The market received two pieces of data over the past week that have lent critical insight into April supply and demand trends. USDA released both the Milk Production report and Cold Storage report, with valuable insights to glean from within.
April milk output was slightly bearish as the year over year gain was stronger versus HighGround expectations for the month. Production jumped to the sharpest year over year percentage gain since November as output kept climbing seasonally in early spring, but the increase received a helpful boost from a prior year comparable value that was impacted by pandemic-induced restrictions. It was the 11th consecutive year over year gain as most key states reported improved output. The increase was boosted by California’s gain that saw output climb further into April opposite the average seasonal peak usually seen in March in the state. The data signified that milk is abundant across the country and widely available wherever needed. In a change from recent years, expanded product production capacity has reduced milk dumping that otherwise would have been rampant with gains of this magnitude. March volume was revised higher by 0.1%, pushing the gain to 1.9%.
Comparing data versus the prior year will be difficult throughout Q2 as COVID-related impacts sharply skewed various supply and demand factors one year ago. As a reminder, many cooperatives and processors in most regions throughout the country implemented production restrictions that took effect in mid-April after dairy demand plummeted at the beginning of the pandemic. Milk dumping last year was extensive and attracted significant media attention. With foodservice sales almost non-existent, dairy products poured into warehouses or cold storage facilities.
Opposite April 2020, this year's Cold Storage report showed a sharply different inventory trend last month. Total cheese stocks declined in April, a rare occurrence during the Spring Flush milk production period and especially notable following expanded cheese production capacity that has come online in recent months. It was the first April stocks decline since 1993 and signifies that cheese demand was extraordinary in the month, likely driven by both retail and foodservice channels as the economy quickly reopened. In butter, the stocks increase was aligned with pre-report expectations. It was the strongest monthly increase since January, but the 28-million-pound climb was below the April 2016-2019 average increase (measured with the pandemic-impacted 2020 change removed to minimize pandemic skew). Inventories remain burdensome, pushed higher following robust production in recent months.
Dairy market participants also have their eyes on grain markets, which have received additional attention over the past two weeks as prices have tumbled from the mid-month highs. After peaking on May 7 at $7.32 per bushel, July corn fell to $6.20 by May 25 before regaining some ground the past two days. It was the lowest close for the contract in more than one month. Soybeans lost more than $1.00 per bushel in a similar period, while soybean meal fell to a 2021 low this week. Dairy farmers across the country are watching feed costs closely as they look for opportunities to lock in a profitable margin. The feed cost increases through mid-May were concerning, with the expected dairy income over feed cost (IOFC) tightening to levels not seen in years and threatening profitability. Corn and soybean price declines in the past two weeks have reduced expected feed costs and provided opportunities for farmers to lock in better prices for feed needs in the coming months.