The leaves are changing, the first frost has arrived, and harvest is already nearing completion in some parts of the country. Attention is quickly turning to the holiday season with Thanksgiving approaching. Butter is flying off the shelves at grocery stores as consumers prepare for the holiday season, with cheese demand healthy as well. At the farm gate level, milk prices have improved versus the dismal levels noted a few months ago. However, is optimism warranted as farmers look ahead with concerns about tight margins lingering into the next several months?
From a milk production perspective, supply is not burdensome. August milk production fell 0.2% versus the prior year, marking the second consecutive month of weaker output. July production, initially reported as down 0.5% in the initial data, was revised lower to a 0.7% year-over-year decline. The August slide was anticipated, given the weaker farmer margins in recent months, a declining herd size, and lower milk per cow. Less volume from California and Texas has been persistent, impacting national milk output recently. Looking ahead, Rabobank expects milk production to be flat to lower throughout the end of this year.
National herd size was steady from July to August at 9.39 million head. During August, the dairy herds in California and Kansas shrunk, while those in Idaho, Iowa, and Michigan expanded. The U.S. dairy herd is down 54,000 head versus the March peak, but with slaughter rates slowing in recent weeks compared to summer, the herd size reduction trend will likely cease in the coming months.
Lower milk output has subsequently reduced the processing of many dairy products into the third quarter of this year. Total August cheese production was lower versus the prior year for the second consecutive month, again negatively impacted by less Italian-style output offsetting stronger American-style production. Output has been down year-over-year during four of the past five months but remains 0.2% higher on a year-to-date basis. Butter production dropped 2.1% in August compared to last year, breaking a 10-month streak of greater output. Cream availability likely tightened as milk production declined, causing less product to flow to churns. Combined nonfat dry milk/skim milk powder fell 14.4% for the third consecutive monthly decline.
Overall, some price optimism has emerged. Butter recently hit a new record high, following a similar upward trend versus one year ago and supporting the Class IV value. Slow but steady gains in the nonfat dry milk price are also positive for the Class IV complex, with producers outside of cheese-heavy regions especially likely to feel the benefits of the climbing price. Cheese has retreated slightly from its highs recently but has found a seemingly healthy equilibrium as supply and demand seem relatively balanced. With dry whey seeing improvement, Class III also noted slight support.
Margins are much closer to breakeven levels as we move into the last three months of this year versus the struggles in recent months, an improvement for dairy farmers. The worst of the pain has likely been felt, with a brighter outlook emerging for the coming months.
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(c) Hoard's Dairyman Intel 2023
October 26, 2023