Earlier optimism for U.S. milk prices has taken a turn for the worse due to strong milk production and slowing dairy exports. But dairy economists at the University of Wisconsin aren’t counting out a potential rally in the cheese market.
Milk production in the U.S. was 2 percent higher in July and August year over year, and stocks of dairy products are fairly high, said university economist Bob Cropp during his latest Dairy Situation and Outlook podcast.
“That 2 percent is quite a bit of milk, and markets are responding to some of that,” he said.
Prices for butter, cheese and dry whey have all dropped.
Futures prices on Class III and Class IV milk have dropped substantially in the last month. CME contract prices for both pushed $17.50 per hundredweight at the start of August and dropped below $16 for September.
Part of the downward pressure on prices is that buyers are done with their holiday shopping and are weighing inventory and production against sales opportunities, said Mark Stephenson, also a dairy economist at the university.
Another factor is that U.S. exports have slowed after increasing for 12 months, particularly for nonfat dry milk. And there’s a lot of competition from Europe and New Zealand, Cropp said.
“Where the cheese market is right now, we’re dropping below $16 Class III price here October, November and December — unless we get a rally,” he said.
And that can happen. When prices are low, buyers often sit out of the market to see if they will go lower, he said.
Last year, the cheese price was about $1.50 a pound in early October and went to more than $1.92 in November. That sent the Class III milk price from $14.50 per hundredweight to $17.40, he said.
If there is a rally, it’ll be because of exports. Domestic sales have been pretty good, but the biggest portion of holiday buying is over, Stephenson said.
“I just don’t see any way for that to build very much enthusiasm unless we have the kind of opportunities for sales of exports. So we’ll have to look for the rally with exports,” he said.
Cropp, however, is not hopeful on that front, particularly for milk powder.
World milk production is just starting to grow. Looking to next year, the export situation could have a dampening effect on prices, he said.
Prices for Class III and Class IV in the futures market are in the high $15s for the rest of the year and not returning to the $16 level until July of next year. That’s a long way from prices possibly in the high $17s the economists were forecasting a month ago.
“I still think the cheese market might improve a little bit, so I’m staying in the very low $16s … for the last quarter and even in next year, possibly. But it’s going to take some strength in the cheese market,” Cropp said.
USDA is expecting milk production to grow 2 percent next year, and exports could be challenging if production picks up in New Zealand and the EU. So average milk prices next year might not be much better than this year, he said.