Downside Dairy Demand Risks Face Modest Supply Growth

Milk supply caught up to prior-year levels in June and surpassed them in the months that followed despite extreme heat and drought across most of the country. YOY supply growth should remain positive through the end of 2022, albeit against low production levels of late 2021. Meanwhile, all eyes are on demand, both domestic and abroad, for signs of weakness against a challenging macroeconomic backdrop.

At 9.43 million head, the U.S. milk cow herd is near the mid-point between the recent highs of 9.51 million head in June 2021 and the lows of 9.37 million in January 2022. While the factors to watch create feasible scenarios that could return herd size to either of those points in the coming months,

I expect a modest increase in cow numbers before plateauing somewhere in between, resulting in a 1.5% increase in milk production YOY in Q4 2022, and 2% YOY in the first half of 2023

Heading into the holiday season, retailers do not want to take the chance of being caught short-supplied with cold storage stocks down 21% from July 2021 to July 2022. In response, butter prices hit an all-time high in October just below $3.27/lb on the CME spot market. Prices are likely to remain elevated until holiday demand is passed, but when butter prices fall, they tend to do so quickly.

Since March 2020, total dairy demand has proved its resilience. The dairy consumer price index (CPI) surged to 16.2% above a year ago in August and remained elevated at 15.9% in September, but the impact on total domestic demand has been muted. Demand may shift from foodservice to retail, and consumers may forego fondue in favor of easy mac, but overall demand for dairy is unlikely to collapse.

Cheese has benefitted from solid exports. Although a strengthening dollar is dulling some of our competitive edge, U.S. dairy products are still at a discount to most of the world due to our stronger production and stocks relative to other dairy exporting regions. Demand should remain strong enough to keep prices relatively supported but not without downside risk. Farm margins are expected to remain sufficient, but with milk prices teetering near break-even levels, production growth will be modest.