The KDM Dairy Report 05/31/2019

Dairy Market News reported this week that while nationally cheese stocks are still heavy, some Midwest producers were indicating barrel demand was outpacing supplies this week. While there is still plenty of milk flowing to keep most facilities across the country running as hard as they want to, manufacturers have been reining in production schedules in order to manage stocks. With sales continuing to improve and another eye on a potential drop in milk supply later this summer, buyers may have had enough motivation to pick up the loads they did during this week’s spot market. Despite cream supplies continuing to tighten, butter futures finished the week lower. We think that trend will reverse as summer heat works to lighten components and the milk supply, but tastes may be changing too. Butter imports from Ireland have surged in the last few years, replacing demand for domestic product. With the extraordinary delay in planting, hay and feed supplies are becoming a growing concern. Storms battered the grain states this past week, with more precipitation in the forecast. Dry whey futures climbed higher again this week. Despite the impact of the swine flu virus, international demand has begun to pick up again, helping to stabilize the market. Farms continue to remove cows at a quicker pace. For the week ending 05/18, dairy cow slaughter was up 6.8% vs. the same week a year ago.

In years past, a drop in the barrel price like we saw this week would probably have resulted in a strong sell-off. Not so this week. As the global milk picture begins to get clearer, there seems to be a growing consensus that the milk supply will be constrained for some time to come. Output is struggling in the EU, lower in Canada, Oceania and South America. The recent announcement for the potential of a fresh set of tariffs with Mexico could temporarily halt the optimism, but a collapse in dairy product prices would only delay a rally as more farms would be forced to exit. Producers should continue to use dips in the market to purchase upside insurance on milk already sold, Q4 and beyond. With most 2020 contracts trading in the low to mid $16’s, we still believe the upside risk is greater than the downside risk and would refrain from selling much, if any milk yet in those months. The southern parts of the country from east to west are already past peak milk output. Warmer weather has arrived in the Midwest and Northeast, which should start to rein in output in these regions as well. The next 30-60 days will tell us a lot more about how well milk production in the U.S. holds up. Have a great weekend!