Dairy prices finally acting rationally?

After a solid rally and underreporting of herd statistics in the first half of the year, corrections in USDA cow numbers, solid inventories of dried powder, and waning demand are finally bringing welcome relief to overheated dairy markets.

We previously addressed the systemic underreporting of herd across the U.S. that helped support dairy prices through the Northern Hemisphere flush. In hindsight, the nationwide herd was continuing to expand over the first six months of the year, and milk output was higher than previously reported. As most of the contraction occurred in H2 2021, cow numbers and output will likely fare better in H2 2022, raising milk production estimates just as inflation and demand destruction may arise. Producers, traders, and brokers, who all had been very proud of their product prices, are finally changing their tune and rushing into the market to clear inventories. Noticing slower demand, however, buyers are less bullish and less willing to pay top dollar to secure loads.

Dairy proteins and nonfat dry milk are leading the way lower, with prices down a good $0.30 to $0.35 per lb 20 percent in the last two months on slowing demand. Inventories across the country are very healthy at 317 million lbs, the second-highest level for June over the past five seasons.

Although bulls may point out that we are down 32 million lbs from June 2021, against a backdrop of slowing demand and growing concerns over recession, stocks appear ample vs. market demand. Even global markets are correcting lower, with the aggregate Global Dairy Trade auction losing a comparable 20 percent since late June.

Skim milk powder has lost $1,000 per MT off its yearly high, and all product categories have been rapidly declining. Nonfat dry milk prices have finally returned to a more sensible valuation (below $1.50 per lb for contracts after September), although butter is still in the early stages of a correction lower. World butterfat values are down nearly 30 percent, and this may be a harbinger for futures prices in the U.S. Key figures to watch will be the upcoming cold storage report and U.S. butter stocks.