Dairy Market Outlook

Summary: Milk growth in the US is weak while European milk production is expected to move back above year ago by spring. Oceania output is being negatively impacted by ongoing drought.

US milk production in February was up only 0.2% vs. year ago as winter weather proved challenging in some areas of the country in addition to ongoing financial strain on dairy farms. This was the slowest growth rate in 3 years. Cow numbers held steady in February and were actually up 6,000 head from December despite unprecedented levels of dairy cow culling and fewer replacement heifers. Anecdotal reports point to additional culling as farms work through their winter feed stocks and beef prices improve. While dairy farm margins are expected to be profitable this year, long-lasting damage has been done to the financial health of the dairy farm sector in the US, particularly small and mid-size farms. But milk production growth from large farms, primarily in the West and Southwest, will be more than enough to offset losses in the Eastern half of the country.

European milk production started the year down 1.2% vs. year ago – the worst year-over-year performance since December 2016 – and the fifth month in a row of declines vs. prior year. The majority of the losses in January were seen in the Netherlands (-5%), France (-3%) and Germany (-2%), partially offset by gains in Poland (+3%), the UK (+2%) and Ireland (+4%). February data show an improvement in the Netherlands (-2%), but only modest growth in Ireland (+2%). Weekly data point to improving conditions in Germany, but French output remains below last year.

Milk production in New Zealand has fallen rapidly given dry weather and deterioration in pasture conditions. February output was up only 0.1% vs. a gain of 7.7% in January. The season has tapered off faster than expected just 1-2 months ago. This has resulted in strengthening GDT prices as buyers snap up limited supplies of product. January production in Australia was down 13% - the worst in over 10 years.

Summary: US cheese market fundamentals have become more bullish in the last month. Following the lead of NZ prices, US and European prices are expected to move higher as the year progresses.

The impact of tighter US milk supplies has been most visible in the cheese market. Spot milk is less available in the Midwest and milk supplies have fallen in the Eastern half of the country. Total cheese production was up only 0.2% in January and 0.5% in February. Cheese stocks at the end of February remained above year ago levels (+4%), but the build during the month was the slowest since 2014. American cheese stocks declined 18 MM lbs. during the month – the largest drop since 1994. The weak stocks numbers caught the market by surprise and CME block prices spent a few days in the $1.70’s before retreating back to the $1.60’s. Barrel prices rallied to $1.60, the highest point since last September. Exports were up slightly from prior year in January and Q1 domestic demand was reportedly good. The cheese market is more on edge with an upward bias to prices given more bullish fundamentals.

Summary: CME butter prices remain in a tight range in the $2.20’s as NZ prices go premium and European prices trade at a discount.

While milk supplies have tightened in the Eastern half of the country, cream has remained relatively plentiful. Spot cream multiples have moved into the low 120’s from the mid-upper teens, likely due to the upcoming holiday demand. In addition, churns have not been aggressive buying cream given the lack of a carrying charge in the butter futures market until the last few weeks. February butter production was 2.9% lower than last year with California down 6.4% and the Central and Atlantic regions nearly 5% below last year. This helps explain the lackluster stocks on February 28 – down 8.7% vs. last year – and the slower than average inventory build to start the year. More cream should find its way to butter churns over the next two months before ice cream season starts in June.

Like cheese, European butter prices are in an unusual place, trading at a discount to both US and NZ prices. EEX futures remain in the low-mid €4,000’s through December. Unlike cheese, butter inventories are reportedly less plentiful, so there is some potential for higher prices. NZ butter prices continue to rally from last fall’s low, now trading at a premium to both US and European prices.

Summary: SMP/NFDM prices softened in the past month as buyers look to the upcoming milk flush in the northern hemisphere.

In the US, NFDM prices remain discount to global prices and have drifted down to the mid-$0.90’s following a brief rally to start the year. Exports were below prior year levels in November, December, and January, and January shipments fell about 2% from December’s pace. Export interest has been reportedly slow in February and March as well. The recently released February 28 NFDM stocks number confirms that with stocks increasing nearly 23 MM lbs. during the month even though February production was 19 MM lbs. less than January.

As in the US, SMP prices in Europe have moved lower in the last month. While the SMP intervention stocks have been depleted, they are still around, just not visible. This will continue to limit upside price moves as some buyers can fall back on the supplies of old powder. Mexico is rumored to have been a buyer of intervention SMP product, which aligns with lower demand for US product in recent months. My forecast is for a modest price recovery in the second half, but the magnitude will be dependent on the growth in milk supplies in Europe.

After a strong start to the year, Chinese dairy imports slowed in February. China imported nearly 27K MT (57MM lbs.) of SMP in February, the second highest February on record. WMP imports were also higher, up about 5% from last year, but down sharply from January (-70%), and a bit lower than the five-year average pace. Chinese demand continues to be the main demand driver for global dairy markets this year, so their buying activity will be closely watched.

Summary: The whey market remains firm for higher protein products, but weak on the low end given the ongoing African Swine Fever in China.

The big story for dry whey and whey permeate demand continues to be the impact from African Swine Fever in China. The nation’s pig herd in February was down nearly 17% from prior year and the sow herd had shrunk 19%. China’s whey imports were down 20% vs. year ago in February.

Dry whey prices have moved lower in response to weaker demand. Sales to China are down 36% vs. prior year over the last four months, and due to tariffs and AFS, the US has lost market share to Europe with only 33% of imports in February compared to 58% in 2018. Dry whey production in the US was down 16% from year ago in February, yet stocks increased 9% from January and hit the highest level in 12 months. This implies another month of weak export shipments. With more production coming online soon, and a weak demand outlook, the market tone will remain bearish.

Information contained within is not guaranteed, is the opinion of the McCully group, llc, and is intended for informational purposes only. Commodities trading involves risk and is not suitable for everyone. The McCully group, llc is not a licensed commodity broker nor trades in commodity futures markets.