U.S. Cheese Production Poised for Growth Amid Market Adjustments
Source: DairyNews.today
By mid-2024, expansions in U.S. cheese processing capacity are expected to boost output by nearly 20 million pounds per day, according to industry reports. While this marks a significant production increase, analysts warn of potential oversupply unless demand keeps pace.
The U.S. Department of Agriculture (USDA) recently released its final decision on Federal Milk Marketing Order (FMMO) reforms, outlining changes to dairy pricing structures. A producer referendum scheduled for December or January will determine whether the updates are implemented, with results expected by mid-February.
StoneX analyst Nate Donnay noted minimal differences between the USDA's July recommendations and the final decision but flagged uncertainty around the timeline for implementation. Changes could take effect as early as March 2024 or face delays. Adjustments to assumed milk component content will likely be postponed by six months.
Impact on Dairy Pricing
The reforms include raising the "make allowance," the assumed cost of converting milk into bulk dairy products. This adjustment, overdue after more than a decade of unchanged allowances, will lower federal order minimum prices. According to StoneX broker Dave Kurzawski, this could create a dynamic where competitive pressures drive up premiums that producers receive above the minimum price.
Had the new formulas been in place over the past decade, Class III milk prices would have averaged 16 cents lower, while Class IV prices would have declined by 47 cents. Despite these shifts, Kurzawski emphasized that the broader price range—currently capable of fluctuating between $12 and $25 per hundredweight—remains unchanged.
Market Outlook
In its latest World Agricultural Supply and Demand Estimates (WASDE) report, the USDA raised its 2024 milk production forecast to 226 billion pounds, up 200 million pounds from the prior estimate. Increased output per cow is expected to offset a decline in herd numbers. Production and marketings for 2025 were forecast at 227.7 billion and 226.7 billion pounds, respectively, reflecting modest year-on-year growth.
Export forecasts for 2024 were revised upward for cheese and butterfat-containing products, driven by robust international demand. Meanwhile, butter prices are projected to decline in 2024 due to higher inventories, while cheese prices are expected to rise, supported by tight stocks.
Cheese Demand and Supply Dynamics
Cheese exports have shown resilience, rising 6.8% year-on-year through September. Domestic use also grew, albeit modestly, contributing to seven consecutive months of year-on-year growth. However, holiday cheese demand appears subdued, with buyers reportedly delaying purchases in anticipation of increased supply from new processing capacity.
The expanded production capabilities, expected to come online by mid-2024, could shift the market from tight supplies to surplus if demand does not accelerate. Analysts at HighGround Dairy warn that even a single week’s output at full capacity could significantly boost cheese inventories, potentially straining prices.
Butter and Dry Dairy Products
Butter production remains robust, with manufacturers working to meet holiday demand while building inventories for year-end consumption. Nonfat dry milk (NDM) and dry whey markets have seen mixed performance. NDM prices have been supported by international demand, while whey exports rose 9.2% despite weaker domestic consumption.
Broader Agricultural Trends
Corn and soybean production forecasts for 2024 have been lowered, with yields expected to decline slightly from earlier estimates. Corn production is projected at 15.1 billion bushels, down 1% from 2023, while soybean output is forecast at 4.46 billion bushels, up 7% year-on-year despite reduced yields.
As the dairy industry prepares for regulatory changes and increased production capacity, market participants will closely monitor demand trends and global trade dynamics. With significant supply growth on the horizon, the balance between production and consumption will be pivotal in shaping the market in 2024 and beyond.
StoneX analyst Nate Donnay noted minimal differences between the USDA's July recommendations and the final decision but flagged uncertainty around the timeline for implementation. Changes could take effect as early as March 2024 or face delays. Adjustments to assumed milk component content will likely be postponed by six months.
Impact on Dairy Pricing
The reforms include raising the "make allowance," the assumed cost of converting milk into bulk dairy products. This adjustment, overdue after more than a decade of unchanged allowances, will lower federal order minimum prices. According to StoneX broker Dave Kurzawski, this could create a dynamic where competitive pressures drive up premiums that producers receive above the minimum price.
Had the new formulas been in place over the past decade, Class III milk prices would have averaged 16 cents lower, while Class IV prices would have declined by 47 cents. Despite these shifts, Kurzawski emphasized that the broader price range—currently capable of fluctuating between $12 and $25 per hundredweight—remains unchanged.
Market Outlook
In its latest World Agricultural Supply and Demand Estimates (WASDE) report, the USDA raised its 2024 milk production forecast to 226 billion pounds, up 200 million pounds from the prior estimate. Increased output per cow is expected to offset a decline in herd numbers. Production and marketings for 2025 were forecast at 227.7 billion and 226.7 billion pounds, respectively, reflecting modest year-on-year growth.
Export forecasts for 2024 were revised upward for cheese and butterfat-containing products, driven by robust international demand. Meanwhile, butter prices are projected to decline in 2024 due to higher inventories, while cheese prices are expected to rise, supported by tight stocks.
Cheese Demand and Supply Dynamics
Cheese exports have shown resilience, rising 6.8% year-on-year through September. Domestic use also grew, albeit modestly, contributing to seven consecutive months of year-on-year growth. However, holiday cheese demand appears subdued, with buyers reportedly delaying purchases in anticipation of increased supply from new processing capacity.
The expanded production capabilities, expected to come online by mid-2024, could shift the market from tight supplies to surplus if demand does not accelerate. Analysts at HighGround Dairy warn that even a single week’s output at full capacity could significantly boost cheese inventories, potentially straining prices.
Butter and Dry Dairy Products
Butter production remains robust, with manufacturers working to meet holiday demand while building inventories for year-end consumption. Nonfat dry milk (NDM) and dry whey markets have seen mixed performance. NDM prices have been supported by international demand, while whey exports rose 9.2% despite weaker domestic consumption.
Broader Agricultural Trends
Corn and soybean production forecasts for 2024 have been lowered, with yields expected to decline slightly from earlier estimates. Corn production is projected at 15.1 billion bushels, down 1% from 2023, while soybean output is forecast at 4.46 billion bushels, up 7% year-on-year despite reduced yields.
As the dairy industry prepares for regulatory changes and increased production capacity, market participants will closely monitor demand trends and global trade dynamics. With significant supply growth on the horizon, the balance between production and consumption will be pivotal in shaping the market in 2024 and beyond.
