The dairy markets had a difficult start this past week. Sentiment improved by Friday but the damage was done. Chicago Mercantile Exchange spot Cheddar barrels decreased Feb. 3 to an 11-month worst – and tested the same waters again Feb. 5. But they regained much of the ground they lost to close this past Friday at $1.4775 per pound, a decrease of 2.25 cents for the week. Block supplies are not so burdensome and it shows. They increased a penny this past week to a respectable $1.93.

The market is still suffering a hangover after over-indulging in October and November. Extremely good cheese values late this past year boosted Cheddar supplies and weighed on cheese demand. After robust Mozzarella production most of this past year, cheesemakers in December shifted milk into Cheddar vats. Cheddar production reached an almost two-year best and was at more than December 2018 by 1.7 percent. In contrast Mozzarella output decreased 1.6 percent from the prior year. Increased Cheddar output likely prompted the steep selloff in CME spot Cheddar barrels. Discounts in the spot milk market in the Midwest suggest that Cheddar output is still formidable.

U.S. cheese exports decreased 9.3 percent from the prior year in December. Cheese exports are likely to remain soft for a few months more, until more-competitively priced product can make its way to the port. All told the United States exported 789 million pounds of cheese and curd in 2019. That’s 2.7 percent more than the prior year.

The butter market softened further. Spot butter decreased 6.75 cents to $1.8325. Butter production increased 4 percent from the prior year in December, increasing full-year output by 0.8 percent to the largest annual total on record. Demand is simply not keeping pace and butter values continue to slump. U.S. butter has decreased far enough to perhaps stave off another wave of imported butterfat.

There is more than enough cheap domestic cream for the market to absorb. The powders fared much better. CME spot whey increased 2.5 cents to 39 cents per pound, its best value since September. The whey market has good reason to rebound. Chinese whey imports appeared to stabilize in December. They were just 1.7 percent less than in December 2018. That suggests that demand destruction wrought by African swine fever may be starting to ebb. Furthermore Chinese importers have turned their attention back to the United States after tariffs were waived. Chinese imports of U.S. whey increased 33 percent compared to December 2018. The data and the détente bode well in 2020 for U.S. whey exports to China.

Processors are flush with milk throughout the West; the driers are running hard. Nationwide production of nonfat-dry-milk and skim-milk powder in December reached 217 million pounds, the greatest monthly total since April 2018 – and 12.5 percent more than the prior year. Manufacturer stocks of nonfat-dry milk increased 26 million pounds, the largest November-to-December increase since 2012. But year-end nonfat-dry-milk inventories were the least since 2016, about 13.6 percent smaller than they were at the end of 2018.

Milk-powder values moved decidedly less Feb. 4 at the Global Dairy Trade auction. Whole-milk powder decreased to a six-month worst price, decreasing 6.2 percent from the previous auction. Skim-milk powder decreased 4.2 percent, to the equivalent of nonfat-dry milk at $1.41 per pound. Fears that the coronavirus would continue to spread likely weighed on Global Dairy Trade values as the market priced in the risk that Chinese consumption will falter.

But the fundamentals of the milk-powder market are otherwise sound. Global stocks are significantly tighter and China’s appetite remained formidable throughout 2019. Chinese whole-milk-powder and skim-milk-powder imports in December were more than the prior year by 65 percent and 29 percent, respectively. China brought in a record-breaking volume of skim-milk powder in 2019. While whole-milk-powder imports were less than of the best amount set in 2014, they were still 29.5 percent greater than the 2018 total. New Zealand is China’s main supplier, but the Kiwis are not likely to finish strong. Drought is taking hold on the North Island. Strong Chinese demand and tighter New Zealand milk-powder supplies leave room for both the United States and Europe to sell skim-milk powder at a heady clip. U.S. merchants sent 152.5 million pounds of nonfat-dry-milk and skim-milk powder abroad in December, an impressive increase of 37 percent from the year before. But milk-powder exports started slowly in 2019; for the year U.S. nonfat-dry-milk and skim-milk-powder exports decreased 1.7 percent from 2018.

Whey, nonfat-dry milk and Cheddar blocks helped to shore up the dairy futures by this past Friday, but they couldn’t entirely overcome the red ink from early in the week. Most Class III futures finished about 5 to 10 cents less than the previous Friday. The March contract plummeted 33 cents. All 2020 contracts stand at more than $17 per hundredweight. Weakening butter values weighed on the Class IV market. Most futures contracts lost between 15 and 20 cents.

Grain Markets

The grains gained a little ground after steep losses the previous week. March corn increased 2.25 cents to $3.835 per bushel. March soybean futures rallied a dime to $8.82.

China promised Feb. 6 to cut in half the tariffs that took effect Sept. 1. In that round China boosted the tariff on U.S. soybeans by 5 percent. Under the new rates U.S. soybeans will face a 27.5 percent border tax beginning Feb. 14, rather than the current 30 percent. That’s a step in the right direction but a small one. The soybean market’s reaction was appropriately miniscule. China will buy more U.S. farm goods and soybeans top the list. But those purchases will likely depend on Beijing offering importers exemptions on the border tax, just as they have for the past six months.

Meanwhile crop analysts continue to increase their estimates of the size of the South American soybean crop – and those crops enjoy a big currency and tariff advantage. Dairy producers in the Midwest continue to reap the consequences of a very difficult season. As they dig into new crop forages, many in the region are watching in dismay as milk yields decrease. But judging by the spot market, there is still plenty of milk to be had.

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Sarina Sharp is with the Milk Producers Council. Visit www.milkproducerscouncil.org for more information.