Guest Columns

Perspective:
Dairy Markets

What’s in store for second half of 2024 for U.S. dairy markets

Mike McCully

Mike McCully is owner of McCully Consulting, South Bend, Indiana, and contributes this column for Cheese Market News®.

Given the price volatility in recent days, it’s difficult to forecast out three to nine days, let alone three to nine months! Dairy market dynamics have deviated from historical trends in some cases. The U.S. is on a nine-month stretch of year-over-year losses in milk production, which typically would push prices well above average. However, that hasn’t been the case this year except for butter and whey proteins. While normally increasing at a steady pace, demand has been notably weaker, both in domestic and export markets. Throw in the unknown impacts from the Bovine Influenza virus and looming expansion of milk processing capacity, and it’s a lot to digest when developing an outlook for dairy markets in the second half of the year.

On the dairy farm, margins have been tight in some parts of the country while farms in other regions are relatively better off. The regional split has been driven by raised versus purchased feed and milk utilization.

Even though Class III milk prices averaged $16.27 per hundredweight over the last six months, the all-milk price averaged close to $21, helped along by higher components, especially butterfat. The federal milk marketing order (FMMO) average mailbox milk price has lagged the all-milk price by around $1 per hundredweight in recent months, and other deductions could result in a lower net price for the farmer. Feed costs are down from last year, but farms might still be feeding higher-cost grain and hay from last year. Eventually, the lower feed costs will help improve margins and foster an expected modest expansion in milk production in the second half of the year when year-over-year comparisons become easier. Not everyone believes this will happen, with some industry predictions pointing to tighter milk supplies later this year.

Cheese markets had been stuck in a $0.25-per-pound range since last November, spending most of the time in the $1.40s and $1.50s. A bullish export report got things moving higher, and then a combination of factors pushed prices into the $1.70s this week. Forecasts and futures have been indicating higher prices as the year went on, but the speed of the rally caught many by surprise. This rally could be short-lived, and prices could drop back into the $1.50s-$1.60s for the balance of the second quarter. Export orders have been strong given low U.S. prices, but that has changed quickly in the last week. This could be a replay of last year when exports picked up when prices were low in the summer, but then after prices rallied, shipments fell off. My forecast has been for cheese prices in the $1.70s-$1.80s in the second half of the year based on a rebound in demand. If production picks up as expected, that might be enough to satisfy any demand growth later this year.

Whey markets have seen strong prices for high-protein whey protein concentrate (WPC) and whey protein isolate (WPI), but more stagnant prices for WPC 34, sweet whey, lactose and whey permeate. There are signs of early weakness in the WPC 80 market, which is expected to put some downward pressure on prices in the second half. However, the WPI market is firm, with low stocks and good demand. In addition, more production coming online in 2025 could keep buyers from getting too aggressive as next year approaches. Overall, whey product prices are expected to trade near current levels throughout the year.

Milk powder prices have been in a narrow range for the last year, bouncing between $1.10 and the low $1.20s. Global demand has been weak with few signs of improvement. In the U.S., production and stocks have been well below year-ago levels. However, some of the losses could be explained by higher condensed skim milk usage, thereby reducing production and demand for nonfat dry milk. Buyers have been well covered since last October but will have to come back to the market for Q3-Q4 coverage soon. This is supportive to prices over the next few months; however, the fundamentals remain weak, and buyers don’t have a need to get very aggressive at this point.

And then there’s butter. For buyers, the last several months have been harrowing as prices kept moving higher on seemingly neutral to bearish supply fundamentals. However, the other side of the equation, demand, has been bullish. Domestic butter sales got off to a strong start with solid sales through Easter as well. Less bulk butter availability, nervousness about second half supplies and memories of $3.25-$3.50 butter the last two years have kept the market tense. It’s not a stretch to expect $3-plus butter this year, but the question is how much will the “plus” be? The dynamics that drove prices to new highs in 2022 and 2023 are still here in 2024. Butter has a history of being unpredictable, and this year could be another example of it.

Aside from the regular wild cards — weather, crop/feed prices, economic conditions — there are questions about how robust both supply and demand can be later this year. On the supply side, heifer numbers are at historically low levels, replacements are expensive and the cost to expand a dairy farm has increased dramatically in the last several years. One of the main questions circulating in the industry is, where will the milk come from for the new plants being built? Some of the factors driving weaker demand are ones we haven’t seen before. How much less dairy are people consuming that are on weight loss drugs? Another key driver of dairy sales has been population growth. It used to be milk production growth of 1.5% or so would keep pace with population growth of around 1% plus export growth. However, in recent years, population growth has slowed to 0.3% to 0.5%. With higher component milk and lower exports, the U.S. doesn’t need 1.0% to 1.5% milk volume growth. Imagine where prices would be with those growth rates over the last nine months. Overall, milk and dairy prices are expected to see modest increases into the second half of the year, with a more uncertain outlook for butter prices.

Peeking ahead to 2025, and the market will have to find milk to supply the new plants and expansions as well as finding new homes for the products. The industry is consolidating, and the pace is expected to quicken in the next few years as pressure is put on both farms and processors. The amount of investment is unprecedented, and a strong sign for future dairy growth. However, there will be bumps along the way.

CMN

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

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