Weekly forecast update – Mar. 4, 2022

Given the unprecedented events and uncertainty surrounding Russia’s invasion of Ukraine, Ceres made significant upward revisions in this month’s forecast, resulting in the highest forecast issued to date. If trends continue, milk and dairy product prices could set new records or be the highest in history. The story remains a deficit market with constrained supply, compared to demand causing prices to remain elevated. Globally, the world’s largest dairy product exporters’ milk production lagged last year. With feed, fertilizer, energy, and fuel prices surging at the beginning of this month, it is likely the break-even milk production price in the United States is somewhere between $20-$21/cwt currently and higher in Europe. While there are no guarantees that milk prices afford margins for dairy producers, it seems probable markets trending toward the $20 mark could cause further slowdowns.

At the same time, demand remains elevated, and higher energy and oil prices are affording some nations a more remarkable ability to buy products. After the Gulfoods show ended, anecdotal reports suggest there was good interest in dairy products, and the general sense was that buyers could be under-committed. Algeria recently completed its latest tender. On the opposite end, New Zealand exports indicate that Chinese imports could be slowing at the beginning of this year. But with the backdrop of slowing milk production, this news remains mostly bullish and supportive of prices.

Finally, the availability of substitute products is somewhat limited and getting tighter in the beginning months of the year. Malaysia palm oil, a substitute for butterfat, is $6,276/MT – that is off recent highs but well above the five-year average. With sunflower oil exports from the Black Sea region disrupted due to the Russia-Ukraine war, palm, soy, canola, and other vegetable oils are poised to move higher. That is supporting butterfat demand and elevated prices. Reports are surfacing that India could be 100,000MT tons short on vegetable oil purchases and that the country is asking Malaysia to increase palm oil output.

Eventually, these price hikes will take a toll on consumption – but that could be somewhat delayed than a “normal” timeline. Given the pandemic over the last two years that confined people into their homes, roiled supply chains, and led to an extremely tight job market – people do not seem to want to stop spending, travel, dining out – all things necessary to curb demand. Eventually, things will get too expensive or scarce, and people will slow demand, but that seems to be more likely in early 2023. Today, there is still pent-up demand that needs to work through the system suggesting higher prices for an extended period. For those reasons, Ceres reduced the 2023 forecast, but most projected prices are still some of the highest on record. Consider, by 2023, European environmental measures will be enforced with expectations most nations will be curbing the size of their dairy herds by tens of thousands of animals. 2024 may reflect a more steady-state – assuming the conflict in Europe does not deteriorate and that a recession is still off in the future.

• Raised Cheddar blocks to the highest annual average – $2.0937/lb – rivaling the 2014 record high. Increased barrels, less than 2014, but comparable. Reduced the block-barrel spread throughout most of the year. There are a few periods of reset – like past runs higher.
• Increased butter to a $2.83/lb average price – and maintained above $2/lb averages through 2024. Although US butter prices are higher than the last two seasons, they are less than world prices. There is good demand for fat and vegetable oil prices are higher and the product more difficult to obtain outside the United States. Given expectations of lower YoY output through the first half of the year, that could cause prices to spike and remain above $3 during the holiday demand season.
• Given lower milk production, most nations will focus on producing cheese, resulting in less NDM/SMP production. At the same time, there is still good demand for these products. Given oil prices above $100/barrel, NDM prices can be supported between $1.70 and $2/lb for an extended period. Expect NDM/SMP to be one of the first products to correct lower in 2023.
• Expect whey prices to moderate throughout the year but slowly given higher soybean meal prices to support above-average whey powder prices.
• Buttermilk prices are forecast higher due to stronger butterfat and solids, not fat prices.

Milk

USDA announced the February Class III and IV milk prices this week at $20.91/cwt and $24, respectively, up 53¢ and 91¢, respectively. Futures are forecasting even higher prices throughout the rest of this year as all commodities are prone to further upside pressure due to the Russia-Ukraine conflict. That is working to lift the break-even point for milk production with estimates between $20-21/cwt in the United States and even higher in Europe. This remains a supply-side shock, with most global exporters reporting lower milk production than last year. Given environmental regulation and higher costs of production expected this year, there is added pressure on farm margins – something that could keep expansion muted despite record-high prices.

Cheese

After flirting with $2/lb, blocks moved above that price level this week, and barrels recovered from an early week setback. In the end, blocks averaged $2.0655/lb, up 7.99¢ compared to the previous week. Barrels averaged $1.9460, up 1.1¢ vs. the prior week. Anecdotal reports indicate that 40# blocks remain somewhat limited; barrels availability fluctuates day-to-day. Milk throughout the country remains tighter than expected, and that has some cheese plants looking for milk this year.

USDA reported January 2022 cheese production at 1.17 billion pounds – 2.83% more than the previous year. Most of the new cheese came from Midwestern and Mideast states. In January, YoY cheese production increased 62 million pounds, high compared to the past three years, but less than 2017 and 2018. Cheddar cheese production totaled 337.4 million pounds – 2.75% less than the previous year. That would begin to account for reports that Cheddar cheese available to Chicago is limited and helps support nearby prices. Mozzarella cheese production grew to 379.1 million pounds and 1.1% more than the previous year. That could support reports of higher export orders through Q2 this year.

Butter

March 1 was New Crop Butter Day. On that day, only butter made on or after Dec. 1, 2021, is eligible for trade at the CME. While “new crop” butter remains somewhat limited, trading was active this week, with 27 loads changing hands. Realistically, processors are selling spot at the CME given a futures market with no carry to achieve a better price than storing products. That said, 2H 2022 futures prices increased over the past few weeks resulting in a flatter price and removing most of the market inversion that has been present since the end of last year. Overall, that has raised the average price expectation. Anecdotal reports suggest that cream headed to churns over the previous week has slowed a bit. While still a few weeks away, preparation for Easter may have started.

USDA reported January 2022 butter production at 195.2 million pounds and 6.9% lower than last year. New York and California output dropped below the previous year. That helped reduce January’s YoY production by 28 million pounds – the slowest start for January over the last six years. Those reports support higher prices this year as more robust exports, good domestic demand, and lower output combine to indicate prices could be prone to upward pressure throughout the year. Regular hard ice cream production also started slowly, with January production nearly 7% less than last year.

NDM/SMP

CME NDM prices are trading in a very limited range, so prices are somewhat stable but high. Prices averaged $1.8665/lb, 0.53¢ more than the previous week. Higher GDT prices on Tuesday provided more support for 2022 prices. Instead of prices spiking, futures are trending toward higher prices for longer. Given the buying power from the Middle East and reports that buyers need additional products, it seems reasonable to expect that this sort of trend could happen this year – especially given NDM/SMP output continues to decline.

USDA announced January 2022 NDM production at 170.7 million pounds – 13.8% less than last year. SMP production was 43.4 million pounds and 20.6% more than the previous year. The shift toward SMP indicates strong export demand. More milk solids headed overseas could keep Class I, II, and IV solids nonfat high this year.

Whey & Lactose

CME whey prices moderated this week, averaging 75.3¢, down 4.2¢ compared to the previous week. Dairy Market News central and west whey prices averages eased also. Lactose prices remain steady at 40.5¢. Again, the reported declines in WPC80 prices likely pressured whey prices lower. Still, prices are likely supported in the near-term in the mid-70s. That could change if WPC prices come under additional pressure. CME futures priced in a decline could impact Class I and III prices should the size of the forecast decline not materialize.

USDA reported January 2022 sweet whey powder production at 77.8 million pounds – 6.2% less than the previous year. WPC (25-49.9% protein) totaled 17.2 million pounds and 2.1% more than 2021. WPC (50-89.8% protein) was 30.4 million pounds and 12.5% more than last year. WPI output was 11.6 million pounds – 9.5% higher than in 2021. Overall, whey solids continue to move to WPC and WPI production. Suggesting the recent declines could be from fewer exports or some processors looking to produce whey instead of WPC as margins ease.