It's rare for international dairy markets to rally in August, with European traders on holiday and the Oceania region in its off-season, but this year, commodity prices, with the exception of skim milk powder, have jumped 25-30% in a matter of weeks. The main driver was the long-awaited slowdown in supply growth from the European Union, which brought worried buyers off the sidelines, according to the U.S. Dairy Export Council's (USDEC) latest issue of “Global Dairy Market Outlook.”

“We still harbor caution, however,” USDEC vice president of communications Alan Levitt and USDEC executive vice president of strategy and insights Mark Beck said in the report. “While the recovery is welcome, there's still a backlog of excess supply to work through, and a number of factors could limit further price gains in the near to medium term.”

Additionally, they said market strength is not across the board as the gains have been driven by fat values, while the skim milk powder price continues to lag. Nonetheless, rebalancing world supply and demand appears to be underway.

In the second quarter, the report showed that milk production from the top five suppliers was down 0.4% year over year, while exports from those same five suppliers were up about 2%, putting a dent in the surplus (Figure). Levitt and Beck expect the trend to continue through the second half and into 2017.

EU milk deliveries increased 6% during the first quarter, but growth slowed in April and May. In June, deliveries were down 1.9% — a decline of 260,000 tons from the prior year. Similar losses were reported for July.

The report said increased culling, less supplemental feeding and poor weather have contributed to the downturn.

New Zealand, on the other hand, is coming into its flush season with pastures in good condition. “New Zealand is highly dependent on spring weather; so far, they're expected to see a small decline at worst, (or) perhaps a small gain at best,” the report noted.

Although they are small players on the global market, Australia and Argentina are down sharply, which leaves less for export supply, the report said.

“The United States is the only region still growing, but a resiliently strong domestic market will continue to constrain volumes sold overseas,” Levitt and Beck suggested.

Deliveries in Ireland and the Netherlands increased nearly 5% in June, but they were the outliers, the report said. Output was lower in Germany (down 1.5%), France (down 3.3%), the U.K. (down 7.2%) and Poland (down 2.2%).

“In light of recovering markets, co-ops and processors have started to raise their payout prices to farmers, which could stall further contraction," the USDEC authors wrote. "However, we look for production in the EU to be down 1-2% in the second half of the year. This will cut into the global surplus further, setting the stage for more balanced markets in 2017.”

While both the details and efficacy of the EU's voluntary supply management program remain unclear, it may contribute to ongoing contraction there during the fourth quarter, the report suggested. Additionally, growth on top of the EU's 4% gain in the second half of last year will be very difficult. In the second half of 2015, milk production in Ireland and Holland was up 20% and 12%, respectively, and these rates will not be repeated, USDEC said.

In the face of declining milk supplies, buyers have stepped up with more urgency to get ahead of continued price increases, the report said, adding that China's purchasing has also improved.

“Lower milk production in China has reinvigorated the need for imports," the report added. "Imports (milk equivalent) were up about 18% in the first seven months of the year versus 2015 levels. However, China imports are still off about one-fourth from 2014 peak volumes.”

Demand from other regions is uneven, and USDEC said it remains to be seen how sustainable the buying surge is.

Market recap

August fed cattle futures posted gains this week after recent losses. Nearby contracts closed higher Wednesday at $111.95/cwt. before expiring. October fed cattle futures were mixed, closing lower Thursday at $103.575/cwt.

September feeder cattle futures were mixed but mostly lower. Nearby contracts closed lower Monday and again Thursday at $139.15/cwt. and $137.30/cwt., respectively.

For the beef cutouts this week, Choice and Select were lower at $195.74/cwt. and $188.49/cwt., respectively.

October lean hog futures were higher this week after recent losses. Nearby contracts closed higher Monday at $61.375/cwt. and climbed throughout the week to Thursday's close of $63.325/cwt.

Pork cutout values were higher this week. The wholesale pork cutout was higher at $78.39/cwt. Loins and bellies were higher at $82.74/cwt. and $82.44/cwt., respectively, while hams were lower at $77.34/cwt.

Hogs delivered to the western Corn Belt were slightly lower this week, closing at $60.25/cwt. on Thursday.

In the poultry markets, the Georgia dock was unchanged Wednesday at $1.105/lb. Breast meat was sharply higher at $1.78/lb., while leg quarters were unchanged at 31 cents/lb. Wings were higher at $1.44/lb.

According to the U.S. Department of Agriculture, egg prices have been steady, with a steady to firm undertone. Offerings have been light to moderate. Supplies have been mixed but usually light to moderate. Demand has been light to fairly good, but mostly moderate to fairly good.

Large eggs delivered to the Northeast were higher at 72-76 cents/doz. Prices in the Southeast and Midwest were also higher at 79-82 cents/doz. and 73-76 cents/doz. Large eggs delivered to California were unchanged at $1.37/doz.

USDA said the turkey markets were steady to firm. Offerings and demand were both light to moderate. Prices for hens and toms both increased on the lower end of the price range to $1.17-1.23/lb. and $1.16-1.42/lb., respectively.