Have markets returned to a sense of normalcy?

DMI
Following more than a year of pandemic-related tumult, milk prices have settled into a more traditional alignment, with an improved balance of supply and demand supporting higher prices.

Following more than a year of pandemic-related tumult, milk prices have settled into a more traditional alignment, with an improved balance of supply and demand supporting higher prices. A series of positive, and growing, producer price differentials in federal orders has resulted from this return to normalcy.

Still, markets have continued to move sideways, indicating that more confidence is needed that the balance is sustainable for prices to move higher. Milk production made additional progress during May–July in coming into alignment with commercial use of dairy products.

Meanwhile, year-to-date exports maintained a record pace in terms of percent of U.S. milk solids production exported in July, further raising the chances that 2021 will set a new such record, despite ongoing difficulties affecting shipping products to foreign destinations.

Commercial Use of Dairy Products

Fluid milk sales have reverted to more normal consumption patterns after unusual gyrations in 2020 that have accordingly made for wildly fluctuating year-over-year comparisons. Both American-type and other cheese are returning to more normal growth patterns following large spikes in April. Despite these distinct trajectories for individual products, domestic commercial use of milk in all products was essentially unchanged over a year ago during May–July.

U.S. Dairy Trade

U.S. dairy exports set a new record in terms of percent of U.S. milk solids production during each month of the May–July period this year. Together with near record exports during the first four months, this moves the industry further toward setting a new record for calendar year 2021, despite ongoing export shipping delays. January through July exports equaled 17.5 percent of milk solids production, while the previous record for a full calendar year was 16.0 percent set last year.

Cheese was the only major category of dairy Imports that showed major growth during the May–July period, likely reflecting the recent removal of U.S. tariffs on certain cheeses from the European Union that were originally imposed in connection with a bilateral dispute on aircraft subsidies.

Milk Production

U.S. milk production dropped at an accelerating pace in July. The drop in daily production that month from its peak level in the spring was greater this year than in all previous years since 2013. Total U.S. dairy cow numbers in July backed off by only 10,000 cows from the multi-decade high of 9,509,000 they reached in May, but July daily production per cow was 4.3 percent lower than in April.

Growth in milk production per cow during May–July was a full half percent lower than during the second quarter. Total milk solids production continues to significantly outpace raw milk production growth, although both moderated during May–July compared with during the second quarter.

Dairy Products

American-type cheese production was up by about twice as much as domestic commercial use during May–July, while exports and imports were both relatively unchanged. Production and imports for other type cheese were both up during the period while commercial use and exports were relatively flat. Inventories of both types of cheese rose somewhat in July as a result.

Dairy Product Inventories

As milk production growth eases back, the effects are showing up in stock levels for the some of the key, market-moving dairy products. Butter and dry skim milk stocks dropped significantly in July from a month earlier. However, imbalances between production, domestic use, imports and exports for American-type and other cheese resulted in somewhat higher stocks of both at the end of July. But while cheese and dry whey stocks were up in July from June, they were both still equal to or less than May ending stocks.

Dairy Product and Federal Order Class Prices

Butter, nonfat dry milk and cheddar cheese prices showed relatively little change from July to August in the NDPSR price survey, although block cheese rose and barrel cheese dropped. Class III and Class IV prices were almost equal in August, and in normal alignment with Class I and Class II prices, resulting in the highest average producer price differential in the component pricing orders since March 2019.

U.S. average retail prices for fluid whole milk and yogurt dropped sharply in August after rising appreciably for several months. U.S. retail prices for cheddar and processed cheese have generally been dropping for several months, while national average retail prices for butter have been falling over the past several years but have stabilized around $3.60 per pound during most of 2021.

The overall cost of living index increased by more than 5 percent annually for the third straight month in August. At the same time, the general dairy product consumer price index dropped by half a percent.

Milk and Feed Prices

USDA has reported the July margin under the Dairy Margin Coverage program at $5.68/cwt, a drop of 56 cents from the June margin and the lowest DMC margin since May 2020. The lower July margin resulted from a $0.50/cwt drop in the U.S. average all-milk price, to $17.90/cwt, and a six-cent per hundredweight higher feed cost. A lower soybean meal price offset a good part of a higher price of corn, while alfalfa hay prices were slightly higher.

USDA has announced that it will change the DMC feed cost formula by replacing the current 50-50 blend of the U.S. average price for all alfalfa and the average price of premium and supreme alfalfa hay in the five largest milk producing states, with just the 5-state average for premium and supreme alfalfa, also referred to as dairy-quality alfalfa.

This change will be retroactive to January 2020 and is expected to provide additional retroactive payments of about $100 million for 2020 and 2021. Full details will be provided when regulations are published in the coming weeks.

For the July DMC margin, the change would result in a margin of $5.47/cwt for the month. Averaged over all the months from January 2020 through this past July, the change would result in an average $15 per ton higher alfalfa hay price used in the DMC feed cost formula and a 13.2 cent per hundredweight higher average payment for DMC coverage at $9.50/cwt.

Looking Ahead

The current futures-based price outlook continues to indicate that the DMC margin will most likely remain below $9.50/cwt for all 12 months of 2021, falling even lower than earlier forecast once the alfalfa hay price change is implemented.

The futures also show that the U.S. average all-milk price might rise by about $2 per hundredweight above its July level during the fourth quarter of 2021, and that federal order class prices will continue for at least the next several months to maintain their traditional alignment. That would ensure firmly positive price differentials in the component pricing orders.