Market Reports

Even as milk production expands seasonally, volumes are tending to run at or below prior year levels. This supports the notion that even though milk prices remain historically strong, the increased pressure caused by rising operating costs gives producers continued margin concerns.

Last week, Q2 Class III contracts summited briefly, but the air was too thin and they quickly pulled back from the highs. Class III futures tumbled early in the week, but on Wednesday they found their footing and began to plod upward once again.

Strong cheese and butter prices propelled the futures to new highs. U.S. milk output dropped to just over 17.5 billion pounds in February, 1% less than the year before and the fourth straight year-over-year decline. The January and February milk production shortfalls represent the steepest U.S. deficits since 2009.

Demand is robust from both manufacturers and bottlers though Class I demand is expected to wane in the coming weeks as schools begin to rotate through spring breaks. More universally, however, a persistent shortage of truck drivers and escalating fuel costs are exacerbating logistical challenges.

Dairy producers cannot afford to pay this much for feed unless milk prices remain high. The market is well aware that global dairy stocks are relatively low, and that output is shrinking. So, for now, milk prices are climbing nearly step for step with the feed market to deter further declines in milk production.

High feed costs and pricey energy will quickly add up on the farm. Feed and energy costs are even higher in Europe, which will further deter growth on the continent.