Guest Columns

Dairy Markets

Cheese rally demand-driven, but supply risks still loom

Nate Donnay

Nate Donnay is the director of dairy market insight at StoneX* Group and has been applying his interest in complex systems and statistical analysis to the international and U.S. dairy markets since 2005. He contributes this column exclusively for Cheese Market News®.

It feels like bird flu is having a big impact on U.S. milk production and dairy prices, but the impact still isn’t showing up in the actual supply and demand data. In our discussions with farmers in early June, it feels like the disease is everywhere and everyone has it — or soon will. U.S. dairy prices have generally been trending up since early or mid-April, with July Class III and Class IV milk futures flirting with or over $20 per hundredweight.

The number of confirmed cases published by USDA has continued to increase, and the virus is showing up in more states. As of June 20, USDA had confirmed cases on 115 dairy farms across 12 states, with Minnesota, Iowa and Wyoming being recently added. We know there are many cases that haven’t been confirmed by USDA. It’s very hard to put a number on it, but the true number of infected farms might be five times higher than the official number — or more.

Given the rally in the market and all the anecdotal comments around the spread of the virus, the industry was expecting milk production for April to come in weak. We forecasted April U.S. milk production to fall 0.9% from last year, and the fear was production was going to be even lower than that. Instead, milk production for April came in higher than forecast, only down 0.4% from last year, and USDA revised up production for March.

The components in the milk (especially fat) were also very good for April. It is tempting to write off the report and argue that milk production is actually weaker than that, but the April Dairy Products report showed that we produced 1.8% more cheese than last year, 5.3% more butter, 7.3% more hard ice cream, 4.7% more sour cream and 10.9% more yogurt. If anything, the April Dairy Products data would argue that milk production in April was even stronger than USDA initially reported.

How do we square the spread of bird flu with the fact that milk production actually improved in April?

First, there were only 26 farms with confirmed new infections in April. If the true number of infected farms is five times higher than that, then there might have been 130 farms infected. There are about 26,000 licensed dairy farms in the country, so it might have been 0.5% of the farms infected. On the high side, an infected farm could lose 20% of their production for the month. It stands to reason then that if 0.5% of the farms are infected and they lose 20% of their milk, it would reduce total U.S. milk production by 0.1% for the month. That assumes the farms are averaged sized. If we assume the virus is hitting mostly large farms (which is reasonable given the states impacted), then maybe bird flu knocked 0.2% off milk production for April. Either way, it is a relatively small impact.

It is possible that the spread of bird flu accelerated in May. The number of confirmed cases increased from 26 in April to 44 in May. However, mandatory testing of lactating cattle moving across state lines started on April 29, so there was probably more testing done in May, which led to more confirmed cases. In this case, it’s hard to say whether the spread accelerated or if it was just due to more testing. But what does appear clear: We likely need to see something like 500 or more farms infected in a single month to have a significant impact on national-level milk production.

If it isn’t supply driving prices, then it must be demand. Domestic cheese disappearance was very weak back in January and February, down more than 3.5% year-over-year during both months. That rebounded to 1.0% growth in March and 0.6% in April. When you combine that with exports that hit a record high in March and were the second-highest on record during April, I think there is a strong argument that much of the price strength we’ve seen in cheese has been demand-driven.

Bird flu — and other on-farm issues — may still have a big impact on milk production and consequently dairy prices, but so far, there isn’t much evidence that it is driving the current price strength in the market. That said, it’s safe to say supply concerns are an underpinning factor in the market today. Often, perceptions of problems are enough to move markets initially.


The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of StoneX Financial Inc. (“SFI”) or StoneX Markets LLC (“SXM”). SFI and SXM are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Contact designated personnel from SFI or SXM for specific trading advice to meet your trading preferences. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by SFI or SXM.

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