Dairy Skim – August 2023 US Dairy Products Report

Dairy Skim is a bite-size episode series where HighGround’s top analysts break down the latest dairy data release. Today, Betty Berning discusses the August 2023 US Dairy Products Report. Customers can view the snapshot report here. Subscribe so that you never miss an episode!

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[00:05] Betty: Hello, everyone, and welcome back to the Dairy Skim, HighGround Dairy’s bite-sized podcast intended to give the dairy industry some flavor into recent reports or events that can impact global commodity pricing. This is Betty Berning, Contributing Dairy Economist at HighGround Dairy. This afternoon, USDA released its August Dairy Products Report, which certainly helped to explain some of the movements in the markets as of late.

[00:34] Let’s start with butter, which set another record in today’s trading. USDA’s August numbers were neutral to the current record-high prices; however, there were several interesting nuggets in the data. Butter production was down 2.1% versus prior year, totaling 140 million pounds. This August’s total was the smallest August number since 2018. The 140 million pounds of butter produced in August was the first-year-over decline in the category since September 2022, as components fell in August on lower milk production in the West. Churns in the West saw their volumes fall by a massive 10.4%. However, California’s churns turned out 4% less butter year-over-year, meaning overall production in the West faltered pretty significantly. The big drop was due to falling output in other places like Idaho, Arizona, and Washington. In the Central region of the country, outflows remained big on a year-over-year basis, though, and churns produced 14.9% more butter than in August 2022.

[01:51] Another thing to note in the butter category is that strong Class II production likely stole some cream away from the commodity, as things like yogurt, cottage cheese, and ice cream production rose year-on-year in August.

[02:05] Moving into cheese, Cheddar vats turned out 314.4 million pounds of product, which was 1.2% smaller than August 2022. This is the third month in a row of annual declines. Interestingly, for the past three Augusts, volumes have fallen year-on-year, as processors are favoring making other types of products this time of year.

[02:32] The devil is in the details as total Natural American cheese production grew by 0.3% year-over-year, as cheesemakers moved milk into the “Other American” category (which includes things like Colby and Monterey Jack) rather than pushing milk into Cheddar.  With current Cheddar block prices at $1.68 per pound and barrels at $1.5425 per pound, it does seem like the market is slightly undervalued, relative to this weaker production of Cheddar in August.

[03:05] Another item of note was that USDA revised July’s Cheddar production down by 8.1 million pounds, moving the total to 323.4 million pounds and making the overall value 2023 value 5% less than July 2022.

[03:24] Total cheese for August was down annually for the second month in a row and it has been down four of the last five months. Mozzarella production also fell annually and has for 5 of the last 6 months. Retail demand for Mozzarella shows decent demand for string cheese and mozzarella right out of the refrigerator case. However, pizza demand may be off in the frozen aisle or food service sector, or at least is not going gangbusters, helping to explain some of the limited mozzarella production. All that said, total cheese and Natural American stocks grew in August per the Cold Storage report issued last week. That would suggest poor demand, helping to explain why cheese markets have moved so much lower August into September.

[04:15] Let’s move into the powder complex. Nonfat dry milk and skim milk powder fell year-over-year production-wise with their total volume falling to 170.6 million pounds, down 14% from August 2022, and the smallest monthly output since Sept. 2018. Splitting those two categories apart, Nonfat Dry Milk production was actually the lowest it has been since September 2014. Again, in the Class IV commodity, output plummeted in the West, down 20% in the region, down 27% alone in California. This was all driven by lower milk volumes and components in that area of the country. Stocks were lower as well, sitting at 266.6 million pounds, posting the smallest August stocks number since 2016. Although inventories are falling, demand has not been great internationally and prices have moved higher as of late, making today’s nonfat dry milk and skim milk powder numbers neutral to our expectations at HighGround.

[05:25] Whey was bearish to our expectations. Last year’s August production numbers were pretty terrible which made for an easy comparison this year. However, when we dive into the data and we compare August 2023’s values to the 2019-2021 volumes, the August 2023 total of 77.2 million pounds is right in line with those other years. Stocks, though, continue to rise. While July to August production fell, stocks actually built over that time frame and that indicates that demand is likely not great if we’re making less product but more is showing up in inventories. Inventories are actually the biggest they’ve been since February 2018 and rose for the fifth month in a row. That’s on both a month-on-month basis and year-over-year basis. Also adding to this, August is a really strange to time to have heavy stocks of powders in the Northern Hemisphere in light of milk seasonality and slower milk flows. While under $0.30 per pound whey is value, it seems like there is room to hold in a narrow range for a while.

[06:35] Demand is the story in the high-protein whey categories and WPC and WPI were bullish to our expectations. WPC 50-89.9% production grew but stocks declined for the second month in a row, hitting the lowest level since September 2022. This really implies that demand is actually outpacing supply.

[06:58] WPI inventories appear to be ready to fall below prior year levels in another month. Demand has really picked up in this category. Inventories have been moving lower for some time now—since hitting a high of 25.7 million pounds in April, they’ve moved over 4 million pounds lower.

I know I just went through a lot of information. I’m going to be writing up more shortly. Watch your inbox if you subscribe—you will get the full analysis. Take care and have a great night!

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