As summer fades, we’re moving into peak demand season for the U.S. dairy market. Keep on top of shifting trends with The Milk Check. Guest host Josh White and a panel of industry experts discuss the latest trends and projections for U.S. dairy as we approach this critical period.

💸 Blue tongue’s impact on European milk production.
🧈 Butterfat is bucking the trend with a strong inventory.
🍦 Cream prices have softened after a brief surge in the last few weeks.
🧀 Cheese markets set record-high prices this year, but is the tide turning?
🐄 Milk powder prices are on the rise as we head into peak demand season.

Plus, we’ll look ahead to 2025: What impact will the expanded cheese production capacity have on milk prices in the second half of the year?

Get the market scoop from Josh White and his team, including Diego Carvallo, director of dry dairy ingredient trading; Greg Scheer, manager of milk marketing; Jacob Menge, vice president of risk management & trade strategy; and Joe Maixner, national sales manager of dairy ingredients.

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Intro (with music): Welcome to The Milk Check, a TC Jacoby and Company podcast where we share market insights and analysis with dairy farmers in mind.

Josh White: Hey, everyone. Welcome to The Milk Check. Today is Friday, September 20th. I am Josh White, filling in for Ted this week. We’ve entered that time of year when producers or processors, customers alike, we all put that summer fun behind us here in the Northern Hemisphere and focus a lot more attention on what’s happening in the market today, closing out the year and thinking about what could influence the next calendar year. As a result, we think it’s a great time to have what TC would call a good old classic market discussion.

Today, I’m joined by most of our traders here at TC Jacoby and Company, and I’ll lead that discussion in Ted’s absence. So I’ll do my best Ted impression and say, “Hey guys, where do we start?” Does anybody have a thought as to what we should cover at the beginning? I personally think it all starts with milk. Greg, I would love your opinion as to what’s happening today and the market as it relates to milk moving across the country and what your thoughts are looking ahead.

Greg Scheer: Thanks, Josh. Yes, we’ve seen tighter spot markets this summer and this spring compared to previous years. We have tighter milk supplies. We have a lack of replacement heifers. We have very expensive replacement cows. Producers have been holding back from culling as heavily as they usually do. We just don’t have the replacements to increase milk supply. So we have firm spot markets. We’ve seen that this summer. We expect to see that this fall, but we are setting up for 2025 to be a tighter year for milk supplies because of those reasons.

Now, that could be mitigated some. I’ve heard of very good harvests being put up, good quality, cheap feed, and producers will be able to feed those cows maybe a little better, but the fact of the matter is it’s going to be hard to get cow numbers up. They’ll probably decline, and the cost of any kind of replacement will be high.

Josh: So Greg, you’re talking through those dynamics and that doesn’t take into account what the industry has discussed a lot about all these new plants coming on a new capacity. We’ve got another plant firing up any day now, another large one in the southwest that will likely start early in 2025, and a few plant expansions in the upper Midwest. How do you think that that influences this tightening milk dynamic as we go into next year?

Greg: It will make the milk competition just that much stronger. For the producer, it should help get higher premiums for milk in those competition areas. Plants will have to plan ahead, and even in some regions where milk’s traditionally been very long and can get all the milk they want, it will be harder next year. It’s just more competition. It will maybe pull some milk from other plants, and some older, inefficient plants might have to shut down eventually. That’s on the horizon with these new big plants opening up.

Josh: The old model is always that you fill up Class I, you fill Class II seasonal demand, fill the cheese plant first, and then the rest gets balanced by Class IV. As we’re seeing milk pivot and shift around, we’re seeing new plants come on, at least some inhibitors to growth in the US. You already alluded to the biggest one, probably heifer supply—some other obstacles or headwinds to growing the herd with bird flu. [inaudible 00:03:27] Bird flu’s now talked about in California, but it’s pretty unclear what that impact will be. It’s a migratory time of year; we have to think that with the concentration of herds there, it will have a bit of an impact. Is it possible that we see less milk volume even during decent times go through cheese plants?

Greg: That’s a good question. The new plants are going to have contracted milk that’s going to come in there. They’re so expensive, they’re going to need to run those plants. But it could pull some from the margins, some of the other plants where they typically buy cheaper spot milk and maybe add a little cheese production to their runs; you might not see that. You could pull back some of that cheese made with opportunities surplus milk; I definitely see that happening.
As far as the three to four balance, that’s really a hard question just because of the cost of these plants, they’re going to try to run those full because they need every drop to go through to pay the expensive price for building these new big plants.

Josh: There are so many variables, and we got to spend some time talking about the demand side of the equation to get a real feel for that. But before we do, another significant topic on the supply side is what’s happening in Europe and Diego. There are a lot of headlines about bluetongue and its impact on the market. I don’t think we represent ourselves as experts on the European milk supply situation, but what do you hear?

Diego Carvallo: We had a fascinating discussion a couple of days ago with Josh, me, and some partners in Europe. Overall, the situation is impacting milk production. That impact is tricky to calculate, but by doing some basic numbers or estimates, we found that it could be around 0.3% of milk production impacted, so it’s a significant number. They are starting to vaccinate the cows, and the effects of winter and cold temperatures should somehow limit that impact. However, some regions like the Netherlands, Belgium, and other countries have been impacted. So, that number is probably higher in those regions, but if you look at the overall volume for the whole continent, for Europe, that’s a rough estimate of how much it’s impacted.

Josh: So, here are a couple of final notes on the supply before we shift to the different products, what the product mix looks like as a result of the milk supply, and then what the demand for those products is. Two other things that have been discussed quite a bit within the TC Jacoby Company that we focus on are the component value in milk. We’ve continued to see very strong solids and butterfat growth, more so butterfat than anything else. How much of that is offsetting some of the inhibitors and growing our milk supply through the number of milking cattle in the herd?
Another variable that we need to consider as it relates to milk production globally is that we are going into the Southern Hemisphere’s heavy milk production season. New Zealand will only continue to ramp up at this moment. And it’s very unclear how the New Zealand to China trade balance will look now. Lately, we’ve at least had better indications of Chinese participation and events like the GDT, but it’s very unclear if China is back, as you’ll hear people talk about it. Are they truly going to step back in and start buying those seasonal volumes coming out of New Zealand?
So, with that, let’s shift in and focus on the US market. I think there are impacts globally right now, but let’s talk about butterfat because butterfat seems to be trending a little differently than the rest of our products. Joe, what’s happening on the butterfat front today?

Joe Maixner: Yeah, thanks, Josh. Butter has been bucking the trends on all the other products all year, and we’re falling into that again recently here, with everything moving higher, and now butter is starting to cool off a little bit counter-seasonally. I think it’s a result of a lot of anticipatory buying for the thought that people would be caught short this time of year, just based on previous history. I think economics are finally coming into play here. We’ve been so high for so long that I think we’ve really just started pushing away any demand that isn’t necessary. Inventories have been built consistently throughout the year, and we’ve continued to see offers in areas that, historically, this time of year, we probably wouldn’t normally see.

The volume is out there. As you mentioned, the butterfat component remains strong even in reduced milk. It’s hard to tell because we’re entering the holiday demand season. We went through a period here a couple of weeks ago when everybody seemed to be back in front of their computers and had a, oh, no moment. I’m not covered, and we saw a little push then. It’s hard to believe we don’t see another slight push before the year ends. We’re not into peak demand season yet.

Josh: Joe, if we think about how butterfat in the US is consumed, ultimately, what’s in the milk that is sold at the retail shelf flows through to the Class II products, get into dips and products like that. There’s a lot of butterfat consumed obviously in cheese, and then the residual left either goes through food service, retail, and packaging or ends up in bulk salted. Where, at this moment, is that pushback on the demand front coming from, or is that unclear?

Joe: I think the fluid side would agree with us. We’re seeing some pushback on the Class II products because I believe many of these producers just don’t want to pay the high cream prices. We’ve seen cream loosen up in the past week or two, but retail numbers have been relatively flat. Food service demand has been down. It feels like things are starting to back up a little bit everywhere.

Josh: So cautious about continued weakness because we still have the holiday season in front of us, but as we look ahead to next year, is there any major trend change or shift that you would expect? The rest of the world remains pretty high on butterfat as well. It seems like fat consumption continues to rise in relation to dairy products. Are any significant shifts expected, or are you concerned about as we look ahead to 2025?

Joe: For 2025, my eyes are staying on where milk ends up because of this additional cheese capacity coming online. The milk, cream, and fat must come out of Class IV. If we do not add a large amount of milk production to compensate for the additional capacity, it would ultimately have to come out of the Class IV market. Now, with that said, farmers always find a way. We can’t discount the American farmer. I think that coming into 2025, we will have pretty ample supplies. It’s maybe the second half of 2025 that I would be more concerned about.

Josh: Before we go on, how about we take a quick break?

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Josh: Okay, welcome back. Let’s get right back into this discussion. Following down the product, the cheese market is… We’ve set record high prices in barrels recently, feels genuinely tight and we’re talking about all this cheese capacity coming on and we need to remind everyone that they don’t flip a switch. These plants don’t start producing cheese, which directly influences the CME price. Jake, what’s happening on the cheese side of things today, and what are we paying attention to as we look ahead?

Jacob Menge: We’ve got these elevated prices; as you said, we’ve got records being set. That being said, it seems like the tide’s turning a bit, at least in the short term here. I would imagine these prices have shut off certain export opportunities we might’ve had. I don’t think that’s a bad thing, though. I believe these prices made sense because our cheese prices in this country are based on 30-day-old cheddar cheese. That market specifically has been tight. There’s not a lot out there of cheddar, really, there’s not a lot out there of anything, so as you mentioned, plenty of plants are coming online. I think we need to be talking, though, specifically about our impact on cheddar since that’s what this country’s cheese is priced at.

Realistically, we probably stay tight through the end of the year. Maybe we get down into the lower twos from where we’re at. I think getting below two bucks might be challenging, but as some of these plants come online, as the prices pull back a little bit, and as time goes on, I think there will be more and more downward pressure. I think there’s a really interesting push-pull, though. For one, if it takes longer than we expect and our prices stay elevated, that will eventually flow through to the consumer, and I think the consumer has yet to see these prices. We’ve moved pretty high pretty quickly. If we stay here for a whole quarter, I would imagine, especially as contracts are being made for next year, the consumer will start feeling it, and I think there’s a demand response.

At the same time, off of the back of what Greg was saying as far as milk supply goes, the margins are excellent here, and there’s undoubtedly a heifer supply issue, but if margins stay as good as they are now, you would have to think that by the second half of 2025, something gets done. It’s a common saying. I firmly believe in not betting against the farmer when margins look like this. So there are many different factors on both sides, but I think everything points to prices, probably not being able to go higher from where we’re at, and probably finding some relief.

Josh: At these price levels, we could see some deteriorating demand on the domestic front. What’s the international market like for cheese?

Jake: International has been strong, whereas it is in the low $2 range. Even though that sounds intuitively pretty high, I think we can still get export business done at those levels. I think we probably can’t at the levels we’re at currently. Freight has not been our friend to most of these hotter export markets, and I’m just not an expert on that freight market. Let up. That could open a door for us there, too.

Josh: Continuing to move through the products, we’ve discussed that the milk situation feels slightly tighter in the US. Concerns about milk supply out of Europe ultimately flow through and impact our ability to produce products available for the international market, both from the US side of the pond and the European side. Our most commonly traded product in the global market is our milk powders, specifically nonfat dry milk. Diego, how was that market feeling today, and what are your thoughts as we go into next year? What are you paying attention to?

Diego: The nonfat market and skim have followed fundamentals in the past few months. Something that we believe was somehow disconnected during the previous month. Right now, we are in a new trading range. We think it is between one 30 and one 40 well sustained by several effects. One is that many international customers are still short. They have their buying tendency for this year, or the buying pattern has been very hand-to-mouth, and now that prices have increased, some of those customers are buying even less or out of budget and not buying or stocking as they usually did.

Then, Mexico’s demand has been strong, partly supported by their downed milk production and the higher price for cheese. At the time, the supply side is tight, and that’s also bringing support to the market. I believe that we have found that no trade range is 130 and 140. It does have the potential to move higher, and I think the potential to move lower and break that support of one 30 is not very likely.

I’m closely monitoring New Zealand meal production, which is so far up to a year, has had a great start of a season with numbers close to almost 10% off for a few months. We don’t expect that to maintain for the rest of the year, but we expect a growth of 1 to 3%. We are closely monitoring Mexican milk production and GDT performance by some of the big buyers like China and Southeast Asia. We are tracking the dollar strength versus the Euro and how competitive our product is versus other origins like New Zealand and Europe, which right now we are at a premium, but that’s a premium that is usually confirmed by Mexican buyers who need product and who are in the market and willing to pay a [inaudible 00:15:54].

Josh: So, to complete the product picture, let’s briefly discuss the whey products. Right now, the entire complex is pretty firm, and it feels, at least to me, that we have maybe found a reasonable parking spot for the rest of the year. Sweet whey powder, the only tradable one from a derivative standpoint, comfortably has moved into a 50 to 60-cent trading range, and every time we push the upper part of that range, we see a slight weakness, maybe some resistance. Every time we move much lower, it seems to be met with buyers. I think there’s a fundamental shortage of sweet whey powder in the market right now, but the global demand isn’t very exciting either, so it seems comfortable. It seems balanced for at least the rest of the year. As we look ahead to next year, people should pay attention to the sweet whey powder available on the market.

There is production coming online, but a lot of production has been lost to the higher WPC markets, and those markets continue to be very firm. WPC, for instance, is trading comfortably at the same price that it ended the prior quarter; it feels like it will remain firm through the fourth quarter, and isolates will remain very strong. A lot of consumer trends are being blamed, I guess, for just how tight that market is, but it doesn’t look like it’s going to change anytime soon. That being said, last time we tested some of the price levels we’re seeing in the higher-weight proteins, we saw demand deterioration, and the markets then were quite volatile and on a downward trend.

So I think we’re looking at it like everyone else is. We’re seeing dietary trends that support more protein consumption, but at the same time, we are reaching prices that the consumer has not yet seen and that, historically, consumers will push back at.

It’ll be interesting to see when we get the answer to that question. Likely, it won’t be very clear until the first quarter. So, for now, wrapping up the year relatively stable on the whey price seems like an accurate outlook. Additionally, we are hearing more and more international inquiries for products from all across the whey complex, starting with whey permeate, a carbohydrate-driven product, up to these WPC-AD and 90% isolates. The whey market feels, as mentioned, pretty comfortable wrapping up the rest of the year. And so, if we pull all of this together, what are some of the upside influencers that could push the entire dairy complex higher, and what are some of the things that we think dairy is at risk of underperforming the recent bullish sentiment in the market?

Jake: A potential bullish driver would be these rate drops. Seventeen years to the day, the last time the Fed eased rates. September 18th, ’07, they did it. The economy was not too happy starting about a month after that. So pay attention to the macro economy, but more directly, those rate drops are weakening the US dollar, and we’re seeing the US dollar test a really strong support level, a hundred on the US dollar index. If it breaks below that and that dollar weakens, you’d think that helps buoy that export market.

Josh: We have a pretty big election coming up and not so long here in the U.S. I think I put out in a prior marketing email some economic outlooks on different products and durables based on which party usually wins the election, not an expert in that area. How disruptive do we think the election can be, or at this moment, do we believe that it’s baked into our markets?

Jake: I’m not an expert either, but I’ll just throw in that unless Congress goes the way the president goes, which is unlikely, it seems like probably not all that much will materialize out of the election. Just my two cents.

Josh: And then I think the final variable we started with this, which we probably should end with, is the tug of war on milk production. Several of us have commented about not betting against the farmer. Don’t bet against the farmer. I want to be pretty straightforward, at least in my view, and be curious if others have a different base view; we have a real situation. It’s going to be difficult to grow our herd, and it’s not even just the biological portion of that through the entire supply chain; it’s challenging to continue to grow.

To add a new dairy in the US today underneath the new model is a challenging one. Everything from permitting to acquiring the animals to the financing, although rates might be coming down and some of the equipment that you would need to get perhaps becomes cheaper. That’s not influencing today’s decision making model.

Does anyone have a different view that we will be constrained in the US in our ability to grow milk with the exception of feeding better, having good genetics, and performing better with components in the milk? Is that the base view from our team at the moment?

Greg: Yeah, I think it will be hard for new producers to come online. Many producers want to expand if their permits are in place, so I think you’ll continue to see that trying to expand with good feed and strong components. We’ll make up some more components in the milk. We’ll make up some for maybe a little less milk, but it’ll be hard for those new producers to come online. Many producers still want to grow, and I wouldn’t bet against the farmer, as we’ve mentioned several times.

Josh: We appreciate everyone’s time. I think we covered a lot today. As with anything, these markets are dynamic. They’re changing every day, and we look forward to future podcasts. Thank you, everyone, for listening to The Milk Check.

Outro (with music): We welcome your participation in The Milk Check. If you have comments to share or questions you want answered, email podcast@jacoby.com. Our theme music is composed and performed by Phil Keaggy. The Milk Check is a production of TC Jacoby and Company.