Dairy Market Outlook Q4 2019

There was plenty of day-to-day excitement in U.S. dairy markets over the last month with cheese prices spiking to 5-year highs, the NFDM market awakening after months of slumber and butter prices sliding to the lowest point since early 2018. Milk and dairy product supplies in the U.S. remain tight for the most part, but milk production is expected to pick up into 2020. The cycle high for milk prices is expected to occur in Q4 2019, and then prices are expected to moderate next year. Trade is, and will remain, an uncertainty for dairy markets and the economy in general. Talk of recession in 2020 is also bearish for dairy markets.

Global dairy prices have seen less excitement than the U.S., but a firm tone is noted for milk powders. Similar to the U.S., global milk supplies have been close to prior year levels since last fall, and aren’t expected to improve much until late this year. This has tightened the supply-demand balance, and with pockets of strengthening demand, the market is leaning to the upside. Trade disputes are not helpful, and there are worrying signs of slowing economic growth with the risk of a recession in 2020 increasing every month. In short, a more bullish supply situation is being offset by worries about demand.

Milk Production

Summary: Milk output in the U.S and Europe is seeing small gains, but milk production from the key exporting regions has been near flat for the last 9 months.  

U.S. milk production was up 0.2% vs. year ago in August following a similar gain in July. Year-to-date, production is barely above last year, a situation that normally brings much higher prices with it. Cow numbers in July were revised up 10,000 head, but then fell 2,000 in August. Weekly cow culling has slowed to near prior year levels, but given better margins, a larger drop could be forthcoming. Milk production growth continues in states in the West and Southwest, which offsets losses in the eastern half of the country. Wisconsin milk production fell 0.5% vs. last year, the worst performance since May 2017. This helps explain the higher cheese prices, and is also a watch-out given concerns of poor feed quality in the state. Spring weather was not good for harvesting the first cutting of hay, so both yield and quality were well below average. Overall, higher milk prices and margins are expected to bring on a modest expansion in U.S. milk supplies in 2020 with a return to 1.0-1.5% growth.  

Like the U.S., milk production in Europe is seeing modest growth. In July, production was up 0.5% vs. year ago, primarily due to a 10% gain in Ireland. Early returns for August show a similar growth rate as July. Weekly data for September indicate slightly higher production in Germany, France and the U.K. Milk prices have been in the €33-34 range most of this year. This is above the cost of production for most farms, but not enough to encourage significant expansion. Plus, European dairy companies generally do a good job of managing supplies from farms, which keeps growth in check. With easy year-over-year comparisons by Q4, milk output is expected to grow 1-2%, with a similar increase for 2020.    

Other areas of the world are seeing mixed milk production trends. Oceania milk production was down 1.5% vs. prior year in August as weakness in Australia (-5.9%) was too much for a small gain in New Zealand (+0.8%) to offset. The prospects for growth in NZ are generally positive at this point, but the outlook for Australia remains bleak. Chinese milk production is reportedly up from last year, but given the pace of imports, it may be over-stated. Argentina is seeing a small rebound in milk production, up 2% in August, but political and economic turmoil could dampen additional growth prospects this season.

Cheese

Summary: CME block cheese prices rallied to a 5-year high before falling back to $2.00 while global prices remain well below U.S. levels.

That was exciting. With a shortage of fresh 40-lb. blocks at the CME, the market found an opening to run from $2.00 to $2.24 within a week, only to plummet back under $2.00 the following week. It has been a few years, but rallies like this have been seen in the past when milk tightens up in early-mid August as heat and humidity knock milk down and the school milk pull begins. A month later, there are no surplus blocks around, and the market jumps. The market has settled down with news of a surprising rebound in cheese stocks and a 5% gain in American cheese production in August. Prices are expected to remain firm into the peak holiday demand period. The block-barrel spread hit a record high on September 23 of $0.43.

Global cheese prices are trending in opposite directions with European prices moving higher while New Zealand prices have eased lower. In Europe, the latest Milk Market Observatory report had cheese stocks at the highest level in the last five years. With returns still favoring cheese-whey, and improving milk production, cheese production and supplies should remain ample. Cheese prices have been under $1.60 for a year, and that level is likely to cap any rally in Q4. After a period of stability, the GDT price for New Zealand cheese dropped to the lowest point since February.

Butter

Summary: While cheese prices were hitting multi-year highs, CME butter prices dropped to the lowest point since February 2018.       

After an early summer run where it looked like U.S. butter prices would jump over $2.50, the fundamentals turned bearish with higher production and stocks the last several months. August 31 butter stocks were nearly 5% above last year after seeing counter-seasonal increases in June and July. Higher milk production in California and new butter production capacity in Texas are having an effect with production up 2-6% over the last three months. There’s been a “2” in front of the CME butter price every day since November 15, 2016. Given current fundamentals, and the Q4 outlook, there is a growing likelihood of prices falling below $2.00 before the end of the year.

The global fat picture hasn’t changed much in the last few months. In Europe, butter stocks were estimated to be 20,000-70,000 MT higher than last year. Prices have leveled off and shown a slight rebound in recent weeks. However, futures prices are not that hopeful with only €100-200/MT improvement through 2020. There could be some bearish ramifications from the higher U.S. tariffs on European butter (primarily Ireland), and of course, Brexit remains an unknown. It appears there is limited downside in prices at this point, but also not a lot of upside until demand improves.

Milk Powders

Summary: After five months of trading between $1.00 and $1.05, U.S. NFDM prices have advanced to the highest level since February 2015 following the lead of NZ and European prices.  

Following a sleepy summer, there is life in the milk powder market. CME NFDM prices have rallied to near $1.15 as fundamentals have become more bullish. Traders that have been holding inventory finally see an opportunity to make money. End-users have come off the sidelines to top off Q4 needs and start booking product for Q1 2020. For reference, the long-term chart below shows how today’s prices compare to the last 10 years ($1.15 is below the 10-year average).

In the United States, stocks of milk powder were 4% below year ago at the end of August. Stronger production (+4% vs. YA) was offset by a 3% gain in exports in August vs. July. Domestic demand is solid as cheese plants max out NFDM usage given much higher class 3 solids prices. This is expected to continue through the end of the year.

The global milk powder market has turned more bullish with prices in NZ and Europe moving higher over the last month. SMP prices in Europe are nearing €2,300/MT (up €200 in the last month) with the latest GDT (NZ) price up to almost $2,700/MT. By this point, the EU SMP intervention stocks have been largely used up, so the market is back to trading fresh powder. Stocks in Europe are reportedly lower than prior year levels due to strong exports. Despite predictions of a slowdown, China continues to be an aggressive buyer of milk powder, particularly SMP. In August, SMP imports were 33% above year ago and are up 30% year-to-date. WMP imports fell below year ago levels for the first time this year in August with a 13% drop. However, the year-to-date volume is 23% above last year. Higher domestic milk production and a weakening economy raise questions about the strength of Chinese imports going into 2020.

Whey Products

Summary: A weaker tone has entered the whey complex to start Q4. Prices for WPC 80 and WPI have softened considerably in the last month.

The dry whey market continues to trade in the mid-$0.30’s with the NDPSR price stuck between $0.35-0.37 since May. CME dry whey prices fell to the low $0.30’s in very active trading. Prices in Europe and NZ are also in the low $0.30’s. U.S. dry whey production was 7% higher than year ago in August, the largest % gain since February 2018. With higher production and exports 33% below last year, stocks rose 7% during August, but still stood 2% below last year.

African Swine Fever (AFS) continues to spread in Asia with the virus now reported in 11 countries. In August, Chinese whey purchases did improve somewhat, with over 45,000 MT imported, the highest volume since January 2019. However, it was still 4% below last year. The U.S. continues to lose market share to Europe with the U.S. share falling from 42% to 37%, but Europe jumping over 10 points to a 48% share. ASF and a lower Chinese market share are the primary reasons for weaker U.S. whey prices.


Disclaimer

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.

About the Author

Mike McCully is the owner of The McCully Group LLC, which provides management consulting for dairy and food companies. For more than 15 years, Mike worked in dairy, meat, and grain management roles at Kraft Foods where he was responsible for the commodity risk management for dairy and meat, dairy policy, sourcing of dairy commodities, and corn purchasing.