Tight Milk Supply – Reality or Perception?

Published on: 13:11PM Sep 30, 2013

Increasing milk output is competing with declining dairy product stocks and booming export demand. But as corn growers know, you can’t always predict where prices will head.

August Milk Production and Cold Storage reports were awaited with much anticipation. It was expected that milk product would increase and inventories would decrease. The extent of the milk production increase was a surprise. U.S. milk production increased 2.6% from last year despite the hot weather experienced during the month. The late summer hot spell and the resulting decrease in milk production had many thinking production would rise very little. But dairy farmers are resourceful and efficient and able to get milk out of the cows even under adverse conditions.

This brings us to the next idea that has been floating around in the market, which is the many reports indicating tightness of milk supply. With production above last year and cheese and butter inventory also higher, one has to wonder why manufacturers indicate milk supply is tight. It seems like it is a perception due to the fact that bottling demand is using sufficient quantities of milk, resulting in the available manufacturing milk supply requiring a premium to purchase. There have been reports of premiums upwards of $3.00 for available milk. This does not work well for many manufacturers when prices are at current levels. Plants would like to keep production schedules full and supply buyers with product. Obviously, tighter milk supply will increase price, but all indications are that demand is not greater than last year, otherwise inventory would be declining at a faster rate.

Butter is the prime example of tightening supply, with August inventory 34% higher than the previous year. In July, stocks were 26% higher; 33% higher in June; 24% higher in May; 22% higher in April; 22% in March; 21% in February; and 21% in January. If this pattern holds, stocks could end the year significantly higher than last year. Cheese is not quite the same but somewhat similar. Making the same comparison we can see that cheese stocks have actually been more stable. Total cheese inventory in August was 5% above last year. In July stocks were 5% higher; 5% higher in June; 8% higher in May; 4% higher in April; 5% higher in March; 4% higher in February; and 1% higher in January. Even though stocks are declining, they are declining at a slower pace than last year.

Export demand is improving as U.S. prices remain competitive with world prices. This certainly is good for keeping some support under market prices. My concern is what will happen when milk production begins to improve seasonally. Will demand be met with sufficient left-over and further limit inventory reduction?

I have made these comparisons to drive home the idea that we must be careful with what we read and well as the conditions we see from our back doors. Grain prices are another example. Many farmers in the country held off marketing their corn this spring when price was higher as they watched and read the news of the impending doom of the crop. Late planting, prevented planting, too much rain, not enough rain, potential frost, etc., gave many the impression corn prices were going to remain high. These same farmers are lamenting the fact they did not forward-contract more and indicate they will store as much as they can and hope for higher prices. We must keep our farming operations in perspective and make true business decisions for the good of our chosen occupation.

Upcoming reports:

- September Agricultural Price report on September 30, 2013
- Global Dairy Trade auction on October 1
- August Dairy Products report on October 3
- World Agricultural Supply and Demand report on October 11

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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