One reason for this is the substantial difference in inventory levels between cheese and butter. Total cheese inventory for August was 4% higher than August 2021 while butter inventory was 22% lower than a year ago. That is having a significant impact on the interest of buyers of the product. Cheese buyers seem to be purchasing more on an as-needed basis while butter buyers have been more aggressive. Even though cheese prices are lower and the time of year would suggest demand would be higher, sellers continue to offer cheese on the spot market without reservation. They have no desire to hold back from taking a chance that prices will increase. Manufacturers would rather move products rather than speculate on seasonality or potential. The window of increased buying for holiday demand and possibly higher prices is narrowing. More orders for cheese and butter have been placed earlier this year than usual as retail and the food service industry wanted to be assured of product with delivery when they need it. This creates an unusual dynamic in the market itself.

Another aspect is the current level of inflation along with the rise of interest rates and the impact it is having on consumer prices. It is unclear how much impact it will have on demand through the end of the year, but we know it will have some impact not only domestically, but also internationally. There have been some reports of slowing demand for certain types and varieties of cheese which would be expected. However, some varieties of cheese are showing strong demand such as pizza cheeses. Much of this demand might be attributed to football season.

International demand for butterfat, cheese, and dry whey has been strong during the first seven months of the year. The latest information showed year-to-date cheese exports up 14.7%, butterfat exports up 46.3% and dry whey exports up 3.7%. There is the potential of exports slowing as the year progresses. Many world economies are struggling with inflation which may impact demand. Exports to China have declined for some products while others remain strong. Butter imports have increased 32%. Dry whey imports by China have been increasing and outpacing a year ago by 1.2 percent. Much of this can be attributed to the growth of China’s hog herd. However, even with the growth of exports to China, exports to some other countries have slowed. This has kept dry whey price suppressed near the lows of this year and the level of late 2020. China’s imports of whole milk powder and skim milk powder have declined significantly.  Overall exports of dairy products to other countries may begin to decline as the impact of the high U.S Dollar may impact export demand.

Farmers in the U.S continue to struggle with the high cost of production. Income over feed in August was $8.08 and the lowest it has been since September 2021. The positive outcome of this is that there will be a payment rendered to those who chose to take part in the Dairy Margin Coverage (DMC) program at the $8.50 level or higher. This is the first DMC payment that will be distributed since November 2021. The negative aspect is that profitability is declining. The latest Agricultural Prices report showed a huge increase in the average soybean meal price in August of $43.03 per ton to $510.90. Premium/supreme hay price jumped $10.00 per ton to an average of $343.00. With the All-milk price declining by $1.40 per cwt, it had a substantial impact on income over feed with a decline of $1.84 per cwt from July.

The bullish implications of the Quarterly Grain Stocks report for corn and premium/supreme quality hay already at an extremely high price at this time of year, could potentially reduce income over feed further as time progresses.