April market report: Is this the bottom? What happens now?


We struck a somewhat optimistic tone when we reported on increased interest in American cheeses from buyers abroad last month.

It led us to believe there is potential for some good to come out of several months in a row of bad news for dairy markets.

This month, we’re taking stock of the situation as the peak of the spring flush nears. Our assessment? We’ve shared nothing but bad news month after month, and it looks like there’s no more bad news left.

That said, it doesn’t mean we’re preparing for an imminent boom across the industry.

The milk supply situation isn’t as dire

As we look at dairy markets across the U.S. and around the world, we acknowledge weakness in most markets just as we have month after month since before the beginning of this year. But we’re heartened to suspect that all the signals pointing to trouble in the industry have probably already been sent.

By this time of year over the last couple years, we were already scrambling in search of capacity for a milk supply that wasn’t traditionally so long so early in the season. This year, things seem rather well-kept. While USDA data show milk production increased again in February, those increases are localized to the west and southwest. That jives with new production plants or increases in plant capacity going online in Garden City, KS; Clovis, NM and Canyon, TX.

And even though California, the nation’s highest-producing dairy state, clocked a 3.5% gain in production over last February, that’s 3.5% over what was a rather dismal month last year.

More importantly, milk isn’t as long in the Upper Midwest, which suffered greatly over the past year due to too-high production without available plant capacity. Production there is still higher than we’d like to see, though, and that’s cause for a little worry.

Butter and cheese markets offer no surprises

Meanwhile, cold storage reports show butter inventories are building. However, that doesn’t really worry us. Over the last few months as other commodity markets —namely powder products— floundered around basement prices week after week, butter has lately fallen into a stable range on either side of $2.20 on the CME. At present, we don’t believe a modest buildup of butter is cause for alarm.

We take the same attitude toward cheese markets. Storage reports tell us that cheese inventories are rising. But it’s April. Inventories always inch upward as the peak of the flush approaches.

The bottom line: No one is panicking.

The bottom is in

No one is panicking, but we hesitate to say we’re bullish in any respects.

It’s more that there’s nothing more to be bearish about. From what we can tell, all the negative energy fueling weakness in the markets has been exhausted.

So what would we need to see before we say we’re back on the upswing? Consider these points:

  • Milk production would truly have to subside, especially in the Upper Midwest. Almost by default, dairy demand increases around 2% each year. Two months in a row of 1.8% increases in milk production means production is effectively flat. However, given our persistent oversupply, flat production is still too much. We’d feel better seeing that number get closer to zero, or even go negative.
  • Similarly, we’d need to see true attrition in dairy herds to help tighten things up. And while more cows were sent to slaughter this February compared to the same time last year, the USDA still reports a net increase in cow numbers.
  • Domestic demand for dairy products needs to increase. Until we see retail data showing more people are buying dairy products at grocery stores or in restaurants, we won’t be convinced a market turnaround is imminent.
  • Exports have picked up speed lately, and this would need to continue. As we noted last month, sustained low cheese prices in the U.S. are the likely driver of increased exports to markets normally served by European producers. The trend looks positive through the end of spring as many export deals have already been made for April, May and June. However, with NAFTA’s future still in question, we aren’t ready to bank on an extended export boom. We believe any surge in exports to neighboring North American markets this spring and summer could be a calculated buildup of inventories in case trade negotiations break down for good.

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