The dairy market has experienced disappointments in recent weeks, with the strength of the market two weeks ago suggesting a potential bottom and higher prices over time. The recent price rally of milk futures was influenced by the bullishness of the January Milk Production report, which led to an increase in underlying cash prices. However, the market must prove itself before a long-term trend develops.
The January Milk Production report showed a significant decrease in cow numbers from December, which traders anticipated. Traders were ready to buy into the market, anticipating a repeat of the previous year’s record high milk prices. However, cow numbers dropped by 23,000 head and milk production declined by 1.1%, with production per cow declining 7 pounds from the previous year. This should be considered bullish, but it seems too early to generate shortage concerns. Lower milk production at a time of lower demand does not result in a tightening supply.
Underlying cash prices have not moved in tandem with milk futures, as trader perception is moving the market. Both block and barrel cheese prices are higher than they were a week ago, but this would have provided support under Class III futures if not for the weakness of dry whey. Dry whey is currently the anchor on the market, and Class IV futures have fared better.
Spot milk prices are vastly different from a year ago, with extra milk supplies tighter than a year ago. Manufacturers have sufficient milk to maintain production schedules and satisfy their obligations. If the pattern of declining cow numbers and milk production continues with spot milk supplies tight and at higher prices, it could result in stronger milk prices during the second half of the year. The extent of price strength will depend on both domestic and international demand levels.
