CIH Dairy Margin Watch: January


Dairy margins remained relatively flat over the second half of January except for spot Q1 which improved following a rally in nearby milk futures prices while the corn and soybean meal markets held steady. USDA estimated December Milk Production at 18.84 billion pounds, down 0.3% from 2022 with total milk production in 2023 pegged at 226.6 billion pounds, essentially flat year-over-year up a marginal 0.04% from 2022. Milk production increased through the first half of the year before declining over the second half of 2023 as negative margins weighed on the dairy industry. USDA’s semi-annual Cattle Report revealed there were 4.059 million dairy heifers as of January 1, 2024, down 0.35% from last year and the lowest dairy heifer inventory in 20 years. 2023’s inventory was revised down to reflect an 8.3% drop from 2022 compared to an initial estimate for a 2.3% decline as increased beef cross breeding has sharply reduced the number of dairy heifers. USDA also cut their estimate of heifers expected to calve and enter the milk-cow herd in 2023, revising their initial forecast of a 2% decline to a 7% drop. A further 1% drop is expected in 2024 with only 2.59 million heifers expected to calve this year and enter the dairy herd, the lowest inventory in 22 years of USDA projections. In the monthly Cold Storage report, USDA pegged 2023 year-end cheese stocks of 1.443 billion pounds, up 5.9 million from November but 0.2% lower than 2022. Butter inventories of 199.53 million pounds were down 13 million pounds from November and 7.8% lower than 2022. The Nov-Dec butter drawdown was the largest since 2004. Our clients continue monitoring targets to extend margin coverage in deferred marketing periods with flexible strategies that will allow for further margin improvement over time.

The Dairy Margin calculation assumes, using a feed price correlation model, that for a typical dairy 62.4 lbs of corn (or equivalent) and 7.34 lbs of meal (or equivalent) are required to produce 100 lbs of milk (includes dry cows, excludes heifers not yet fresh). Additional assumed costs include $0.90/cwt for other, non-correlating feeds, $1.65/cwt for corn and meal basis, and $8.00/cwt for non-feed expenses. Milk basis is $0.00/cwt and non-milk revenue is $1.00/cwt.