Overview
A restrained supply and expanding demand is offering some hope that the current dire milk-price situation may improve, potentially offering a rapid recovery in dairy margins that are currently at punishing levels for dairy farmers.
The past year’s relatively modest increase in U.S. milk production that faltered in the spring came to a full stop in June, when production and U.S. dairy cow numbers were both essentially unchanged from a year earlier. In July, the recent bout of intense dairy product retail price inflation also came back to Earth, with retail prices of fluid milk, cheese and butter all lower than a year earlier and retail prices of all dairy products up an average of just 1.3 percent. With that, dairy futures markets have been signalling for some weeks now that milk prices will rapidly improve in the remaining months of 2023, as will the DMC margins, which hit a record low of $3.65/cwt in June. But a third key driver of milk prices, namely U.S. dairy exports, continues to languish relative to the last two years of consecutive record-setting export volumes, potentially limiting the upside of price recovery.
Commercial Use of Dairy Products
USDA’s analysis of domestic milk use in all products shows much larger increases in all milk equivalent measures than those in its reports of milk and milk solids production. All major product categories except fluid milk and other than American-type cheese contributed to this second quarter U.S. demand growth. However, significant shortfalls in exports compared with last year’s record-setting volumes are pulling total use expansion down to levels comparable to production growth in the second quarter.
U.S. Dairy Trade
U.S. dairy exports in all major product categories were well below year-earlier levels during the second quarter of 2023, by at least double-digit percentages in most cases. Collectively, the U.S. dairy industry shipped about two and a half percent less of its total milk solids production out of the country to overseas markets during the quarter compared to a year earlier. On average, losses were greater for the more consumer products, including butter and cheese, than dry skim ingredient products. U.S. exporters are facing stiffer competition and continued on page 2
aggressive pricing from traditional competitors in Europe and Oceania, while import demand, particularly by China, has softened.
The United States joined many other countries in reducing its dairy imports year-over-year during the third quarter.
Milk Production
Following up a slight uptick to 0.65 percent in May, from April’s 0.38 percent, the annual growth rate of U.S. milk production dropped to flat: -0.02 percent, according to preliminary USDA numbers for June. The May increase was driven primarily by increased production in the larger milk producing states. The drop in June production was led by Texas and New Mexico, but California was also down more than 1 percent. However, many of the larger and mid-sized of the 24 states that report monthly production still showed increased production.
Nationwide cow numbers were essentially unchanged from a year earlier in June, as was national average production per cow. USDA data on growth of U.S. total milk solids production has not yet reflected as strong a downturn as has liquid milk production. It indicated that almost 7 percent more milk solids were produced in June than a year earlier.
Dairy Products
American-type cheese and butter continue to show the most pronounced gains in production during the second quarter of 2023. Unlike butter, total dry skim milk production, of all forms, was lower year-over-year, although bulk condensed skim milk production was 9 percent higher than a year earlier during the quarter.
Dairy Product Inventories
Stocks of all cheese, as well as all American-type and all other types of cheese were little changed from a year earlier
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in June, but all were just a few million pounds short of their respective all-time high levels since 2000, which occurred in July last year. June-ending butter stocks were down from May’s but were 5 percent above a year earlier. June-ending manufacturers’ stocks of nonfat dry milk were close to their average over the past half-decade, while dry whey stocks have increased steadily since hitting a half-decade low of 56 million pounds at the beginning of 2022.
Dairy Product and Federal Order Class Prices
The recent strength in the daily CME cash markets for cheese began in July but not in time to prevent the July monthly NDPSR cheese prices from dropping below June. Butter was the only NDPSR-reported product that showed a price gain from June to July. The July Class III price reflected a corresponding drop, while offsetting product price moves kept the Class IV price constant during the two months. The Bureau of Labor Statistics-reported U.S. average retail prices of fluid milk products, both whole milk and all other
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types, were lower in July than both a month and a year earlier. The BLS retail price indices for both cheese and butter were lower in July than a year earlier. Retail prices for almost all
dairy products have dropped from their peak levels, reached mostly during the last few months of 2022 and are also down considerably in their more commonly-reported year-over-year retail price increases from their peaks attained mostly during the second half of 2022.
Milk and Feed Prices
The June Dairy Margin Coverage (DMC) margin dropped by $1.18/cwt from a month earlier to $3.65/cwt, the first time it’s been below $4/cwt since margin protection became the basic federal safety net mechanism for dairy in 2014. It will generate a lot of $0.35/cwt payments for Tier 2 coverage at the free $4/cwt level, as well as payments of $5.85/cwt for Tier 1 coverage at the maximum $9.50/cwt level. The June all-milk price was $1.40/cwt lower than in May, the same as the April to May drop a month earlier, while the DMC June feed cost was only $0.22/cwt of milk lower than May’s, due to relatively similar slight drops in the prices of all three feed cost formula components.
Looking Ahead
USDA’s World Agricultural Supply and Demand Estimates (WASDE) report for August reduced its forecast of this year’s U.S. milk production growth from its July estimate of 0.9 percent to 0.6 percent over 2022 production. The department also halted its steady reductions over the past several months of this year’s predicted average milk price for the year, and instead raised it to $19.95/cwt from July’s low of $19.55/cwt. The CME dairy futures markets indicated a 2023 average milk price of $20.45/cwt at the same time. USDA also raised its 2024 average milk price forecast to $19.35/cwt, while the CME futures were indicating $21.25/cwt.
Available forecasts indicate the DMC margin will improve slightly in July from the June level and then increase rapidly from August through October and reach $9.50/cwt by December.
Peter Vitaliano National Milk Producers Federationpvitaliano@nmpf.org www.nmpf.org
Dairy Management Inc.™ and state, regional, and international organizations work together to drive demand for dairy products on behalf of America's dairy farmers, through the programs of the American Dairy Association ®, the National Dairy Council ®, and the U.S. Dairy Export Council ®
The National Milk Producers Federation (NMPF) is a farm commodity organization representing most of the dairy marketing cooperatives serving the U.S.