prices, resulting in just trading dollars for dollars.

American cheese inventory surprisingly declined in May despite strong cheese production. Stocks declined 9.5 million pounds from April to nearly the same level as last year. Other cheese stocks increased 8.3 million pounds. The result was a decline in total cheese inventory of 400,000 lb. from April.

All-in-all, these reports indicate the trend is for declining milk production, given the direction of the milk production reports and dairy cattle slaughter. Cheese inventory seems to have peaked and will decrease as fall and end-of-the-year demand increases. This lends support for better milk prices than previously anticipated. Current Class III futures contracts have a nearly $1 per cwt. premium in them relative the underlying cash, which may be realized if cheese buyers become more aggressive.

Demand will be the key. If demand does not maintain or improve, a declining milk and cheese supply may not allow prices to hold where they are. Milk prices do look better for the year, but profitability may not change much if crop conditions do not improve.

Upcoming reports:

- Commercial disappearance on June 26
- Agricultural prices report on June 28
- June Federal Order price on June 27
- June acreage and quarterly grain stocks report on June 29
- California Class 4a/4b prices on July 2

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.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.