Dairy Processing - July/August 2022 - 65

exporter of dairy products, was down 4.0% last season despite
record high milk prices. While most of the decline was likely
driven by poor weather that limited pasture growth, tighter
environmental restrictions have also stunted the long-term
growth prospects for the New Zealand dairy industry. The
primary concerns in New Zealand have centered more around
run-off from farms polluting waterways and aquifers, but
greenhouse gas emissions are also a concern.
In the US, consumers and legislators are increasingly
concerned about sustainability issues, but new regulation
feels like it is a way off. Despite that, US milk production
has been below year ago levels from November through at
least May and likely into June and July. Record high feed
costs, low milk prices in parts of the country and pandemicreduced
demand in some areas have all been tough financial
hurdles for some dairy farmers. However, milk prices in the
second quarter have risen to record highs that are more than
offsetting the higher input costs and dairy farmers have been
adding cows to the herd since January. If everything continues
along the current trends we should be looking at positive milk
production growth during the second half of the year.
Even with improved US milk production, and factoring in
improved weather in New Zealand and some improvement
in European production, the milk supply across the major
exporters looks like it will stay well below trend for the
foreseeable future. So we may see some headwinds for
demand, but there are still some issues that are going to keep
supply relative to what we are used to.
In past recessions we've seen large drops for dairy
commodity prices, but a decline is more likely during the second
half of a recession than the first half. The graph to the right
shows the price of CME block cheese for the 12 months leading
up to recession and the 36 months following the start of the
recession. For comparison purposes, assume the US went into
a recession in April this year. During the first halves of the 2001
and 2008/2009 recessions, cheese prices were very strong, before
eventually dropping by 37% in 2001 and 48% in 2008/2009.
There is still considerable disagreement about whether we
will enter a recession in the next 12 months, but central banks
around the world are intentionally trying to slow inflation by
slowing their economies. So we can have some confidence
that economic activity will be slowing and that will likely
reduce demand for dairy products.
In the past, recessions have led to significant drops in
dairy prices, although it typically takes six months or more
from the start of the recession before prices drop. But
with milk production across the major exporters weak and
sustainability issues capping the growth in Europe and New
Zealand, the drop in dairy prices could be more muted than
in past recessions with some risk that prices hold steady or
Estimated Income Elasticity by Sales Channel
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
A 1% change in real GDP
drives a 0.34% change in
Retail
Limited Service
Full Service
CME Block Cheese Price (USD/Ib.)
(start: Mar 1, Dec 7, Apr 22
2.5
2
1.5
1
Recession
(start: Mar 1, Dec 7, Apr 22
Recession
2008/2009
2022
increase if adverse weather affects the cows or the crops.
Editor's Note: This material should be construed as
market commentary, merely observing economic, political
and/or market conditions, and not intended to refer to
any particular trading strategy, promotional element or
quality of service provided by the FCM Division of StoneX
Financial Inc. ( " SFI " ) or StoneX Markets LLC ( " SXM " ). SFI
and SXM are not responsible for any redistribution of this
material by third parties, or any trading decisions taken
by persons not intended to view this material. Information
contained herein was obtained from sources believed to be
reliable, but is not guaranteed as to its accuracy. Contact
designated personnel from SFI or SXM for specific trading
advice to meet your trading preferences. These materials
represent the opinions and viewpoints of the author, and do
not necessarily reflect the viewpoints and trading strategies
employed by SFI or SXM.
Nate Donnay is the director of Dairy Market Insight
at StoneX and has been applying his interest in large
complicated systems and statistical analysis to the
international and US dairy markets since 2005.
DAIRYPROCESSING.COM | JUL-AUG 2022 65
Source: StoneX, BLS, BEA, NBER
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Dairy Processing - July/August 2022

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Dairy Processing - July/August 2022 - Intro
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