Dairy Market Report - October 2022

Dairy Market R

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Vol u m e 2 5 | N o. 1 0

Overview

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October 2022

DMI | NMP F

Following months of uncertainty about the direction of U.S. milk production, numbers now indicate the trend is clearly toward growth. The preliminary numbers

from USDA’s August milk production report indicated milk production more than a percent and a half higher than a year earlier, while the previous preliminary July number was revised from flat versus a year earlier to half a percent above it. The tilt toward resumed milk production growth was also clearly evident in the numbers for many individual states. What rising production growth means for milk prices is somewhat less clear; while margins under the Dairy Margin Coverage program have returned to payment-triggering levels for farmers enrolled in maximum coverage, robust domestic consumer demand and market signals imply a floor to price declines.

While supplies increase, U.S. dairy export demand continues to recede slightly from its torrid pace from late spring but remains near record levels. Cheese, nonfat dry milk, and dry whey wholesale prices have been receding at various rates over the past several months, taking milk prices down with them, but most of these prices appear to be finding a floor and even moving back up moderately. This month, USDA increased its milk price forecasts for the next two years. Butter prices are still increasing. While this year’s retail price inflation for dairy products is affecting domestic consumption, the relative inelasticity of dairy demand seems to be making that effect modest, and in some cases any drop in demand has been partially offset by strong export sales.

Commercial Use of Dairy Products Domestic use of milk in all dairy products continues to lag below year-ago levels by all milk equivalent measures, as dairy price inflation continues to exceed the overall inflation rate; still, the drop was a little smaller during June–August

than during the previous rolling three-month period. By contrast, domestic consumption of butter, which is currently experiencing the highest rate of annual inflation among dairy products, was down from a year earlier by a greater amount during this most recent period.

Domestic Commercial Use

Jun–Aug 2022

Jun–Aug 2021

Total Fluid Milk Products Yogurt Butter American–type Cheese All Other Cheese Total Cheese Dry Skim Milk All Products (milk equiv., milkfat basis) All Products (milk equiv., skim solids basis) All Products (milk equiv., total solids basis)

10,260 1,176 484 1,332 1,968 3,300 196 55,720 44,838 48,164

10,465 1,203 510 1,341 1,957 3,298 201 56,230 45,357 48,652

2021–2022 Change

Percent Change

(million pounds)

-205 -27 -26 -9 11 2 -5 -511 -520 -488

-2.0% -2.2% -5.1% -0.7% 0.6% 0.1% -2.3% -0.9% -1.1% -1.0%

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U.S. Dairy Trade

Milk Production

U.S. exports of the major dairy product categories continued to show mostly double-digit percentage growth over the previous year during June–August, with the exception of dry skim milk products. August exports, at the equivalent of 18.8 percent of total U.S. milk solids production that month, were down from the consecutive record levels of May and June, but were still the third highest dairy export month ever by this measure. U.S. cheese exports are at record levels so far this year at 7.3 percent of domestic cheese production, as is the U.S. trade balance in cheese (exports minus imports by this measure), at 4.4 percent of domestic production.

The recent prolonged episode of constrained milk production that began in June 2021 may finally be ending, based on the USDA/NASS milk production report for August. The Department revised its July preliminary milk production estimate up to show a 0.5% gain over a year ago that month, reporting a preliminary estimate of August milk production 1.6% higher than a year earlier. Both growth estimates are higher than those of any previous month since August 2021.

Indications of marked turns toward more milk production were present in the August numbers for many states. U.S. total milk solids production increased twice as fast as total milk production during June–August in percentage terms.

Annual changes in the volumes of the major U.S. dairy product import categories were within single digit percentages during June–August, with butter and cheese down slightly and concentrated milk proteins up moderately. Overall import levels continue to be relatively stable on a percent of domestic milk solids production equivalent basis.

Dairy Products Italian-type cheese production, particularly mozzarella, continued to outpace production of American varieties during June–August. August butter production dropped below continued on page 3

U.S. Dairy Exports

Jun–Aug 2022

Jun–Aug 2021

2021–2022 Change

Percent Change

(metric tons)

Butter Anhydrous Milk Fat / Butteroil Cheddar Cheese American–type Cheese All Other Cheese Total Cheese Dry Skim Milk Whole Milk Powder Dry Whey Whey Protein Concentrate / Isolate Lactose Percent of U.S. Milk Solids Exported

18,317 4,427 23,604 23,823 95,732 119,555 198,725 10,653 60,908 63,303 120,643 18.9%

10,472 3,322 16,127 16,178 90,659 106,837 233,333 8,840 52,249 55,198 96,880 18.1%

7,845 1,105 7,478 7,646 5,072 12,718 -34,609 1,813 8,659 8,105 23,763 0.8%

75% 33% 46% 47% 6% 12% -15% 21% 17% 15% 25% 5%

U.S. Dairy Imports

Jun–Aug 2022

Jun–Aug 2021

2021–2022 Change

Percent Change

Butter Cheese Dry Skim Milk MPC (all protein levels) Casein Percent of U.S. Milk Solids Imported

13,177 49,064 116 11,404 17,967 3.5%

13,334 51,069 152 10,503 16,974 3.4%

-157 -2,005 -35 901 994 0.1%

-1% -4% -23% 9% 6% 2%

(metric tons)

2 – Dairy Market Report | October 2022

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Dairy Products from page 2

August 2021 following two months of resumed annual growth, which capped an almost year-long streak of reduced production that has generated the current record high prices.

Dairy Product Inventories Cheese stocks had backed off at the end of August by an average of 2.5 percent from the record levels they reached a month earlier. Ending-August stocks were also generally lower than the levels that set previous records in April and May. Month-ending butter stocks had dropped by more than half during the second half of 2021, setting the stage for the

strong price increase during the months of 2022. However, stocks recovered during the first half of this year but are now falling again month-to-month, generally following seasonal trends in both cases. Dry skim milk and dry whey manufacturers’ stocks were both down from a month earlier in August.

Dairy Product and Federal Order Class Prices Cheese, nonfat dry milk, and dry whey wholesale prices have been receding at various rates over the past several months, but they mostly appear to be finding a floor and potentially may moderately rebound. U.S. average milk continued on page 4

Milk and Dairy Products Production

Jun–Aug 2022

Jun–Aug 2021

2021–2022 Change

Percent Change

Milk Production Cows (1,000 head) Per Cow (pounds) Total Milk (million pounds) Total Milk Solids (million pounds)

9,420 6,067 57,143 7,341

9,474 5,992 56,760 7,239

-53 75 383 102

-0.6% 1.3% 0.7% 1.4%

Dairy Products Production Cheese American Types Cheddar Italian Types Mozzarella Total Cheese

(million pounds)

1,380 982 1,457 1,159 3,453

1,387 975 1,425 1,113 3,421

-7 7 32 46 32

-0.5% 0.7% 2.2% 4.1% 0.9%

Butter

456

451

5

1.1%

Dry Milk Products Nonfat Dry Milk Skim Milk Powder Dry Whey Whey Protein Concentrate

469 152 245 129

445 191 240 119

24 -39 5 11

5.4% -20.4% 2.1% 8.9%

Dairy Product Inventories

Aug 2022

Jul 2022

283 842 641 314 63

315 860 662 345 69

Aug 2021

2021– 2022 Change

(million pounds)

Butter American Cheese Other Cheese Dry Skim Milk Dry Whey

363 827 606 289 68

-22% 2% 6% 9% -6%

Dairy Market Report | October 2022 – 3

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Dairy Product and Federal Order Class Prices from page 3

prices are following the same basic pattern, while butter prices are still rising, at least until purchasing for holiday season sales wraps up. Class II, III and IV prices were more stable from August to September than in recent months.

Dairy Product and Federal Order Prices

Sept 2022

The annual rates of retail price inflation eased back slightly for most dairy products in September, reflecting similar moves in wholesale prices. Butter was a conspicuous exception, increasing by 26.6 percent from a year ago that month.

Aug 2022

Sept 2021

2021–2022 Change

NDPSR Dairy Product Prices Butter Cheddar Cheese 40-Pound Blocks 500-Pound Barrels Nonfat Dry Milk Dry Whey

$3.116 $1.950 $1.884 $1.983 $1.580 $0.490

$2.979 $1.976 $1.948 $1.970 $1.669 $0.505

Federal Order Class Prices for Milk Class I Mover Class II Class III Class IV

$23.62 $26.51 $19.82 $24.63

$27.89 $26.91 $20.10 $24.81

$16.59 $16.89 $16.53 $16.36

$7.03 $9.62 $3.29 $8.27

Retail Dairy Product Prices Fluid Whole Milk (per gallon) Lowfat Fluid Milk (per gallon) Cheddar Cheese (per pound) Butter (per pound)

$4.181 $3.808 $6.084 $4.718

$4.194 $3.888 $5.995 $4.699

$3.585 $3.165 $5.387 $3.568

$0.596 $0.643 $0.697 $1.150

Aug 2022

Jul 2022

Aug 2021

2021–2022 Change

$24.30

$25.70

$17.60

$6.70

Feed Prices Corn (per bushel) Soybean Meal (per ton) Premium Alfalfa Hay (per ton)

$7.24 $511 $343

$7.25 $468 $333

$6.32 $358 $242

$0.92 $153 $101

Feed Prices (per cwt of milk) Corn Soybean Meal Premium Alfalfa Hay

$7.77 $3.76 $4.70

$7.78 $3.44 $4.56

$6.78 $2.63 $3.32

$0.99 $1.12 $1.38

$16.22

$15.78

$12.67

$3.55

$8.08

$9.92

$5.03

$3.05

Milk and Feed Prices Producer Prices All Milk (per cwt.)

DMC Feed Cost* (per cwt.)

DMC Margin* (per cwt.) *DMC calculations are not revised

4 – Dairy Market Report | October 2022

(per pound)

$1.773 $1.641 $1.776 $1.487 $1.282 $0.534

$1.343 $0.309 $0.107 $0.496 $0.299 -$0.043

(per hundredweight)

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Milk and Feed Prices The August Dairy Margin Coverage margin was $8.08/cwt, down $1.84/cwt from July’s margin and generating a payment of $1.42/cwt for Tier 1 coverage at $9.50/cwt under the DMC program. This payment would cover about three-quarters of the single-year annual premium for that coverage. The margin drop resulted from an August U.S. average all-milk price, $24.30/cwt, that was $1.40/cwt lower from a month before and a $16.22/cwt DMC feed cost calculation that was $0.44/cwt higher than July’s. The August all-milk price was $3.00/cwt lower than the May price, which capped a straight 3-month run of consecutive record U.S. average milk price levels. The August DMC feed cost was $5.06/cwt higher than the October 2021 DMC feed cost and was the second consecutive monthly record for this dairy feed cost measure.

The three cost components of the feed formula have all generally contributed to its steady rise during the past ten months, but the price of corn was the main driver this spring, while soybean meal and premium alfalfa hay prices have taken over this lead role during the past two months.

Looking Ahead The August milk production report has once again changed USDA’s outlook on milk production over the next few months.

In its monthly World Agricultural Supply and Demand Estimates

Peter Vitaliano National Milk Producers Federation pvitaliano@nmpf.org www.nmpf.org

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(WASDE) October edition, a more expansive outlook was summarized by the comment “the cow inventory is raised reflecting a more rapid pace of expansion in late 2022 and the first half of 2023.” Just a month earlier, the outlook was summed up by “slower growth in cow numbers is carried through late 2022 and is expected to carry into 2023.”

In its defense, the department has just been following key indicators that had been pointing in anything but a clear and consistent direction over the past few months. Despite this more bearish sign for milk and dairy product prices, the futures markets are currently showing a rise in cheese and milk prices in the near future, likely due to the standard holiday season effect coupled with continued strong cheese export growth. Nonfat dry milk and dry whey prices are currently projected to slow their recent rate of decline and perhaps even to find a floor through the holiday season.

Butter prices are expected to peak this month, and then to fall off fairly rapidly thereafter. A modest rebound in milk prices is also expected to pull the DMC margin back up, potentially back above $9.50 per cwt during the closing months of this year. In sum, signals are still a bit ambiguous about the forces at work on milk prices. While weakness during the early months of the new year is a growing sentiment, USDA raised its WASDE milk price forecasts for 2023 and 2024 this month.

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.

Dairy Market Report | October 2022 – 5