Trade war crashes markets

In a series of tweets heard round the world, President Donald Trump this past week lambasted China for stealing America’s intellectual property and “ordered†American companies to look for ways to move their foreign operations out of China.

According to Trump, “We don’t need China and, frankly, would be far better off without them.â€

The latest fusillade in the trade war pummeled the markets. Stocks, bond yields and commodities plummeted. The trade war has weakened the dairy markets on multiple fronts – skewering whey values, subjecting U.S. cheese sales to Mexico to one year of increased taxes, and introducing the idea that U.S. suppliers may be unreliable because the rules and transaction costs for overseas buyers could change in an instant.

Less directly the trade war has slowed global commerce and stunted business investment with crippling uncertainty. That has reduced demand for goods of all kinds.

The macroeconomic environment surely pressured the dairy markets this past week; the bulls remained cowed. September Class III futures plunged 63 cents, and most Class III contracts lost about 20 cents this past week.

Class IV futures settled 30 cents to 40 cents less than the previous Friday. Skim-milk powder and butter prices retreated at the Global Dairy Trade auction Aug. 20, further weighing on Class IV values.

But Cheddar rallied at the Global Dairy Trade auction and whole-milk powder posted a surprisingly strong 2.1 percent increase.

The bad news for butter continued Aug. 22 in the form of the U.S. Department of Agriculture’s Cold Storage report, which showed a counter-seasonal increase in butter supplies. In a typical year butter inventories decline 4.5 million pounds in June and another 8.3 million pounds in July.

Download PDF Butter Stocks

This year butter inventories grew 12.5 million pounds in June and 3.5 million pounds in July. The summer increase increased butter stockpiles to 329.8 million pounds as of July 31, 3.6 percent more than the prior year. It’s likely that cheap imported butterfat has boosted U.S. supplies and that’s finally having an impact on U.S. butter values. Chicago Mercantile Exchange spot butter decreased to a seven-month-worst price of $2.2275 per pound, a decrease of 11.25 cents from the previous Friday.

Download PDF CME Spot Butter

A number of butter futures contracts closed a nickel in the red this past Friday, at their daily trading limit. End users who were becoming anxious about securing product for the holiday baking season now feel that they can afford to be patient.

While bearish for butter, the Cold Storage report was decidedly bullish for cheese. There were 1.36 billion pounds of cheese in inventory as of July 31. That’s 3.5 percent less than at the end of July 2018.

Cheese stockpiles typically grow more than 24 million pounds from June to July, but this year they decreased 18.3 million pounds, the largest July drawdown in USDA records dating back to 1915. American cheese stocks decreased 10 million pounds this past month to 776 million pounds. They are 5.8 percent less than inventories in July 2018 and the smallest volume for any month since March 2018. In short, cheese stocks are shrinking when they should be growing. That’s evidence of tighter milk supplies and booming domestic demand. Those fundamentals propelled CME spot Cheddar blocks to new multi-year best prices at $1.91 as of Aug. 20. But blocks decreased back to $1.88, steady with the previous Friday. Barrels continued to slip, decreasing a dime this past week and closing at $1.665, a two-month worst.

Download PDF American Cheese Stocks

The other spot markets managed to shrug off the outside pressures. CME spot nonfat-dry milk increased 0.75 cents to $1.0375. Whey powder rallied 3 cents to 39.5 cents. That marks spot whey’s third-straight weekly gain, suggesting the bad news has been fully priced into whey values.3

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Despite the difficult week in the dairy pits, there are reasons to believe that dairy-product prices in general and Class III values in particular will soon find their footing. They may not soar, but they will likely remain well-supported. Cheese demand is excellent, the whey market is recovering and milk output is generally steady around the globe. Milk is hovering at about $17 per hundredweight. That’s sufficient to pay the bills but not enough to stimulate much expansion or reassure lenders. Contraction is likely to continue for now, prolonging the potential for adequate milk prices.

U.S. milk output in July was 18.33 billion pounds, on par with 2018. The industry made exactly as much milk with fewer cows, thanks in large part to improved production per cow in the mountain states and California. Summer heat in California was not as extreme as it was in July 2018.

The dairy herd continues to shrink. USDA decreased its assessment of the June milk-cow herd by 4,000 head and reported a further 9,000-head decline in July. At 9.31 million head, the U.S. milking herd is smaller than it has been since January 2016 and about 82,000 head smaller than in July 2018. The industry has been decimated in the Midwest and along the East Coast. Compared to the prior year, there were 35,000 fewer milk cows in Pennsylvania, 14,000 fewer in Ohio, and 9,000 fewer in Virginia.

Download PDF U.S. Milk Cow Herd

But in the past year dairy producers added 27,000 milk cows in Texas and 10,000 in both Idaho and Colorado. Further expansion in the mountain states will likely be limited until new processing capacity comes online late next year. With noticeably fewer cows, growth in U.S. milk output is likely to remain limited in the near term, helping to undergird the markets.

Grain Markets

Grain futures took another sizeable step back this past week. Timely rains improved conditions in the field. Reports from crop scouts suggest that, while USDA’s August projections may be a bit too optimistic, a dramatic decrease in the national average corn yield is unlikely barring an extremely early frost. Soybean-pod counts imply considerably reduced yields than in 2018, but stockpiles are large and demand is in question. The soybean market was hit hard by the latest escalation in the trade war. September futures decreased 24 cents this past week to $8.4325 per bushel. September corn futures lost more than a dime to close at $3.5975.


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