Weekly forecast – August 4, 2023

Forecast updates

Cheese:

  • Increased block prices through the end of the year, given the rapid appreciation at the end of July.
    • Cheese less than 30-days is reported tight;
    • Milk in central states tightened up quickly and should remain that way until school milk is resupplied.
    • While this is a supply-side rally, the demand is unchanged to higher, meaning prices will be subject to periodic corrections lower.
    • Expect that as new cheese capacity ramps up, prices could tumble post-season (February 2024)
    • Markets could be subject to recalibration to retain export share – those resets are likely temporary.
    • Given current demand, USDA withdrawals, exports, and supply could mean higher prices through January.
  • Maintained a wide block-barrel spread.
    • While barrels are higher than Q2, the block-barrel spread could be wide.
    • There are more processed cheese solids available to the market due to new cheese capacity and onboarding.
    • While barrels could move up into the fall, they are unlikely to close the gap on blocks as they did last year.
    • As cheese operations stabilize, that could provide some support for barrels in early 2024

Butter

  • Increased butter price through November based on the higher spot price, tight cream and current stocks.
  • Stocks, given expected drawdowns in July, could be tighter than expected that could support higher prices through the holiday demand season.
  • There could be more upside during the holiday demand period – 10 to 25 cents. These will likely be spikes and shortlived.

NDM

  • Adjusted AUG/SEP prices – left other prices unchanged.
  • Less supply will reduce milk headed to NDM/SMP this fall.
  • Supply is likely to contract in August as school supply lines restock.
  • Internationally, demand is lifting, but it will be a slow and steady climb largely dependent on China.

Whey

  • Reduced prices through the end of the year on expectation of more whey hitting the market and significant slowdown in Chinese infant formula imports.
  • Additionally, an outbreak of ASF in SEA and China could spike culling reducing nearby feed needs.

Milk Market

Milk availability is tighter than in recent weeks. While the leading indicators suggested milk could and would tighten up, markets have been somewhat surprised by how quickly supply reacted to sharply lower prices. Had milk prices lingered above $16/cwt, the supply corrections may have taken longer to unfold. But the prices in May to July have been sufficiently low to cause a swift reaction – similar to the milk price drops in spring 2020, 2023 followed a similar pattern – two months to right-size supply. What was unexpected was widespread heat and humidity that caused raw milk supplies to contract further. At the same time, domestic demand continues to putter along – not good or bad, likely consistent with last year, and exports have picked up in recent weeks.

Milk will likely get tighter over the next two weeks as the market works to restock bottled milk for retail and schools as schools nationwide begin the 2023/24 year. As a result, discounts have vanished, and milk is starting to move to deficit regions. Additionally, cheese plants with discretionary run-time curb those runs as milk becomes more costly. That tightness is unlikely to relax until the supply lines are back to normal in September.

Cheese Market

Cheddar blocks consistently performed this week, while barrels retraced the prior week’s gains on Friday. This makes more sense, given that plenty of processed cheese solids are available to the commercial market that are likely competing with barrels. Overall, 30-day blocks are tighter than in past week, resulting in significantly lower volume trade and higher prices. While there may be limited upside from here, there may be little reason for prices to correct lower in the coming weeks, given milk tightness. CME blocks averaged $1.9610/lb, 8.9¢ more than the previous week. Barrels pushed higher this week, which seemed at odds with anecdotal reports of more solids in the commercial markets. At the same time, barrels that can be traded at the CME may be less available as processors focus on export opportunities. CME barrels averaged $1.842/lb, up 4.95¢ from the previous weeks.

US June cheese output totaled 1.17 billion pounds, 0.36% more than last year. YTD output is up 0.5% compared to the same period last year. The imbalance is likely caused by fewer Q2 exports than last year, given the modestly higher output. Wisconsin, Illinois, and South Dakota output slowed for the first time this year compared to last year. Production gains remain elevated in Idaho and the Northeast. Cheddar production totaled 337.9 million pounds and 1.1% less than last year, with CA, WI, and VT slowing output vs. last year. Other American-style cheese production was higher, up 140.5 million pounds or 12.9% higher than last year. Mozzarella production was 380.5 million pounds and 1.6% less than last year That was the second YoY decline over the last six years.

In May, global cheese trade picked up +2.6% compared to last year resulting in a 0.7% increase YTD through May, according to USDEC. China (+57%), Mexico (+17%), and South America (+28%) are all pushing higher while SEA continues to lag. European cheese export prices remain elevated, limiting the amount of products participating in global trade. New Zealand shipped more Mozzarella to China as foodservice demand continues to return.

Butter Market

After rising on Monday, CME spot butter prices turned lower through the end of the week. Butter averaged $2.643/lb, down 1.1¢ from the previous week. Markets seemed to take cues from the GDT where butter and AMF prices pulled back on Tuesday. While international markets are lower to unchanged, that may have little to no impact on US prices through the end of the year. Cream is more important to the spot market, and it is tight, according to various reports. That has slowed cream headed to churns as processors divert fresh cream to other uses like ice cream, cream cheese, and sour cream. Consider as the bottling supply lines restock – that is an incremental amount of butterfat that will end up in fluid markets – further tightening supply. It seems prices may be looking to international markets which may have less impact on US price direction through the holiday demand season.

US June butter production totaled 162.6 million pounds – 2.3.% more than the previous year. YTD butter output is 4.1% higher than last year. Consider the YoY butter vs. AMF production shifted toward butter and away from AMF this year, resulting in some YoY change. For reporting states, California produced 1.2% less butter vs. last year; Pennsylvania dropped 5.3%. The YoY increase was consistent with the past few years but higher than the five-year average.

World butter trade expanded in May by 11.3% compared to last year, according to USDEC. That put YTD volumes 2% more than the same period last year. While volumes are expanding for Kiwi and European traders, US butter exports are much lower. Given domestic vs. export prices, that comes as little surprise to markets. Since the end of last year, trade to China and Hong Kong has been running below trend. With the uptick in May, it is possible to see a return to trend (reflective of growth) by the end of the year. The bigger concern for markets is where WMP trade will end this year. The 2022/23 peak to trough was larger than in recent years. The market is starting to recover, but it would take substantial imports in 2H 2023 to return to trend this year. After 2015 it took until 2021 to reach this peak. Next year, there could be sizeable comparison issues with the zero-tariff powder between NZ and China.

NDM/SMP

After the August 1 Global Dairy Trade (GDT) event resulted in WMP prices dropping 8% markets pulled back globally. Spot prices found some support by the end of the week. CME averaged $1.1315/lb, down 2.05¢/lb compared to the previous week. While GDT WMP and SMP prices declined, a few underlying facts may make the report less bearish than currently reported. First, there was a considerably higher volume than the previous event and last year. Additionally, major buyers from North Asia (China), LATAM, and MENA purchased more products than last year and the previous event. Currently, supply is contracting, and that will tend to impact milk powder first. Overall, there is more buying happening compared to Q2 which should be supportive to prices despite.

US NDM output totaled 182.5 million pounds in June, 8% more than last year. YTD output is up 5.4% compared to the same period last year. For reporting states, California and Pennsylvania were more than last year by 17.3% and 1.7%, respectively. Wisconsin output was down 12% in June compared to last year. SMP output totaled 37.4 million pounds and 31.2% less than last year, likely on fewer exports to SEA. MPC production totaled 22.5 million pounds, 18% more than a year ago.

US Manufacturer NDM stocks totaled 296.5 million pounds and 3.97% less than a year ago. Ceres estimates that is 49 days of production on hand. While manufacturer stocks are lower, some of the sizeable month-end sales reported in the weekly NDPSR may have resulted in stocks that still exist but are now held by private parties and excluded from reporting. The MTM decline was 12.3 million pounds, less than last year, consistent with the five-year average.

Whey & Lactose Products

CME whey prices picked up this week as prices averaged 26.1¢, up 0.4¢ from the previous week. While spot trade volumes were a modest seven loads, there were considerable unfilled bids and uncovered offers left on the board each day. Whey news remains unchanged, although the spread of African Swine Fever does not bode well for demand later this year if SEA and China cannot control the spread of the disease soon. The DMN Central whey mid-point was 25¢, unchanged from the previous week. DMN west mid-point was 28.5¢, up 0.5¢ from the previous week. DMN lactose was stable at 19.5¢.

US June 2023 whey output totaled 80 million pounds, 2.7% higher than a year ago. WI & NY produced less whey. WPC (25-49.9%) output totaled 13.6 million pounds and 12.4% more than a year ago. That was the first May-June increase since 2020. WPC (50-89.9%) output totaled 26.6 million pounds and 10% more than a year ago – the largest May-June increase since 2017. WPI output totaled 8.6 million pounds and 29.1% less than last year. That was the largest May-June slowdown in seven years.

Whey stocks remain elevated. June 30 whey stocks totaled 79.6 million pounds and 14.3% more than a year ago. WPC (25-49.9%) stocks totaled nearly 38 million pounds and 75.9% more than a year ago. WPC (50-89.9%) stocks totaled 49.1 million pounds and 0.07% more than a year ago. WPI stocks totaled 24.1 million pounds and 34.1% more than a year ago.