Let's Chat Markets is a weekly podcast presented by HighGround Dairy, hosted by analysts Alyssa Badger and Lucas Fuess. Every Friday, they sit down to recap the week in dairy markets and summarize recent reports and relevant news. The podcast can be found here, or wherever you listen to your podcasts. Subscribe so that you never miss an episode!

Alyssa: Happy Friday everyone! Or is it Saturday? Maybe Monday morning? Not sure—we heard from a lot of our customers that their favorite time to listen to sound of our voices is usually on their Monday morning commute. Either way, thanks so much for being here with us this week! Lucas Fuess and I had a pretty interesting week analyzing dairy markets as we released our monthly price forecast report on Monday, which was followed by our webinar on Tuesday for all of our customers. There was a Global Dairy trade event on Tuesday as well Europe released their milk production figures and export figures. We also got some insight into domestic demand here in the US as well as what milk production looks like here at home during July. Boy, I don’t even know where to start. How about US milk production since that’s fresh in your mind, Lucas?

Lucas: It was definitely quite the week now that you rambled all that off. I do think milk production is a good place to start, though. This data came out on Thursday afternoon so it's quite fresh as we record here on Friday. Total US milk output in July was just a little bit below HighGround expectations but still well above prior-year levels of 2% versus July of 2020. That was due to the heat that significantly impacted output across several states in the West. California production turning lower versus prior year and then a variety of other states as well seeing really weak milk per cow that pulled production lower. Oregon, Washington, Idaho, even into Colorado and even into New Mexico—some of those still above prior year but seeing some weaker output than we might have expected overall. The western states, though, do contrast with what we saw in the Upper Midwest as Minnesota, Wisconsin, Michigan, and other key dairy states in the region see very impressive milk yields even into the summer. Typically, looking at Wisconsin specifically, we would see production start to decline into June and July here after the peak of the spring flush in May but July was just slightly lower versus June. Not really seeing much of a seasonal contraction in the Upper Midwest. That means that all these reports of ample milk are certainly true with plenty of milk across the Upper Midwest. I do think also it's important to kind of look ahead to what we think is coming here in the near term months. We are watching a few things in that area—I think primarily the herd size has definitely stopped growing. We saw that shrink in both June and July. I think we might continue to see that tick slightly lower here into the fall, primarily due to tighter margins, partially due to high feed costs, and partially due to these milk prices that just are not necessarily profitable or not overly profitable for a lot of farms. As farmers cull cows that are unprofitable, that will tighten things up a little bit but other things like switching out rations and trying to cut costs here will also reduce milk. That’s not to say that we reject any year-over-year declines into the coming few months here but into 2022, I think we could be looking at kind of flat milk production depending on how this settles out. The only thing I will add here is yesterday morning we got news that USDA is planning another direct payment, direct cash payment, to dairy farmers. However, it is only for the first five million pounds of milk, which means that very small dairies—up to the 200 to 250 cow herd size level—will benefit the most. USDA was intentional with this. They announced it in Vermont with Senator Leahy so a little bit unexpected there, I wouldn't have said that this administration would necessarily be rolling out yet another direct payment but from a milk production standpoint that will keep some of these smaller dairies in business for a little bit longer and is borderline supportive to milk production in the end.

Alyssa: Well thanks for that recap, always appreciated. Is there anything to glean from the commercial disappearance data that was released by the USDA? How does the domestic demand look here in the US?

Lucas: Yeah good question. I think just a few key highlights here. This is of course June data so it's a little bit delayed. From the cheese perspective, it was almost identical disappearance versus prior year. That was driven primarily by American cheese disappearance, which was higher versus prior year yet again, but opposite non-American styles that dipped just slightly below last year. Butter is kind of on-trend throughout the entirety of the second quarter, a little bit weaker versus 2020. That is influenced by the strong retail butter demand that we saw during the early months of the pandemic last year. I think maybe most notably from this data is really weak nonfat dry milk domestic disappearance. So, while exports remain robust and we are still on track to see a record nonfat dry milk export year from the US, domestic demand really weak here—the weakest June on record. This data goes back to about 1995 or so, so a few decades of data in there. I think part of that is due to plenty of milk availability, cheese plants not necessarily needing nonfat to fortify with, and I think there is also just some early summer hesitation here of waiting to see where this price will go. If people were waiting to buy domestically, they were not rewarded into July or August as the price has been fairly steady around that $1.25 mark over the past few weeks.

Alyssa: Awesome. Backing up to the beginning of the week, there was a positive Global Dairy Trade event. That was after eight consecutive negative trends on the average winning price up until this week. Fats and skim milk powder led the way there though cheddar prices were also quite strong. However, New Zealand's flagship commodity, whole milk powder, remained negative with c2 regular whole milk powder falling 1.5% from the prior event. I think it's important to continue to remind ourselves that August is a very seasonally low-participation month for China so it's not unusual to see weaker price action. But, what was interesting was that Africa and Latin America stepped up to fill demand and kind of helped to prop up prices on both fats and powders this past week. Rumors continue to swirl that New Zealand suppliers are highly committed off the auction so it will be interesting to see how these Global prices shake out in Q4 if those rumors are certainly true.

Lucas: Yeah it was interesting to try to dig into some of that Fonterra data there and see exactly what that means for global prices here in the coming months. I think the only thing to add, Alyssa, just briefly on the European markets: after May’s 2% milk production gain, we saw that tighten a little bit into June. EU plus UK milk production up just 0.8%. And then, looking at those weekly figures that provide us insight into trends into July and August, I think probably further tightening as well. Both data from France and Germany show weaker output from those two key European countries.

Alyssa: Perfect. Well, Lucas it's so nice to finally do an episode together! We've been like two ships passing in the night. 

Lucas: Between vacations and I, at least, had my first—I don't know if I can call it post-covid—maybe mid-covid business trip last week, so it was great to see if you were there! And if we didn't get to connect, of course feel free to reach out.

Alyssa: Perfect, thank you so much. Everyone, please enjoy the rest of your day—we will be back on here next week to chat dairy markets!

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