Dairy Processing - July/August 2023 - 77

While inflation has cooled, prices are still rising on top of
two years of strong price increases. That means each dollar
spent buys fewer and fewer physical things, and consumers
have been reluctant to spend more dollars, so the total volume
of goods purchased has been declining.
On the positive side, consumers have still been willing to
spend more on services, such as restaurants. But even there,
higher menu prices mean that the volume of food and drinks
being purchased through food service likely fell below year
ago levels during the second quarter of this year while the
estimated volume of food being purchased through retail
has been below year ago since January. To compound things,
we're seeing the same type of consumer behavior and sales
in Europe, which is leaving excess product available globally
as well.
WHAT'S NEXT?
Where does demand go from here? Consumer sentiment
has improved a little recently, but I'm not sure it is going to
translate into more spending. Inflation has cooled, but core
inflation is still running much stronger than the Federal
Reserve would like to see, and the odds are that they continue
to try to slow the economy in order to bring core inflation
down, which may lead to a weaker job market and higher
unemployment late this year and into 2024.
Spending on goods increased
at four times the normal pace
during the pandemic and early postpandemic
period, which is obviously
unsustainable. Retail sales hit about
$590 billion in March of 2022, and
they have effectively stuck there.
With this in mind, it's hard to see the economy helping
dairy demand; but what will help is the lower dairy prices.
The 15-40% decline in commodity prices is feeding through
to lower retail prices and restaurants, especially pizza
restaurants, might start to run more promotions with cheese
prices down. Demand will likely improve a little, but without
a big improvement in the macro economy and consumer
sentiment, demand probably won't be strong.
The milk supply is not excessive, and it will be getting
smaller. YTD milk production is only up 0.8%, which is below
the long-run average growth of 1.3%. Feed costs for dairy
farmers are shifting lower, but even with corn at $5.00 a
bushel the breakeven for dairy farmers is likely around $18.00
Class III milk. Right now the Class III futures market for the
US Retail Sales (millions)
$650,000
$600,000
$550,000
$500,000
$450,000
$400,000
$350,000
second half of 2023 range between $13.80 and $17.75. So the
market is telling farmers that they will be losing money for at
least the next six months. In response, farmers are expected
to cut the size of the dairy herd. YTD dairy cow slaughter is
already up 5.8% and should remain strong in the second half
of the year.
While the dairy cow herd is expected to get smaller, milk
production per cow is expected to grow as feed costs come
down. That could keep milk production growing between
0.5% to 1% during the second half of the year despite the
strong slaughter. I think it is going to be February or March
before we see milk production finally falling below year
ago, although it could happen sooner if dairy prices stay
very weak.
It is hard to get excited about demand, but lower prices
should give us a small boost in the second half of 2023 and
early 2024. Farmers are starting to adjust production in
response to low milk prices and negative margins, but it is a
relatively slow process that will likely take 12 months to play
out. With dairy prices currently below the cost of production
for dairy farmers, we can confidently say they will eventually
move higher, but it is hard to call the exact turning point.
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 " ).
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 Financial Inc. and has been applying his expertise
in large complicated systems and statistical analysis to the
international and US dairy markets since 2005.
DAIRYPROCESSING.COM | JUL-AUG 2023 77
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