After prices rallied sharply in November, the dairy market seemed dominated by bullish buyers and tight heifer supply. However, when the market is leaning so hard in one direction, with brokers/distributors only seeing dollar signs, it may be a time to pause, reflect, and perhaps adopt a contrarian view.
Domestic prices for butter have rallied north of $2 per lb, and NFDM has approached $1.60 per lb, substantially boosting farm revenue and suggesting that dairy operations could start adding head to their herd in early 2022 ahead of spring flush. Simultaneously, surging Omicron cases are raising new concerns of shutdowns and reduced travel. As countries hit the pause button on year-end celebrations and possibly travel restrictions, overall economic activity remains in question.
All that being said, dairy markets seem overextended to the topside and overdue for a price correction lower as we turn the calendar to 2022. Two events from last week suggest that just such a correction is nearer than many may think: USDA’s December milk production report and Fonterra’s Global Dairy Trade auction.
After a three-month slump, milk yields have finally turned the corner and are now on the upswing, with milk per cow per day improving to just over 64 lbs of milk, a new record. Although herd the did decline last month by a further 10,000 heifers, the pace of culling seems to be decelerating and nearing a bottom.
Improved prices and a higher yield increase the probability that dairy farmers may start adding head and building herd, which we expect to see in Q1 2022. Total milk output in the U.S. is still up 1.5 percent YTD, even with the herd at its lowest level in twelve months.
Meanwhile, overall international prices saw their first decline since August as buyers backed away from the market on Omicron fears. New Zealand is at the height of its season, and China appears to have largely rebuilt its stock levels in recent months.
Although prices for most product categories advanced, overall trade-weighted prices retreated by 1.5 percent, with whole milk powder prices falling the most (down 3.3 percent). This could be interpreted as buyers reaching a point of exhaustion and overextended prices in need of a pullback. Interestingly, prices for skim milk powder (SMP) are only $100 (4.5 cents per lb) below those for whole milk, perhaps signally that SMP is nearing a top.
U.S. daily milk yield
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