May 9, 2016

Hold on Tight for a Bumpy Ride

 |  By: Mary Ledman

M ilk production in the U.S. is seasonally rising and posting higher-than-trend year-over-year (YOY) gains, according to USDA’s March Milk Production report. U.S. milk production increased 1.8% on an average daily basis in March compared with February. At 18.4 billion pounds, March’s milk output was 1.8% greater than 2015 and the high- est percentage YOY gain in output since May 2015. Greater YOY production is driven by a 1.6% increase in output per cow and a larger dairy herd. The U.S. dairy herd, at 9,325 million head, grew by 10,000 in March and stands at the highest level since December 2008.

Regionally, milk production gains are more pronounced east of the Rockies. In particular, the highest YOY percentage gains were posted in South Dakota, at 10.9%, followed by Michigan, at 7.7%, New York, at 5.5%, and Wisconsin, at 5.3%. Wisconsin posted the largest volume gain in YOY milk production, up 129 million pounds, followed by Mich- igan (66 million pounds) and New York (65 million pounds). California reported a 2.4% (90 million-pound) drop in YOY milk output, along with Florida, down 5.7%, and New Mexico, with a 2.9% drop.

U.S. Herd Keeps Growing. The latest Milk Production report provides little incentive for dairy ingredient buyers to rush out and gain coverage. Arguably the March Milk Production report is like looking in the rearview mirror, but it does confi rm the retreat in most dairy mar- kets in March and continued weakness extended through April. At press time, with the peak in U.S. milk production nearly a month away (the second half of May), it is possible the dairy markets will test new lows for the year. The growth in the U.S. dairy herd is perhaps the most bearish news in the marketplace, which was not entirely unexpected. With ample supplies of lower-cost feedstuffs and energy, and several years of favorable margins and reducing debt, many producers are increasing output to enhance cash fl ow during this period of low milk prices.

Futures Move Lower. CME Group milk and dairy product futures moved lower on the heels of the March Milk Production report. Class III futures closed double-digits lower shortly before the report release, despite an 8¢ jump to $1.45 per pound in the barrel cheese price and a $1.25 gain in the block market to $1.44. The CME spot butter market fell 0.03¢ on April 20 to $2.04 per pound. USDA reports butter processors say stocks have grown to the point they do not want inventories to increase any further and are working hard to manage current levels. It is likely butter manufac- turers do not want to take the price risk of building stocks any further without a committed buyer for the product.

Strong domestic demand has mitigated downward price pressure in the cheese and butter market. However, stronger production, weaker exports and increased imports have contributed to ample stocks, which are expected to weigh heavily on the markets through midyear or longer.