By Lee Mielke

 U.S. milk production was slightly below that of a year ago in December, according to the USDA’s latest Milk Production report. Preliminary data put output at 18.8 billion pounds, down just 0.15 percent from December 2020. The top 24 producing states totaled 18.0 billion pounds, down 0.2 percent. Revisions lowered the original 50-state November estimate by 11 million pounds, now put at 18.0 billion, down 0.4 percent from a year ago.

December cow numbers totaled 9.375 million, down 7,000 from November, seventh consecutive month they were down from the previous month, and were 67,000 head below a year ago. The November count was revised 3,000 head lower. The U.S. milking herd has dropped 132,000 head from its peak in May.

Output per cow averaged 2,008 pounds, up 11 pounds or 0.6 percent from a year ago.

The preliminary data shows 2021 milk output totaled 226.3 billion pounds, up 1.4 percent from 2020. Cow numbers averaged 9.45 million head, up 60,000 or 0.6 percent from 2020, with output per cow up an average of 173 pounds or 0.7 percent from 2020. USDA’s latest projections show 2022 milk output will be up 0.7 percent from 2021.

December milk output in the Number 1 producing state, California, totaled 3.5 billion pounds, up 75 million or 2.2 percent from a year ago, thanks to a 45-pound gain per cow offsetting 1,000 fewer cows. Wisconsin put 2.65 billion pounds in the tank, up 46 million or 1.8 percent. Cow numbers were up 16,000 and output per cow was up 10 pounds.

The Jan. 24 Daily Dairy Report pointed out that herds in New Mexico and Washington State shrunk “as co-ops began to manage supply and cows were relocated to states with fewer restrictions and newer facilities.” No doubt, weather and local economics also contributed.

StoneX viewed the report as slightly bullish but pointed out that components were very strong, with protein up 3.32 percent versus 3.28 percent last year, and butterfat at 4.16 percent versus 4.11 percent a year ago.

In the week ending Jan. 15, 62,100 dairy cows were sent to slaughter, down 900 from the previous week, and 5,300 head or 7.9 percent below a year ago.

The amount of market share that dairy cows account for in the total cattle market has shifted slightly lower but still account for just over 10 percent of the beef market, according to StoneX, and may signify the end of the dairy herd decline.

Americans chewed through plenty of butter in December, as evidenced in the Agriculture Department’s latest Cold Storage report. The Dec. 31 butter inventory fell to 199.1 million pounds, down 11.4 million or 5.4 percent from November, sixth consecutive month to lose ground, and were at the lowest level since December 2019. Stocks were 74.7 million pounds or 27.3 percent below those in December 2020, third month in a row to fall short of the previous year.

American type cheese added 11.5 million pounds or 1.4 percent from November, and was 44.6 million pounds or 5.6 percent above a year ago. The “other” cheese category grew to 576.8 million pounds, up 10 million or 1.8 percent from November, and 2.1 million pounds or 0.4 percent above a year ago. The total cheese inventory hit 1.445 billion pounds, up 22.8 million pounds or 1.6 percent from November, and a plentiful 48.8 million or 3.5 percent above a year ago.

StoneX viewed the data as neutral to cheese but bullish for butter, adding, “As an industry we weren’t putting expensive butter into inventory and that likely continued into the first half of January but there are indications that stocks are now starting to build seasonally.”

Broker Dave Kurzawski said the market did what it was designed to do in the Jan. 31 ‘Dairy Radio Now’ broadcast, especially on butter. Physical demand pushed it to top $2.90 per pound, he said, and then plunged, but the futures market never went up with the spot market.

Some believe that, if the spot market is well above the futures market, that means the futures market is right and the price has to come down, he said, and in this case that was kind of true. “There was physical tightness and the spot market should be the highest price on the board to dis-incentivize anybody who makes the product from putting it in storage. Bring it to the market now, we need it,” he said. “We can debate why the price up where we had it, but bring the butter, bring the cheese to the market.”

The Milk Production and Cold Storage reports likely fed the bulls more than the bears, however Kurzawski suspected they were “already baked into the market.” He explained that cheese and butter had moved higher through the middle of January, and the news was bullish for butter, but the cheese side saw stocks build from November to December, which is typically when we draw stocks down by about 14-15 million pounds. Cheese was neutral to slightly bearish, he said.

Add to that, “Milk production has not fully recovered here so, yes the bulls were fed a little but the markets had already adjusted to the upside. Now we had to take some of that premium out,” he concluded.

Dairy prices and milk futures end January weaker but still above a year ago. After losing 11.25 cents the week before, the Cheddar blocks fell to $1.73 per pound Wednesday, but the brakes got applied Thursday and they actually regained 6 cents Friday on a sale to close at $1.79, down 1.75 cents on the week but 21.50 cents above a year ago.

“Bearish cheese prices snuggled up to demand tones this week,” according to Dairy Market News, but contacts relayed that customers were waiting on further price drops before committing to anything outside their contractual needs. That said, a number of plant managers admitted that while sales have slackened, they were down only a small percentage and production was still busy. Spot milk remained under flat market and was keeping some plants busy.

StoneX reported that the USDA put out a solicitation to buy 82,080 pounds of salted print butter for April to June delivery but no one offered any. “Not a market moving quantity either way,” StoneX said, “but interesting to note.”

There are likely several reasons for the price fall, according to StoneX. “The main dynamic is a slump in demand due to Omicron and seasonality coupled with supply chain issues. If shipping were easy, perhaps exports would be stronger. If people were not out with Omicron, perhaps cheese converters would be pulling more Cheese through their facilities instead of pushing back some onto manufacturers. The dynamic today isn’t necessarily long-term and eventually we’ll get to a price where buyers really want to own cheese.”

Add to that, “The U.S. dollar has been strong this week and breaking out above the high-water mark established in November and December 2021. The strength is a function of Fed comments about raising interest rates, but the point is a stronger dollar may be a limiting factor, not necessarily a death knell, for a basket of commodity prices. This is the point of course as the Fed gears up for battle with inflation,” StoneX concluded.