US dairy supply and demand is highly seasonal.

In the first half of the year, we produce more than we consume, and inventories build. Then we rely on those inventories in the second half of the year as milk production falls and consumption steps higher for year-end holidays in November and December.

Since we’re past the midpoint in the year, it’s worth looking at how the markets developed in the first half and what we might see in the second half of the year.

To sum up the state of the dairy markets in the first half of 2024, it would be fair to say supply growth has remained weak while demand has been erratic. US milk production for January through May was down 0.8% from last year after adjusting for leap year. Some farmers were still working through expensive feed purchased or produced in the first half of 2023.

In regions where a lot of milk goes into butter, farm gate milk prices were pretty good, but in regions with a lot of cheese production, milk prices didn’t start to get good until May. So there wasn’t a strong financial incentive to push production higher until about midyear.

The spread of HPAI

The more interesting development for milk production has been the spread of highly pathogenic avian influenza (HPAI) in the dairy herd. There is still a lot that isn’t known, but the virus likely made the jump from wild birds to dairy cows in the Texas panhandle in October or November of 2023 and started spreading from there.

As of Sept. 12, the USDA confirmed infections on 203 dairy farms; although the true number is likely much higher than that. When a farm gets infected, it typically sees a 20% drop in milk production for two to three weeks. A few of the sick cows don’t fully recover and are sent off to slaughter earlier than planned.

It is estimated that HPAI knocked 0.2%-0.6% off milk production from March to May. The virus is likely being spread farm to farm by the movement of calves and cows, veterinarians, feed and milk trucks, or workers moving between farms.

While farmers were still using high priced feed in the first half of the year, feed costs have been trending sharply lower in the same time period. With the high price of butter, and now a relatively strong cheese price, farm gate milk prices are looking very strong and margins are looking profitable for farmers. So farmers should be trying to boost milk production, but it is likely HPAI will keep spreading to new states and will remain a drag on milk production until the entire US herd builds better immunity to it. Thus, milk production should improve a little in the second half of the year, but it won’t be strong. There is a small chance that HPAI stays largely confined to the states where it currently is and burns itself out in coming months, which could help milk production growth in the second half of the year.

Product outlook

The story on demand is really mixed, depending on the product, the particular month and whether you look at domestic consumption or exports. Cheese exports have been fantastic, while domestic demand for whey protein isolate (WPI) was incredible in the first half of 2024. Other than WPI, domestic demand is somewhere between normal and a little weak for most products.

Cheese: The big market driver for cheese this year has been domestic demand. Domestic disappearance was down more than 3.5% in January and February but rebounded to +1.3% growth March to May compared to last year. The long-run average growth is 2.5%, so we’re still running weaker than average; but the stronger domestic demand helped to push CME spot prices from around $1.50 in the first quarter to the $1.80s in the second.

Butter: Exports have been very strong all year, hitting a new record high in March, driven by cheap US prices and very strong demand from Mexico. Domestic demand is expected to continue to grow, but remain below average. Now that US prices have shifted higher, we should see a slowdown in exports, but demand from Mexico is a potential bullish wild card in the second half of the year.

CME spot butter averaged $2.88 for the first half of the year, which is the highest it has ever been for that time of year (the next highest was $2.75 in 2022). There was fear that the weak milk production would limit butter production and the market might run short in the second half of the year. However, the weak cheese demand left more milk for butter and the amount of fat in the milk has been better than expected, so butter production has been pretty strong, up 4% YTD, after adjusting for leap year.

Domestic demand was strong in January, then fell off in February through April. Signs pointed to high price levels finally killing off the demand growth, but the preliminary data for May suggested domestic sales were up an amazing 18.1% from 2023, which put YTD domestic sales up 2.9%. That added some bullish uncertainty back into the market and we could stay above $3.00 until there is more certainty about how supply and demand are shaping up for the second half of the year.

Nonfat dry milk (NFDM)/Skim milk powder (SMP): Production was weak in the first half of the year (-16.2% YTD), but demand also was weak, with domestic sales down 37.7% YTD and exports down 11.7%. Protein is being directed into milk protein concentrate, casein and condensed/ultra-filtered milk instead of NFDM/SMP, so production is expected to remain weak, even if milk production improves a bit. With US production down, the market could rally if demand improves in the second half of the year.

Whey products: The biggest drivers have been very strong domestic demand for WPI and good exports, which caused processors to pull liquid whey from plain dry whey and low protein whey products and push it into high protein whey protein concentrate (WPC) and WPI. Demand has remained strong in the second half of 2024 and prices remain high. The reduced production of dry whey also tightened the low end of the market. However, dry whey prices globally have been flat, which is going to keep the export market competitive and might limit upside for dry whey prices in the second half of the year.

In general, US dairy prices in the second half of the year are expected to be higher than the first half, supported by seasonally tighter supply and continued weakness in milk production due to HPAI and a lack of heifers to grow the herd. The upside could be limited by weaker demand at the high price levels and a potential mild improvement in production due to the profitable margins.

– Editor’s note: The trading of derivatives such as futures, options, and over-the-counter (OTC) products or “swaps” may not be suitable for all investors. Derivatives trading involves substantial risk of loss. Past results are not necessarily indicative of future results.

– Nate Donnay is the Director of Dairy Market Insight at StoneX Financial Inc.