Weekly forecast update – Sept. 2, 2022

Forecast updates

  • Increased prices for cheese and reduced the block-barrel spread moving forward.
    • Still expect cheese prices to run above $2/lb one more time this year.
    • It is more likely toward the end of October/November.
    • US cheese prices continue to command a price advantage vs. New Zealand and Europe – that could keep exports moving well into 2023 and may limit the number of Cheddar barrels on offer.
    • At the same time, higher butterfat prices could encourage more Cheddar barrel use in processed cheese.
    • Forecasting a price decline post-Super Bowl for a few months.
    • Reduced the block-barrel spread through 2025.
  • Expect a modest recovery for NDM/SMP headed into the fall based on higher NZ exports to China and reports of widespread drought that could cause China’s milk production to retreat next year.
    • While dairy is not a staple in China, lower output could cause companies to look to imports to balance supply.
    • US production increased in July, contrasted with much lower output in July 2021. Still, that helps explain the recent sell-off.
    • Limited supply and policy to further limit dairy output could support NDM/SMP prices moving forward.
  • Believe US butter prices track higher through October, with prices resetting in November.
    • Internationally, butterfat prices are supported; however, expectations are for NZ prices to remain below US and EU values.
    • US prices could ease toward the end of the year based on fewer exports and higher AMF imports.
    • Still, expect prices to remain higher than futures forecast from 2023 forward, with prices averaging $2.50 or higher.
  • Whey prices could remain supported with a fair chance of higher prices into the end of the year. Although price increases could be limited due to reports of declining WPC80 and WPI prices headed into the fall.
    • With reduced natural gas availability in Europe – it remains a question whether whey will be dried or if it may be fed as a liquid this fall.
    • All of this has led to modestly higher milk prices through 2023 compared to the previous forecast.

Milk Market

USDA announced the August Class III and IV milk prices this week at $20.10 and $24.81/cwt, respectively. Class III was $2.42 less than the previous month, and Class IV was down 98₵ over the same period. While the Class III milk price is the lowest price this year – it is still considerably above last year.

Ahead of the Labor Day holiday milk moved to manufacture, but based on the July Dairy Products report, it appears milk has been headed there due to fewer bottled milk sales. With school back in session, the initial data suggests the lack of free meals and milk could take a toll on demand. The United States produced more cheese and more milk powder with similar milk output, suggesting declines in other product categories, namely fluid milk and cultured products. Despite flat milk production, should fluid demand remains stunted. More milk may move to manufacturing in the coming months. That could work to cap dairy product price potential.

Cheese Market

After dropping on Monday, CME spot market block prices recovered through the rest of the week; barrels eased. That closed the block-barrel spread but remains wide and inverted with block discounts to barrels. CME blocks averaged 1.738/lb – down 3.8¢ compared to the previous week. CME barrels averaged $1.8535/lb – 2.55¢ less than the prior week. The spot trade caused futures to retreat through the end of the year. Still, futures are forecasting a return to $2/lb by November, where prices remain through most of 2023. Likely modest year-over-year production gains in July factored into the late-week futures price recovery.

This week USDA released the July 2022 Dairy Products report. US July 2022 cheese production totaled 1.158 billion pounds, 1.1% more than the previous year. Year-to-date production is 2.25%. This was the slowest YoY growth since 2019. Output from Wisconsin fell sharply, down 5.1% compared to last year. American cheese production was 467.9 million pounds, 0.14% more than the previous year. Cheddar cheese output was 331.6 million pounds – 2% more than the last year indicating a slowdown in other American cheese categories. Mozzarella cheese output was 393.3 million pounds – 5% more than the previous year. All reporting states, except New York, reported more Mozzarella output. Hard Italian cheese (Parmesan) fell 9.6% vs. last year, likely due to higher milk costs.

Butter Market

CME spot butter prices reached $3.10/lb by Friday, lifting the weekly average to $3.076/lb, 3.74¢ more than the previous week. While the Labor Day holiday will send cream to butter churns, it will return to normal channels by mid-week. Some reports show that cream cheese manufacturers have finally caught up from last year’s issues that derailed the holiday build and order fulfillment. For now, butter is tight; however, reports that trade could be shifting remains a specter after the holiday season should US exports slow and imports increase – futures markets appear to be anticipating such an event.

US July butter production totaled 151.7 million pounds, 3.2% more than the same period last year. California and New York reported output, with each u, 16%, respectively, compared to the previous year. Given California’s production, other western states were up 8.7% vs. last year. The most significant declines came from Midwest processors, with volumes falling 12.4% compared to the previous year.

NDM/SMP

CME NDM price retreated throughout the week. While last week’s data was mostly positive, spot markets pulled back again by the end of the week. CME NDM averaged $1.545/lb – up 0.05¢. Markets are still unsettled, and supplies are flat; however, data may indicate that despite lower milk production, the United States continues to produce more milk powder than a year ago. That said, on Friday, Russia took the Nord1 pipeline offline and did not return it to operation by Monday, indicating there would be no natural gas for Europe until western sanctions were lifted. That resulted in 80% less natural gas to Europe, causing costs to climb – a factor that could impact drying later this year into next year.

US NDM production totaled 165.7 million pounds – 20.2% higher than the previous year. California’s production was up nearly 113% compared to last year. SMP production was 50.84 million pounds and 21% less than the previous year. That suggests that the 13 million pound decline moved to NDM, accounting for some of the 53 million pounds year-over-year increase. MPC production was 15.5 million pounds, 34% more than the previous year. Given the sizeable rise in NDM production against flat US milk production – it would suggest that fluid milk production is substantially less than a year ago. Last year, fluid production pulled milk away from manufacturing – this means a significant return to trend this year and one that could shift milk to manufacturing despite flat YoY milk production. Central states produced less NDM than last year – down 15.6%. Other western states increased output by 51%. While Pennsylvania produced less NDM, other Atlantic states produced more NDM.

US manufacturers’ stocks totaled 336.7 million pounds on July 31 – 7.2% more than the previous year. Stocks continue to steadily recover with July. That reflects approximately 63 days of production on hand – higher than in recent months. The June-July stock build of 19 million pounds was above average. Overall, manufacturers’ attempts to deplete additional stocks at the end of July help explain the aggressive price declines in recent weeks.

Whey & Lactose Products

CME whey averaged 47.5¢, up 1.4¢ from the previous week. DMN central mostly price was 45.25¢, unchanged from the last week. Western prices were 53.5¢ this week, up 4.5¢ from the previous week in an unexpected rebound. The lactose price was 45.5¢ this week, unchanged from the last week. European prices were higher this week compared to the previous week. The futures price outlook remains consistent – upper 40s through 2023.

US released whey production and stock data this week. US whey production totaled 85.75 million pounds – 5.8% more than the previous year. US WPC (25-49.9%) output totaled 14.4 million pounds – 13.6% more than last year. US WPC (50-89.9%) output totaled 29.1 million pounds – 12% more than last year. US WPI output totaled 3.1 million pounds – 4% more than last year. US whey stocks were 69.4 million pounds on July 31 – 3.4% more than the previous year; flat to June. US WPC (25-49.9%) stocks were 23.4 million pounds on July 31 – 9.5% less than the last year. US WPC (50-89.9%) stocks were 52.6 million pounds on July 31 – 385% more than the previous year.