Weekly forecast update – May 14, 2021

Forecast updates
Modest changes to Q2 pricing due to fluctuations in spot markets.
Slight adjustments to June to September whey prices – slight reductions due to spreading African swine fever in China that could reduce future demand.
Some of those changes impacted milk prices also.
Fluid Milk Market
Milk production remains seasonally high but similar to past weeks, with several regions indicating that milk is flattening. Class I milk for bottling is mixed, with some areas reporting stronger pull while many regions are starting to notice milk for schools is slowing down as the end of the school year approaches. There are concerns that Gov. Newsome’s emergency drought declaration could have some impact on output later this year. While counties near the Delta appear to have adequate water to meet needs for crops, those in the Central Valley’s southern counties are leaving land fallow this year and reallocating water use away from corn silage to orchards and vineyards. That has put some Golden State dairy producers in the spot feed market – a rather expensive proposition this year given the lofty level of corn.

After reaching new contract highs last week, corn futures continue to moderate. New, sizeable orders from China caused last week’s spike. Still, new crop corn prices are in the mid-500s per bushel. That could keep some farms reluctant to sell 2022 milk. At the same time, Class III and IV milk are hovering near $18/cwt. – higher feed prices could impact farm decisions to lock up milk.

Cheese Market
CME spot cheese prices spiked mid-week, ahead of USDA Section 32 bid that included 1.3 million pounds of Cheddar cheese. While traders tried to keep markets moving higher, sellers returned to the market with more cheese, and prices moved lower by Friday. In the end, CME blocks averaged $1.7725/lb, 0.95¢/lb less than the prior week’s average with 35 loads changing hands. Spot barrels averaged $1.73 – down 6.6¢ compared to last week’s average on 19 trades. After setting new contract highs mid-week, CME cash-settled cheese futures followed spot lower by the end of the week. Additional government orders will work to elevate spot markets. That said, many are reporting plenty of cheese that is readily available to meet current needs. Current carry is providing some processors with the ability to store cheese for use later this year.

News this week that the Center for Disease Control (CDC) indicates that vaccinated people no longer need to wear masks outdoors and now indoors could speed up recovery and reopening of restaurants. Many states are in the process of rolling back social distancing requirements at a faster pace, with several expected to be fully reopened by the end of the month. That may help increase food service demand; however, that could come at the expense of retail demand as people look to get out of their homes now that news suggests it is much safer for those with the vaccine. Just this week, Open Table reported that May 15 reservation bookings at restaurants were just 9% below 2019 levels – reflecting a remarkable recovery. Mexico is reflecting most of the new reservations – that could suggest tourism is starting to improve and that could be supportive of cheese imports this year.

Butter Market
Like cheese, a USDA Section 32 bid released on Tuesday sent spot butter prices higher this week. The bid is due on May 25 and is for 13.3 million pounds of butter. While markets were softer ahead of the announcement of additional government purchases, they turned quickly and moved up again. CME spot butter averaged $1.837/lb – 8.7¢ more than the previous week. Markets suggest that cream demand for ice cream and other Class II uses remains high. Also, cream multipliers recovered this week, making cream more costly for butter churns – likely slowing intake. Higher ice cream cream demand, better exports, and more government orders have started to lift butter prices.

On Tuesday, GDT will host the second May auction. There will be 59% more butter on offer compared to the same event last year. A lower move at the GDT could zap some of the current CME market enthusiasm.

Butterfat in milk, based on federal order data, is sailing past previous years. Genomics and genetics are starting to impact components and cow performance, which could profoundly impact components available to plants in the coming years.

NDM/SMP
The CME NDM price eased this week with prices averaging $1.3125/lb., down 2.45¢ compared to the previous week. Given the lofty levels of price so far this year, temporary resets are possible. Globally, prices continued to move higher, and early indications suggest that GDT prices could be less predictable for next week’s auction. At the same time, NZX futures suggest good demand and buyers seeking additional coverage. However, Fonterra will add 28% more volume than last year at the May 18 event, but Contract 2 volumes will be 65% more than 2020. The cooperative is adding volumes for two reasons 1) more supply due to better-than-second half milk production and 2) more demand. A setback for WMP or SMP could negatively impact CME demand.

Mexico is suffering from the worst drought in 30 years. That drought extends north into the United States. March was the 11th driest on record dating back to 1941, according to NOAA. Jalisco is the largest dairying region in Mexico, accounting for 20% of annual output; March represented the third consecutive month without rainfall in that state. According to the Foreign Agricultural Service, Mexico’s dairy industry relies on a combination of grazing, feed, silage, and hay. In all cases, feed depends on rainfall as irrigated acres are limited; reduced water caused USDA to revised its corn production lower for the 2020-21 marketing year. That could cause Mexico to increase NDM imports from the United States to make up for any shortfalls.

Whey & Lactose Products
CME whey prices averaged 63.2¢, down 1.35¢ from the previous week on just two trades. Dairy Market news prices moved lower also this week while lactose was stable. News from China is concerning as the latest African swine fever (ASF) variant is spreading throughout northern provinces, causing significant culling of 20-30% of breeding sows to control the spread of the disease. For now, piglet prices are rocketing higher, which could be supportive of whey prices; however, analysts suggest that the spread of ASF is as bad as it was in 2018/19 – something that could cause prices to drop quickly if China’s hog herd declines. Whey price declines could impact the Class I and Class III milk price.