Just when milk and dairy product prices appear to be headed lower, September prices have started to trend higher. Markets are wrestling with the prospect of lower global milk production as well as unsettled energy availability in Europe, which could hamper output this fall and winter should shortages or costs prevent manufacturers from processing dairy products. That, along with a modestly higher Global Dairy Trade auction in early September, has positioned prices for a bit of a run.

A few short weeks ago, October 2022 Class III milk futures dipped to $19.94 per hundredweight (cwt) before recovering to $21.64 per cwt as of Sept. 9. Ahead of the Labor Day weekend, milk and dairy product prices soured as spot cheddar blocks moved to Chicago, causing a wider-than-normal block-barrel price spread, with blocks discounted to barrels and prices to teeter on dipping into the $1.60s for the first time in months. By late August, CME spot cheddar markets erased all gains achieved earlier in the year, resetting to January and February price levels. As the calendar turned to September, sentiment shifted again, with blocks and barrels racing back toward the $2-per-pound level ahead of the holiday season.

What caused the change? In part, the global milk supply (Argentina, Australia, Brazil, the European Union, New Zealand and the U.S.) remained 1.85% less than the same period last year through June. In addition, a nationwide drought in China could negatively affect milk output in that country well into next year. Furthermore, milk production gains are easing in Mexico, where output is still on the plus side but less so than earlier this year. At the start of September, Fonterra – New Zealand’s largest dairy cooperative – said it expected milk collections to decline 10% compared to earlier estimates. Unlike in most years with record milk prices, dairy producers have been slow to expand – whether for financial reasons, such as higher costs of feed and labor, or out of regulatory concerns, with new rules, costs, taxes and fewer subsidies taking hold next year. A year of declines followed by flat to declining milk production will almost certainly support dairy and milk prices.

Although a recession continues to threaten the U.S. economy, steadfast consumer spending is lifting U.S. commercial disappearance figures. In addition, more U.S. dairy products have headed into overseas markets, which appears to be another supportive factor for prices through the end of this year. Ceres estimates this year’s U.S. cheese disappearance to be about 1% more than last year through July. Moreover, year-to-date U.S. cheese exports have been running nearly 15% ahead of last year, and markets have been capable of absorbing new production. While retail sales across the dairy complex lagged last year, recovering food service sales and exports have helped keep markets balanced.

This September, the CME spot butter market established a new all-time high of $3.17 per pound as of Sept. 9. That sent CME butter 2022 and 2023 futures higher as buyers sought protection from what could be even higher prices. So far this year, CME futures seem to be missing the mark by suggesting discounted butter is just around the corner, only for buyers to find – much to their dismay – that prices continue to be steady to higher. Simple math suggests that more exports and better food service sales, as well as stronger cream demand, have left U.S. butter holdings snug. On average, the U.S. produces between 170 million and 180 million pounds of butter each month, with output dropping to 150 million to 160 million pounds per month in the second half of the year. If working inventories are 50% of monthly production, minimum stockpiles of butter would be between 75 million and 90 million pounds each month. As of July 31, the USDA reported that 314 million pounds of butter were in warehouses. Typically, consumption exceeds stocks by 200 million pounds between August and December each year, which puts available inventories near 114 million pounds. With butter exports being considerable, it becomes evident that U.S. butter stockpiles are tight for this time of year, which helps to explain the recent surge in butter prices.

While the bulls are running, the bears continue to lurk in the shadows. Japan reportedly has more than 100,000 metric tons of skim milk powder to market. That could temper a price run and offset potentially short supplies from Europe should energy issues disrupt output. And there is still the matter of higher energy prices this winter that could cause consumers to ratchet back spending. Given the uncertainty, volatility seems to be the only constant.