The T.C. Jacoby Weekly Market Report Week Ending November 22, 2019

Sarina Sharp, Market Analyst for the Daily Dairy Report

Dairy Markets Absorbed Disappointing Data But Kept Right On Climbing

The dairy markets absorbed some disappointing data this week and kept right on climbing. November 2019 and first-half 2020 Class III futures traded at new life-of-contract highs today. The November contract settled at $20.36 per cwt., up 11ȼ from last week. The December through March contracts moved substantially higher, while deferred contracts were generally steady or a penny lower. Most Class IV contracts rallied at least a dime since last Friday. However, the November contract remained disappointingly low, at $16.65.



Higher prices and mild weather have boosted milk output. On Tuesday, USDA reported October milk production at 18.1 billion pounds, up 1.3% from a year ago. That matches the year-over-year increase reported in September but was noticeably higher than the mix of small gains and losses in the rest of 2019. Milk output topped year-ago levels in the seven largest dairy states. Production was up 2.8% year over year in top-ranked California, complemented by increases in Wisconsin (+1%), Idaho (+2.3%), New York (+1.8%), Texas (+9.3%), Michigan (+3%), and Minnesota (+1.8%).

The gains were driven by impressive improvements in milk production per cow. Milk yields increased in all but five states. Dairy producers in Washington, Idaho, Colorado and Arizona could not replicate the milk per cow achieved in October 2018 under nearly ideal conditions. The yield was steady in South Dakota. All of the other major dairy states reported much higher milk production per cow than last year, and the national average milk yield jumped 1.7%. The weather in November has been less accommodating, particularly in the Midwest and Northeast, where cows shivered in an early cold snap. It is unlikely that milk yields will climb by such a wide margin this month.

The dairy herd is no longer contracting. This was the more bearish part of the report, as it indicates higher potential milk production in the months to come. USDA revised its estimate of the September milk cow herd upward, now showing a 5,000-head increase in the size of the U.S. dairy herd from August to September. Dairy producers added another 5,000 cows last month, bringing the national total to 9.327 million head. That’s 40,000 fewer than in October 2018, but the yearover-year shortfall is narrowing. Despite stillhigh slaughter volumes, USDA estimates that dairy producers added 10,000 cows in just two months. They must be adding heifers at a rapid clip.

On the other side of the world, the trend is much different. Milk collections in New Zealand totaled 3.2 million metric tons in October, 2.6% less than the record-high volumes of a year ago. The year-over-year deficit in New Zealand offset more than 80% of the U.S. increase.

Despite higher U.S. milk production in October, inventories of cheese and butter in cold storage warehouses declined noticeably, signaling robust demand. The cheese stockpile dropped 31.6 million pounds last month to 1.374 billion pounds. The larger-than-typical draw-down pushed cheese inventories down 2.4% from a year ago. Inventories of American-style cheese are now 8.5% below the prior year. The Cold Storage report was released after the closing bell today, and is likely to support the market when it opens again next week.

Tighter stocks – particularly for Cheddar barrels – propelled the cheese markets to multi-year highs this fall. After a steep selloff last week, spot Cheddar prices made a more orderly retreat this week, and values remain historically high. The trade was relieved to see buyers bid the markets back up on Thursday, which allowed the futures to rally. However, spot Cheddar finished lower than it was last Friday. Blocks fell 4.75ȼ to $1.8425 per pound. Barrels closed at $2.185, down 1.25ȼ.

CME spot butter slipped 4.25ȼ this week to $2.025, a three-year low. Foreign butter remains inexpensive, and there seems to be plenty of butter to meet holiday demand. There were 237.7 million pounds of butter in warehouses on October 31, 2.8% more than the year before. However, the report reveals better demand than previously thought. USDA revised its estimate of September 30 butter inventories down noticeably, easing concerns about butter consumption earlier this fall. Furthermore, the September-to-October drawdown was the largest since the early ‘90s, suggesting that Americans’ appetite for healthy, natural dairy fats remains strong.

The protein products moved higher this week. Skim milk powder (SMP) enjoyed another strong performance at the Global Dairy Trade (GDT) auction. SMP climbed 3.3% to the equivalent of nonfat dry milk (NDM) at $1.46 per pound, the highest GDT value since August 2014. At the CME spot market, NDM rallied to a five-year high of $1.235 on Tuesday and finished at $1.22, up 0.25ȼ for the week. The whey market was once again a standout. CME spot whey climbed 2.75ȼ to 34.75ȼ, the highest value since September. Over the past two weeks, spot whey has vaulted 7ȼ, an increase of 26%. That’s adding substantial value to the Class III section of dairy producers’ milk checks.

With more cows lumbering through U.S. milk parlors than there were this summer, the market is understandably concerned that the U.S. will make more dairy products, especially milk powder. In milk surplus regions like the mountain states, that is almost certainly the case. But after many months of milk production deficits around the globe, the world can absorb the increase. Dairy product inventories have tightened, and it will take more than a few months of higher milk output to overcome all the painful pruning the industry has undertaken over the past two years. Meanwhile, demand continues to grow.

It was a quiet week in the grain pits. March corn settled at $3.785 per bushel, down 1.5ȼ this week. January beans closed at $8.97, down more than 20ȼ. Favorable weather in South America and concerns about the prospects of even the simplest phase of the U.S.-China trade deal weighed on the soy complex. Soybean meal futures dropped to their lowest levels since September, offering dairy producers another opportunity to purchase protein feeds at historically affordable values.



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